CHAPTER 8
The Citrus Sub-Sector
by Michael Westlake^[67]

8.1 Introduction

Starting from negligible production in the early 1970s, Syrian citrus output expanded rapidly in response to a set of government policy measures aimed at replacing citrus imports with national production. By 1998/1999, production was roughly 100 times greater than in 1970/1971, principally as a result of very fast growth between 1986/1987 and 1994/1995 (Figure 8.1), and it increased further to reach 830 000 tonnes in 2001/2002.

In 1998/1999 Syria jumped to 740 000 tonnes of citrus with a domestic wholesale value of approximately SP11 million (US$240 million). This record crop, at the time, led to a fall in domestic market prices and to concern within Syria that there was now a national citrus surplus that would continue to depress domestic prices and reduce farm incomes. Consequently, the Government saw the national citrus industry as a priority area for analysis and policy development.

Figure 8.1 National citrus production, 1970/71 to 1998/99

8.2 Economic characteristics of the citrus sector

a) Importance

Citrus production provides an important source of income for more than 27 000 Syrian farm families located in the coastal governorates of Latakia and Tartous. In 1998/1999, Syria’s citrus sub-sector accounted for some 5 percent of the value of national agricultural output, 1.3 percent of GDP, 20 percent of the value of national fruit and vegetable exports, and about 0.8 percent of the 90 million tonnes of citrus that were produced globally.

b) Structure of production

Other than for three Government-owned farms, all commercial citrus production takes place on privately owned and operated farms. In 1998/1999, some 89 percent of these farms had less than 600 citrus trees, equivalent to less than two hectares of citrus planted in pure stand. The small size of the vast majority of Syria’s citrus holdings will be seen from Figure 8.2, which shows the total number of trees located on holdings of particular sizes^[68]. It will be seen that the bulk of Syria’s trees are located on farms that have from 181 to 2 500 trees, with almost half being located on farms with from 301 to 1 200 trees. Very small farms with less than 181 trees account for 15 percent of the national tree total. There are less than fifty farms with in excess of 5 000 trees. In total, these account for just 5.7 percent of the national tree stock.

In 1998/1999, oranges accounted for a little under half of Syria’s citrus trees and for almost 60 percent of the weight of national citrus output. Other citrus trees comprised 35 percent mandarins, 12 percent lemons and 3 percent grapefruit.

Citrus production is almost entirely irrigated, with rainfall being supplemented by a roughly equal volume of irrigation water. Traditionally, irrigation was mainly from boreholes, but the majority of farmers have now switched to water from public irrigation systems supplied from recently constructed reservoirs. There is no metering of this water, with the result that farmers apply more than necessary, leading to wastage and to fungal growth on the bark of the trees and to a high usage of chemical fungicides.

Figure 8.2 Numbers of citrus trees in Tartous and Latakia Governorates analysed by farm size

c) Yields and production instability

The Syrian climate leads to relatively low yields but to good flavour. Oranges yield significantly more per tree than the other main citrus types, especially mandarins. The mean mature yields of all four types of citrus grown in Syria have increased markedly over time due to the introduction of new varieties and a progressive improvement in husbandry.

Despite being irrigated, national citrus production varies markedly from year-to-year. The per-hectare yield of oranges tends to be less stable than the yield of the other citrus types due to a strong biennial yield pattern and a greater susceptibility to frost. Orange production fell by 37 percent in 1997/1998 and then rose by 85 percent in 1998/1999. The high level of production instability for oranges can be seen from Figure 8 1.

8.3 Costs of production

Detailed estimates were made of 120 different typical farmers cost models in the Latakia and Tartous Governorates (1998/1999) for producing oranges, mandarins, lemons and grapefruit on small, medium and large-scale farms under five types of irrigation (dams with gravity feed onto the farm, dams with the farmer needing to pump, rivers with and without the farmer needing to pump, and wells).

The cost models explicitly took account of the time lag between production and first yield and between first yield and maturity by calculating separate per donnum costs and revenues for each year until full maturity. The analysis included an estimate of the financing situation of the farmer at the end of each year and of the amount of annual interest to pay on outstanding debts incurred during the establishment period.

Estimated 1998/1999 yields and profits from mature citrus on typical small farms of from one to eight donnum located in Latakia and Tartous Governorates are summarized in Table 8.1. The figures shown are the mean of the estimates for each type of irrigation weighted by the area covered by each type.

A key conclusion from the analysis is that a typical small-scale farmer with mature orange and lemon trees was able to make substantial profits in 1998/1999. This was despite the fact that, for oranges, domestic market prices were generally lower in real terms than at any time during the decade. The high profitability of oranges per donnum stemmed principally from the high output per tree, especially in Latakia. The profitability of lemons was due mainly to high domestic market prices. It should be noted that the margins shown are net of all costs, including financing and an imputed cost for family labour.

Table 8.1 shows that, in 1998/1999, typical small-scale farmers made only a small return from mature mandarins and loss from grapefruit, other than for a return to family labour of some SP3 000-4 000 per donnum. For mandarins, the poor return was due to a combination of a lower per-kg market price than for oranges and a much lower yield per donnum. For grapefruit, the cause was principally the exceptionally low domestic market price.

For the larger citrus farms, the pattern of profitability was similar, with large farms being slightly more profitable than small farms in the case of oranges and lemons, but slightly less profitable in the case of mandarins. As expected, the extent to which irrigation water has to be pumped influenced the level of profitability, with gross margins being highest for farms with gravity fed irrigation and lowest for those using wells.

Table 8.1 Estimates of the profitability of mature citrus trees on a typical small citrus farm, 1998/99

* Family labour valued at the wage rates for hired labour.

These estimates show that it would take small-scale farms until the sixth year after planting orange seedlings before they produced sufficient fruit to produce a positive net income. It would take a further two years before sufficient revenue would be earned to pay off the full cumulative costs of establishing and maintaining the immature trees. Thus, the high profitability of mature oranges comes at the cost of a six-year period during which annual expenditure exceeds annual revenue, plus a further two-year period when farmers have yet to recoup their full investment.

For lemons, the shorter immature period and the high 1998/1999 prices means that newly planted trees yield a positive net income from the third year after planting, and generate sufficient income by the fourth year to allow investment costs to be recovered in full.

Despite a short immature period, mandarins would not yield a positive net income until the sixth year after planting, and it would take small-scale farms a further seven years to earn sufficient income to cover the full costs of establishment. This is the situation if no funds are taken from the net income to pay family labour. Large farms would take much longer to recover their establishment costs due to their use of mainly hired labour.

At 1998/1999 prices, grapefruit would not be profitable even at full maturity. Consequently, the initial investment in planting and maintenance of immature trees would never be recouped.

It should be noted that the above analysis applies to typical farms selling at mean 1998/1999 wholesale prices. In practice, costs of production differ markedly between farms due to differences in soils, micro climates, ease of access to irrigation water, local availability of labour, and the technical and managerial skills of the farmer. Moreover, market prices differ over time within a season, between wholesale markets in different towns, and between wholesale markets and other outlets. Consequently, within the main citrus producing areas there is great variability in profitability both above and below that is shown by the models.

8.4 Past and projected national citrus production

a) Past production

The strong growth in Syrian citrus production over the past two decades was achieved through a package of government measures aimed at increasing production efficiency and the incentive to plant citrus. These included the introduction and certification of new, higher yielding varieties, free extension assistance, the introduction of integrated pest management, the provision of interest-free long-term credit from 1977 to 1993, and programmes that both provided and subsidized land preparation, seed and inputs. The incentive to plant citrus that these measures provided was reinforced by a comprehensive system of national production planning. Although this planning system remains partly in place, it is no longer enforced to the same extent. As a result, the production of seedlings by the Citrus Board is now the most powerful instrument for guiding the amount, type and variety of citrus that farmers plant.

Between 1970/1971 and 1998/1999, the total number of citrus trees in Syria increased more than eleven-fold, from some 850 000 to 9.47 million. Over the same period, the mean yield of trees increased from 9.1 to 78.1 kg per tree. These increases in tree numbers and yields, coupled with an increase in the proportion of mature trees in the national population, resulted in an increase in output over the 28-year period from 7 760 tonnes in 1970/1971 to 740 000 tonnes in 1998/1999. More than half this increase in tonnage took place during the 1990s. In 1998/1999, Syria’s citrus output comprised an estimated 440 000 tonnes of oranges, 214 000 tonnes of mandarins, 66 000 tonnes of lemons, and 20 000 tonnes of grapefruit.

b) Production projections

Medium-term projections of national citrus production in Syria were traditionally based on the assumption that all citrus does not fruit until six years after planting and thereafter yields at its fully mature level. In practice, citrus trees normally produce their first crop two years after planting and yields then rise over a number of years before stabilizing. Moreover, there is a marked difference in the speed at which oranges and the other citrus types mature. Mandarins, lemons and grapefruit reach their full yield some six years after planting, whereas oranges take about twelve years to become fully mature.

The crop projection model incorporated separate estimates for oranges, mandarins, lemons and grapefruit. Based on the findings from field visits to 160 farms in Latakia and Tartous Governorates, a gradual, type-specific, year-by-year build-up of yield and allowance for trees dying or becoming unproductive were estimated. Citrus Board data on tree stocks were used to derive estimates of the 1998/1999 size and age structures of each of the four types of citrus.

Two sets of projections were made, incorporating different assumptions on new planting. The first set uses the assumption that there is no further planting, showing projected output from the estimated 1998/1999 stock of trees. The second set assumes future annual plantings according to the Government’s present development plan.

In the absence of information on the extent to which productive trees are replaced and the speed at which this is done, minimum and maximum projections were based on extreme assumptions regarding replacement. Under the minimum projections, no replacement of unproductive trees takes place; under the maximum projections, as soon as trees become unproductive, they are replaced by trees that immediately have the yield level of healthy trees of the age replaced. This, in effect, means that no trees die or otherwise become unproductive.

These assumptions, coupled with those relating to future planting, gave the four sets of annual projections shown in Table 8.2^[69]. For the purpose of comparison, the final column in this table shows the projected percentage growth in the population of Syria from 1998/1999, calculated using the annual 2.54 percentage rate projected by the Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat. Projected production from the present tree stock is shown in columns A and C. With no new planting and no replacement of trees that become unproductive, output would grow from a trend value of 718 000 in 1998/1999 to a peak of 792 000 tonnes in 2003/2004, before falling back to 728 000 tonnes in 2009/2010^[70]. With no new planting but full, immediate replacement, production would grow throughout the projection period, reaching 937 000 tonnes in 2009/2010. This represents a total growth of 27.7 percent, less than the projected growth of the Syrian population.

Projected production from the present tree stock and from the new plantings planned by the Government are shown in columns B and D of Table 8.2. If the Government’s planting targets to 2005 were to be met in full, production would grow throughout the projection period, even if there were no replacement of dead trees. However, the rate of growth would be less than the rate of population growth. Total projected growth to 2009/2010 would be some 15 percentage points less than the growth in population.

Table 8.2 Projections of national citrus production and national Population growth to 2009/2010

Note: Column A is based on the assumption of no new planting and no replacement; Column B, new planting and no replacement; Column C, no new planting and full replacement; Column D, new planting and full replacement.

If the Government’s planting targets were to be achieved in full and if all unproductive trees were to be replaced instantaneously with trees that immediately were to produce their mature yield, citrus output would expand strongly to 1.05 million tonnes in 2009/2010. Growth until 2005/2006 would be above the rate of population growth and would be roughly equal to growth thereafter. However, even with this extreme combination of positive assumptions, it will be seen that projected production would expand per annum at less than an average of two percentage points above the rate of population growth over the period to the end of the present production plan in 2004/2005.

Thus, a major production surplus would be unlikely to occur unless there were, for some reason, an unexpected major downturn in national GDP that depressed household incomes and the domestic per caput demand for citrus. The greatest likelihood is that national demand will expand, leaving Syria with significant surpluses only in years when exceptionally good growing conditions combine with a high year in the biennial production cycle for oranges.

The conclusion drawn from this forecasting exercise was that the fear of a large continuing permanent national surplus was likely to be unfounded.

8.5 Domestic marketing and processing

a) Internal marketing

The months in which citrus is picked vary by type and variety, leading to significant amounts of citrus being harvested in each month from September to June. There are no national grades and standards for citrus. Farmers normally sort their output into two, three or four grades, principally on the basis of size, with the aim of maximizing their sales realizations. Most sell their produce at one of 14 wholesale markets located in Syria’s major cities and towns, to which they travel together with their produce in small hired trucks. In the absence of an effective formal market information system, farmers usually telephone traders at a number of markets before deciding where to sell. Prices are determined by negotiation once the produce reaches the market, with no prior agreement. There is no cooperative marketing of citrus and there is only minimal participation by Government enterprises in marketing. Farmers may occasionally share transport, but their produce is still sold separately once it reaches the market. The organization of trading at the wholesale markets is informal and opportunistic. Traders at these markets operate both on their own account as wholesalers and as commission agents who arrange sales between farmers and buyers. Traders judge the quality of consignments by touch and eye. Most produce is sold on the day of delivery, with farmers normally being paid immediately in cash.

b) Utilization and domestic prices

The vast majority of the harvested crop is consumed in fresh form within Syria. In 1998/1999 an estimated 580 000 tonnes were consumed fresh, equivalent to 37 kg per head. A further amount of approximately 10 000 tonnes was processed. Imports of citrus were banned in 1992/1993 and, following a more than doubling of national output during the 1990s, Syria has switched from a net importer to a net exporter. Exports from the record 1998/1999 citrus crop may have been as high as 50 000 tonnes.

Analysis by the study team of available annual time series of domestic citrus prices show that inflation-adjusted prices have fallen, as one would expect, as the country has moved from importer to exporter. Lemon prices have been more unstable from year-to-year than orange or mandarin prices, despite no obviously greater instability in national production. This may be explained by the fact that lemons are an important integrated element of the national cuisine, whereas oranges, grapefruit and mandarins tend to be consumed as separate items that can be substituted by other fruits. Thus the demand for lemons is almost certainly less price elastic than that for the other citrus varieties.

Analysis of monthly market price data shows that wholesale market prices for the main types of citrus are lower in the markets of the main producing governorates of Tartous and Latakia than they are in Damascus. Generally, there are substantial differences between major towns and cities in monthly wholesale prices, but no obvious patterns. This suggests that the national market is not well integrated.

c) Domestic processing

In 1994, the government banned the importation of all fruit juice concentrates including citrus juice. In 1995, in response to the protection afforded by this ban, a juice extraction company located in the city of Homs imported an evaporator and began producing orange and grapefruit concentrates. In the second half of the decade it processed 4 000-5 000 tonnes of domestically produced citrus annually, equivalent to 0.5-1.0 percent of national citrus output. Virtually all the resulting juice was sold in the domestic market. In 1999, a major bottling company established a much larger facility for processing concentrated juice in Latakia Governorate, with the assistance of a long-term interest-free Government loan. The rationale for this public support was that Syria was thought to be moving towards a major surplus of citrus and that processing represented a means of absorbing the surplus while providing an additional source of adding value domestically. The facility, which had just commenced operation at the time of the study, has the capacity to process some 100 000 tonnes of citrus if operated at full capacity 24 hours per day for a five-month processing season. Recognizing the small size of the domestic market for citrus concentrates, the company was planning to export the majority of its production.

In developed countries, the retail price of citrus juice is a function of how the juice has been processed. The lowest priced juices are those made from concentrates. Single strength juices that have been extracted in the source country but have not been concentrated fall into an intermediate price category. Such not-from-concentrates (NFCs) sell at significantly higher prices than reconstituted juice. The highest priced juices are those that have been freshly squeezed from whole fruit in the consuming country. The retail prices of freshly squeezed orange juice can be over six times the price of the lowest quality juices made from concentrate.

The world market for citrus juice is dominated by Brazil and the USA. Together, exports from these countries account for about 95 percent of world trade. The US state of Florida is the largest producer and exporter of NFC orange juice. Brazil is by far the largest exporter of concentrated orange juice. The main Brazilian producing companies have made major investments in storage and transport both in Brazil and in Western Europe. All transport and storage from their processing plants in Brazil through to packing plants in Europe is in bulk, with the concentrate stored under a carpet of nitrogen at -10 to -12 degrees centigrade. This makes their distribution costs much lower than for the alternative of using barrels, which are more costly to transport and handle and must be kept at the lower temperature of -18 degrees centigrade.

Brazilian concentrated juice tends to sell at a premium over other sources in Western European markets because of the ability of Brazilian producers to guarantee a regular supply of large quantities with consistent characteristics and because of the ease with which their concentrate can be accessed from its storage facilities in Western European ports.

These factors, coupled, with much lower growing costs in Brazil, would result in a very low export prices for Syrian orange juice concentrate sold to Western European and other developed country markets. Exports of Syrian concentrate to countries in the Middle East would also need to compete with imports from Brazil, but would fetch relatively higher export prices due to the fact that, compared with exports to Western Europe, it would cost more to deliver Brazilian concentrate to these markets but less to deliver concentrates from Syria.

Having made allowances for this transport cost advantage and also employed optimistic assumptions regarding the additional gross income that Syrian citrus processing companies could derive from the production and export of oil extracted from citrus skins, the study team estimated that Syrian processors would be likely to obtain the equivalent of SP5.23 per kg of oranges from sales of concentrate and oil in nearby countries. This compares with a 1999 wholesale value of fresh oranges in the Saudi Arabian and Gulf markets of some SP30.00 per kg.

With such low realizations, Syrian producers of orange juice concentrate would be able to operate profitably only if they were to pay producers a farm-gate price of SP4.00 per kg or less. Our farm cost analysis, described in Section 4.3, indicated that this would be insufficient to cover the annual cost of operating an efficient citrus farm that comprised entirely mature orange trees. Thus, it is apparent that Syria does not have a comparative advantage in growing oranges for use in the manufacture of concentrate for export. The policy implication of this is that the Government of Syria should not encourage the further expansion of large-scale citrus processing.

8.6 The export of fresh citrus

a) Domestic assembly and preparation

Exporters acquire their citrus both from wholesale markets and directly from farmers. Exporters prefer to contract with farmers to purchase the crop on the tree so that they can supervise picking and ensure that fruits are picked from the tree by hand rather than being knocked down and collected from the ground. Such purchase also allows them to choose the time at which they harvest. They can then retain the crop on the tree and make spot purchases when domestic market prices are low and harvest when domestic prices rise. Notwithstanding these advantages, most citrus are purchased for export at wholesale markets since the high transactions costs associated with contract purchasing from farmers render this practice largely uneconomic given the small size of most farms and of most citrus shipments.

There are no readily available data on the national capacity to pack citrus for export. In 1999, there were thought to be almost 50 fruit and vegetable traders who packed and exported citrus, mostly based in Damascus. Of these, only one was a specialist citrus exporter who regularly exported consignments consisting solely of citrus. Although there are some automated packing facilities dedicated to citrus where fruits are mechanically sorted, washed and waxed, the typical citrus exporter owns and operates a packhouse where a range of fruits and vegetables are graded, prepared and packed by hand. These export enterprises invariably export mixed consignments of fruits and vegetables in 17-tonne refrigerated trucks, of which citrus usually comprises only one or two tonnes. In 1999, automated facilities dedicated to citrus were thought to have a capacity to pack 40 000 tonnes of citrus per season, but total citrus packing capacity was probably well in excess of 100 000 tonnes per full season, given the potential to switch the manual preparation, sorting and packing facilities used for other fruits and vegetables to citrus. Thus, physical packhouse capacity was sufficient to allow a large expansion in citrus exports, with actual exports consequently depending on relative prices in the domestic and export markets and on the resulting profitability of exporting citrus.

b) International competitors and markets

The production of citrus is concentrated in the Mediterranean region and North, Central and South America. Worldwide, roughly one-tenth of fresh citrus production is exported. Within the Mediterranean region, Spain, Italy and Egypt are the largest producers. Spain is by far the largest fresh citrus exporter, accounting for some 30 percent of world exports. Of the countries bordering the eastern Mediterranean, Egypt is the largest producer, with a total citrus output roughly four times that of Syria, some 70 percent of which comprises oranges. Turkey is the second largest producer with an output more than double that of Syria. It is the largest producer of mandarins in the region. Lebanon produces about half the output of Syria, principally oranges. Israel is also a significant producer of oranges and grapefruit, but its production and exports have been declining, and it does not compete in the regional market.

Saudi Arabia is by far the largest export market for Syrian citrus, accounting for roughly half of the value of all Syria’s citrus exports in 1997 and 1998. Government data show that it has become a particularly important market for Syrian mandarins, for which it accounted for over two-thirds of national exports in 1997 and 1998. Kuwait is Syria’s second most important market, accounting for 28 percent of the value of national citrus exports in 1996, 11 percent in 1997 and 16 percent in 1998.

Interviews held with exporters indicated a large increase in total national exports in 1998/1999, possibly to as much as 50 000 tonnes. This was likely to have been due principally to the record national crop pushing domestic prices down to a level which made national exports attractive. Other probable causes were adverse weather conditions in competing exporting countries in the region and an increase in the capacity of Syrian exporters to wax, pack attractively and otherwise prepare their produce for export.

c) Transport to export markets

Other than for infrequent exports to North-Western Europe, all Syria’s citrus exports are carried overland in refrigerated trucks that hold 17-18 tonnes of fruits and vegetables. The Syrian Government prohibits empty foreign trucks from entering the country, which, due to a lack of refrigerated overland imports, in effect means that exports must be made in Syrian trucks. There are some 2 000 refrigerated trucks registered in Syria. This fleet is reported by exporters to be just adequate in capacity for the current total level of fruit and vegetable exports. Virtually all the trucks are old, with many dating from the early 1970s. This has two disadvantages. First, their capacity is less than that of most modern refrigerated trucks, leading to higher unit shipment costs. Second, all goods in the truck can only be maintained at one temperature, leading to damage to some components of mixed shipments. An additional problem stems from the fact that there are no large transport companies in Syria - most trucks are owned either by exporters or by individuals. While this may raise competition, it leads to higher maintenance and operating costs due to a lack of economies of scale.

The cost of delivering to Saudi Arabia and the Gulf states is inflated by a lack of refrigerated backloads. All exports must transit either Jordan or Turkey, both of which levy transit fees. The cost of supplying fruits and vegetables to Saudi Arabia is further increased by the Saudi Government requirement that they must be transferred to Saudi Arabian trucks at the Saudi border, leading to delays, additional handling costs and to physical and quality losses.

Importers are currently permitted to import only trucks of one year old or less. The high cost of such trucks, coupled with high import tariffs and difficulties in obtaining foreign exchange, means that there has been little addition to the truck fleet in recent years. A short-term solution for exports to countries to the north of Syria would be to allow more modern, higher-capacity Turkish trucks to enter Syria. There are reportedly 90 Turkish truck companies located in the town of Antakya, which is just 40 km from the Syrian border and only 90 km from Latakia. The most appropriate long-term solution would be to allow transporters to import refrigerated trucks without the present restrictions on age. The best arrangement would be to allow the importation of refrigerated trucks that meet TIR (see below) requirements. This would have the effect of allowing the importation of trucks up to an age of about five years.

Syria signed the Transport Internationaux Routiers (TIR) agreement on 14 January 1999. Syrian membership of this agreement should reduce transport costs to Europe and Russia, since Syrian trucks can no longer be subjected to separate fees through each country transited. Saudi Arabia and the Gulf countries are not members of TIR and transit fees through these countries will continue, as at present, to be determined under the provisions of the Arab Transit Agreement.

d) Foreign markets, price determination and price stability

The markets for citrus in Saudi Arabia and the Gulf countries are strongly segmented. There is a high quality market through which citrus is supplied to supermarkets and other quality conscious buyers such as hotels, and a market for lower qualities for sale principally through traditional retail outlets. The traditional market is supplied through wholesale markets. All Syrian sales of citrus to Saudi Arabia and other Gulf countries are currently made through wholesale markets, using commission agents located in these markets in the same way that they are used in Syria’s markets.

Prices in the Gulf wholesale markets tend to be highly unstable in the short term, varying sharply from day to day. This is principally due to the fact that exporters in all the major supplying countries take their decision on export destination at least three days before the product reaches its destination and is sold. This makes the markets inherently unstable because a price increase in a particular market leads to a flood of exports to that market, causing prices to fall sharply a few days later. The inherent price instability is exacerbated by the high temperatures and the lack of access to cold storage at markets in the Gulf, which mean that exporters must sell quickly regardless of the level of the ruling price. Although price instability poses problems for exporters, it also gives them the opportunity to occasionally make very high profits. Exporters interviewed during the course of the study provided a wide range of assessments of the extent and speed of price change, and of whether or not they felt they lost or gained from price instability over the long term. However, it would seem clear that such instability is a major reason why Syrian traders spread the risk that they face by exporting mixed fruit and vegetable consignments. The level and impact of price instability in nearby markets is an area that needs to be investigated systematically.

Exports to Eastern Europe and to countries of the former Soviet Union are sold either at wholesale markets or directly to traders, usually by means of a forward contract. The much larger populations in these countries means that the quantities supplied and demanded are larger than in the Gulf and that prices are consequently more stable in the short term. Moreover, the lower temperatures at most of these markets mean that exports can be stored for a number of days, if local prices are unusually low and are expected to recover. However, unlike for sales to the Middle East, exporters experience payment problems and face transport costs that are significantly above those of competing Turkish exporters.

e) Costs and export parity price structures

Table 8.3 contains an estimate of the 1998/1999 parity price structure for the export of oranges from a Damascus packhouse to Saudi Arabia. This was the most common form of citrus exportation in 1998/1999 and is likely to remain so for the foreseeable future. The left-hand column of the table refers to the citrus acquired by packers that is actually exported. The right-hand column refers to citrus that packers reject during grading at the packhouse and sell back into the domestic market.

The price and cost figures are based on data that the study team gathered during meetings with exporters. These data are typical values rather than the exact values reported by a single exporter. Furthermore, exporters face large variations in sales prices at markets in Saudi Arabia and the Gulf countries. Consequently, in the absence of more detailed information on prices for Syrian citrus in these markets, the analysis cannot be used to draw conclusions on the competitiveness of Syrian exports. It does, however, give a good indication of the importance of the different cost items facing exporters and therefore where efforts to reduce costs should be focused.

It can be seen from Table 8.3 that the cost of moving oranges from the packhouse to the wholesale market in Riyadh is by far the largest operating cost incurred by exporters, equal in magnitude to the value of payments to the farmer. This cost amounts to almost SP9 000 per tonne compared with only SP750 per tonne for domestic transport to the packhouse and SP5 250 for all packhouse costs including waxing. This indicates that the greatest returns to measures to minimize costs are likely to be in the area of international transportation.

The right-hand column of Table 8.3 shows that the net value to the exporter, and therefore to the farmer, of citrus rejected and resold into the domestic market is very low. This is partly because citrus are most commonly rejected only during final sorting at the packhouse. The net value of rejects is consequently reduced not only as a result of their low intrinsic value but also because of the double transport and handling costs incurred in moving them first to the packhouse and then to a wholesale market. The implications of this are twofold. First the number of low-quality fruits must be minimized through better cultivation and harvesting practices. Second, these fruits need to be isolated at or near the farm to minimize transport and handling costs to the point of final sale. This requires the development of efficient citrus assembly markets.

Simulations that were undertaken by the study team of the impact on the farm-gate price of changes in cost elements and in the Riyadh wholesale market price demonstrated that this latter price is of overriding importance. Relatively small changes in it have major implications for the price at the farm gate and/or the profitability of exporting. For example, if the Riyadh price is reduced by one third to SP20 000 per tonne with no changes in the costs between the farm-gate and Riyadh wholesale market, the farm-gate unit value falls from over SP8 per kg to under SP2 per kg. If it is increased by one-third to SP40 000 per tonne, the farm-gate unit value increases to almost SP15 per kg. Such simulations assume that the full impact of the changes in the Riyadh price are passed back to Syrian farmers. In practice, this would not happen due to the existence of the large domestic market. To the extent that exporters are able to predict the price in Riyadh, a lower predicted price would result in their being prepared to pay less for Syrian oranges. This would have the effect of lowering prices in Syria’s domestic markets, which in turn would stimulate an increase in domestic consumption that would reduce the negative impact of the reduced price in Riyadh on prices within Syria. To the extent that exporters were unable to predict the price fall, its main impact would be to reduce their income and profits, possibly forcing them to incur losses. The impacts of predictable and unpredictable price increases in Riyadh would be the reverse of those for price falls.

Table 8.3 Parity price estimates for the export of oranges to Riyadh, 1998/99

* It is assumed that the packhouse has a waxing line. If not, transport from the farm to the packhouse must be via a packhouse with a waxing line. This adds some SP0.50 per kg in transport costs. In 1998/1999 waxing on commission was being charged at SP1.75 per kg compared with a reported cost of SP1.00 per kg.

8.7 Key policy issues

Among the set of policy issues examined as a result of the research summarized in this chapter, findings and conclusions in three key areas are discussed below.

a) What kind of surplus in the citrus sector?

The widespread perception within Syria of a national citrus surplus of several hundred thousand tonnes was significantly reinterpreted on the basis of a detailed analysis of the full value chain for Syrian citrus.

Citrus, a perishable crop, can only be stored for short periods without marked deterioration. Consequently, stocks cannot be carried over from one year to the next. To prevent a part of the crop being spoilt it is essential that all that is produced during a crop year be sold in that year. This, in turn, requires that prices in the domestic market be allowed to fluctuate to ensure that the quantity supplied by farmers is equal to the quantity demanded.

This is indeed what happens in Syria. There is no effective Government intervention to control citrus prices. In this situation, a physical surplus would be observed only if domestic market prices were insufficient to cover farmers’ harvesting and marketing costs, leading to farmers leaving their citrus to spoil on the farm. Citrus prices have never fallen to such levels in Syria. Consequently, other than for damage and loss during the course of harvesting and marketing, all citrus produced is utilized productively. Most is consumed in the domestic market in fresh form, small quantities are utilized for domestic processing, and small quantities are exported. There is no observable unutilized physical surplus.

Given this, why was there concern in 1998/1999 about a large surplus? One explanation could be that the ‘surplus’ was in effect defined as the amount by which domestic production exceeds the domestic requirement of the population - the requirement, in turn, assuming an ideal annual per caput consumption of citrus instead of a price-sensitive demand. Such a planning-based notion of surplus does not reflect the fact that market forces determine the quantities of citrus consumed domestically.

There are two definitions of surplus that are consistent with the market-based functioning of the Syrian citrus economy. These definitions employ the two readily observable indicators of surplus in a market economy, namely export quantity and market price.

The first such definition of surplus is the amount by which national production (net of harvesting and marketing losses) actually exceeds domestic consumption. In the absence of long-term storage, this amount is equal to the quantity exported. Such an export-based definition is the conventional means of specifying a surplus in market economies. However, it does not seem that this definition was behind the perception of a citrus surplus in Syria, since exports were only a fraction of the size of the perceived surplus.

The second definition of surplus is actual production minus the level of production necessary to achieve a preferred level of prices in the domestic market. Since, elimination of the surplus would raise prices, the use of such a definition would imply that domestic prices were perceived as lower than ideal. This appears to be the definition of surplus that was underpinning the Government’s concern for changes in citrus policy, since the welfare of citrus farmers and a desire to improve the profitability of citrus farming were at the centre of the national debate.

b) Means of improving the profitability of citrus farming

Exports influence the domestic prices of a commodity through competition between traders to acquire the commodity for sale in the domestic and export markets. For Syrian citrus, such competition takes place principally within the nation’s wholesale markets. For exports to raise domestic prices, export parity prices at wholesale markets must be above the levels at which the domestic market would clear if there were no exports. In this situation, competition between exporters and buyers for the domestic market drives domestic prices upwards until the profitability of exporting falls to the level at which exporters are only making normal profits and the incentive to expand exports further is eliminated. The more efficient the exporters are, and the lower are their unit costs between the point at which they purchase citrus domestically and the point at which they sell, the greater will be the positive impact of exporting on domestic prices. Thus, policies and measures that increase the efficiency and reduce the costs faced by exporters, such as those referred to in section 8.5 above, will serve to raise domestic citrus prices and the profitability of citrus farming, provided there is no export capacity constraint. Is there such a constraint?

In the short-term, within a particular season, exporters may have insufficient physical and/or financial capacity to increase exports to a level that drives domestic prices up to the point at which they are making only normal profits. In such circumstances, existing exporters make windfall profits, in effect at the expense of Syrian farmers. It is possible that this happened in 1999 with the result that domestic prices were lower than they would have been if exporters had sufficient capacity to exploit fully the export opportunities afforded by the large 1998/1999 crop. If this was indeed the case, the concern about a surplus of citrus in Syria may well have been a concern about the inadequate capacity of exporters. Thus, the surplus would refer to a level of output leading to inadequate prices to farmers, partly because of inadequate capacity of exporters. In practice however, it would seem unlikely that such inadequate capacity was a major factor, given the ease with which exporters could substitute citrus for other fruits and vegetables in their mixed export consignments.

In summary, improvements in the efficiency of domestic marketing and processing will result in domestic market prices being translated into higher farm-gate prices, thereby further raising the profitability of citrus farming. Profitability will be increased further again through improvements in the efficiency of citrus farming itself.

Thus, the solution to the present ‘surplus’ problem lies in improving efficiency in the Syrian citrus economy throughout its value chains. Increases in the volume of exports and in farm-gate prices will be manifestations of this improvement.

c) Focusing on markets fit for Syria's citrus exports

Currently, all but a small proportion of national citrus production is consumed domestically. With new planting planned, domestic production may expand more rapidly than domestic consumption. However, exports are unlikely to account for more than about one quarter of production by 2009/2010.

The geographic concentration of Syrian citrus means that, despite being fully irrigated, production varies markedly from year to year (see Figure 8.1, above). This production variability, coupled with continuation of the situation in which most production is consumed domestically, will mean that national export volume is likely to vary sharply from year to year. This has important implications for the export markets that Syria should target.

It is vital that exporters focus their efforts on those markets that are likely to prove most profitable. The Government, in turn, should focus its support for the citrus sub-sector in the context of such markets and their projected demand.

Syria currently exports its citrus principally to wholesale markets in Saudi Arabia and the Gulf countries. These markets indeed are well suited to the level of development and characteristics of the Syrian citrus sector, for a set of reasons:

i) they do not demand a high quality, uniform product. This makes them compatible with Syria’s small-farm production base, from which it is difficult to assemble large volumes of uniform fruits;

ii) they do not depend on forward contracting. This makes them suitable to the current and likely situation over the medium term, where there is marked variability from year to year in the amount of citrus available for export, and where it is difficult to predict availability well in advance;

iii) they are already the main destination for other fruit and vegetable exports from Syria. This allows Syrian exporters to ship mixed loads, thereby spreading price risks, and to vary the quantity of citrus that they ship from year to year without facing capacity utilization problems in their packhouses;

iv) the countries of the Gulf have stable exchange-rate regimes that minimize the currency risks faced by exporters; and

v) Syria has a transport cost advantage for exports to the Gulf that, unlike in other markets, gives it an edge over major competing countries, including Turkey.

Other than for exchange-rate stability, western European markets have none of these advantages. There is somewhat more potential for Syrian traders to export to Eastern Europe and the Former Soviet Union (FSU), because the quality and consistency requirements are lower. However, for Syria, these markets lack the transport cost advantages of the Gulf. Exporters also face major exchange rate and payment risks. Additionally, there is a problem with physical security and with losses from theft. Exports to this region are likely to remain opportunistic and, compared with shipments to the Gulf, relatively infrequent and unprofitable.

Although Saudi Arabia is the main destination for Syrian citrus exports, Syria supplies only a small fraction of total Saudi Arabian citrus imports of around 300 000 tonnes per year. In 1995/1996 for instance, total Syrian citrus exports accounted for only 5 percent of Saudi citrus imports. The assessment of exporters is that in 1999 Syria accounted for no more than 5 percent of other Gulf countries’ citrus imports. Thus there is great scope for Syria to expand its exports to Saudi Arabia and the Gulf simply by cutting marginally into the market shares of other supplying countries.

While individual exporters will doubtless wish to continue to investigate markets in Europe and the FSU, it is important that scarce Government resources be focused on measures that maximize the profitability of exporting to Saudi Arabia and the Gulf, since this is clearly the export area in which Syria has a comparative advantage.

d) Adjusting the domestic marketing system to a surplus situation

Citrus production in Syria is dominated by small farms that normally grow more than one type of citrus and often several varieties of each type. The main types of citrus and the varieties of each tend to be harvested at different times of the year. Harvesting of particular varieties tends to span a two-month period. In the case of lemons, the crop is harvested over most of the year. Coupled with a need for a regular flow of income, these characteristics of Syrian citrus production mean that most farmers market very small amounts of citrus frequently throughout much of the year.

Normally, such situations lead either to the creation of marketing cooperatives or to the establishment of a class of small traders that assemble the product. This has not happened in Syria. Consequently, most farmers are forced to transport their citrus to urban wholesale markets themselves.

This has a number of disadvantages. First it means that farmers spend an inordinate amount of their time selling their crop. This causes them to be away from their farm during a period when the need for labour and management is at a premium. Second, the small quantities marketed mean that citrus is normally transported in small trucks or pickups at relatively high unit cost. Third, it forces every farmer to take time investigating market conditions in an attempt to ensure that he delivers his crop to the most remunerative market. Fourth, it means that the farmer has little market power in a system that depends on personal negotiation of selling prices. Fifth, grading and preparation of the product must take place on every farm rather than at specialized facilities. Sixth, only a small number of farmers have sufficient citrus for sale at any point in time for it to be in the interest of an exporter or processor to purchase from them directly.

The existing crop assembly and marketing system clearly has important deficiencies even for the past situation where virtually all production was consumed domestically as whole fruit. It will become wholly inappropriate for the emerging situation where, in some years, a significant proportion of the total crop will need to be channelled efficiently to exporters and the existing processors. As shown in the analysis in Table 8.3, it is highly inefficient for exporters to acquire citrus from wholesale markets and grade it before re-channelling the non-exportable quality back to wholesale markets. Even if exporters buy directly from farmers, it is important that the citrus that they buy has already been graded effectively at or near the farm, thereby preventing the double handling and transport of non-exportable quality that takes place at present. Equally, it is essential that citrus be graded prior to delivery to processing plants to ensure that the processing plants use only the low-quality citrus that is least suited to domestic consumption and export.

The grading of citrus on farm and its subsequent separate delivery to exporters, processors and wholesale markets would be feasible for Syria’s largest citrus farmers. However, at best, this would apply to only the 3.1 percent of citrus farmers that have more than 1 200 citrus trees. These account for some 24 percent of national production. More probably, it would only be feasible for the 0.7 percent of citrus farmers that have over 2 500 trees. These account for only 11 percent of national production.

The need is for a system where the crop grown by small citrus farmers is assembled and graded locally into qualities suitable for export, domestic consumption and processing, prepared and packed locally in a form suitable for each market, and transported in bulk to export packhouses, wholesale markets and processing plants. This would eliminate all six drawbacks of the existing system.

In the absence of the spontaneous development of privately owned grading and packing facilities in the producing areas, the most appropriate arrangement would be for farmers to group into local associations that would own simple premises at which citrus would be assembled, sorted, prepared and packed. The necessary investment in physical facilities would be relatively small: small stores, sorting tables, and a covered area for workers involved in sorting and preparation. The association would not need to own vehicles since it could use hired transport for both assembly and delivery.

On past experience, farmers associations are unlikely to develop spontaneously, while Government-sponsored ones may lack the independence required for efficient operation. Some other form of assistance, e.g. provided by a donor, could provide seed money for the establishment of pilot associations (for instance in Latakia and in Tartous) as well as technical support until the associations were up and running effectively. If successful, farmers in other villages would be likely to replicate the pilot schemes using their own or borrowed resources.

At the very least, it will be a number of years before the majority of Syria’s citrus is sorted at or the near the farm, with selected qualities being channelled directly to exporters and processors. Moreover, even when this is achieved, exporters are likely to undertake further sorting leading to additional amounts being rejected as unsuitable for exporting. The recycling of such low-quality citrus is currently inefficient because the majority of exporters are located in Damascus, whereas the country’s larger processors are located near Latakia and at Homs, in or on the way to the major producing areas. Legal and institutional constraints on the establishment and operation of packhouses in these areas should therefore be minimized.