Agriculture - Challenges and Current Policy

CHaLLENGES aND CURRENT POLICY
AGRICULTURE
The project is implemented in the framework of The East-West Management Institutes (EWMI) Policy, Advocacy, and Civil Society 1 is made Development in Georgia (G-PAC) Program, funded by United States Agency for International Development (USAID). The project possible by the generous support of the American people through the USAID. The content is the responsibility of the implementing organizations and does not necessarily reflect the view of USAID, the United States Government, or EWMI.
CHaLLeNges aNd CuRReNt POLicY
AgRicuLtuRe
The project is implemented in the framework of The East-West Management Institutes (EWMI) Policy, Advocacy, and Civil Society Development in Georgia (G-PAC) Program, funded by United States Agency for International Development (USAID). The project is made possible by the generous support of the American people through the USAID. The content is the responsibility of the implementing organizations and does not necessarily reflect the view of USAID, the United States Government, or EWMI.
Economic Policy Research Center (EPRC). All rights reserved. 2013
CONTENT
About the project................................................................................................................................................................................................5 Main findings........................................................................................................................................................................................................6 Methodology........................................................................................................................................................................................................8 Introduction..........................................................................................................................................................................................................9 Resource base of agriculture...................................................................................................................................................................... 16 Classification of farms and land fund..................................................................................................................................................... 16 Annual crops................................................................................................................................................................................................... 18 Perennial crops............................................................................................................................................................................................... 18 Animal husbandry........................................................................................................................................................................................ 20 Mechanization................................................................................................................................................................................................ 21 Food security.................................................................................................................................................................................................. 22 Institutional environment........................................................................................................................................................................... 24 Current policy................................................................................................................................................................................................. 24 Melioration...................................................................................................................................................................................................... 24 Training and consultations........................................................................................................................................................................ 26 Support of small-size farmers................................................................................................................................................................... 27 Soft agricultural loans.................................................................................................................................................................................. 29 Programs implemented in the most recent past.............................................................................................................................. 33 Program on supporting corn production of....................................................................................................................................... 33 Program on intensification of wheat seeds......................................................................................................................................... 36 Program on support of wine production............................................................................................................................................. 41 Program on 100 new agricultural enterprises.................................................................................................................................... 44 Assessment and modeling........................................................................................................................................................................ 46 Conclusions and recommendations....................................................................................................................................................... 49
ABOUT THE pROJECT

The report, Agriculture: Challenges and Current Policy, has been prepared by the Economic Policy Research Center (EPRC) within the framework of the program Policy, Advocacy, and Civil Society Development in Georgia (G-PAC) implemented by the East-West Management Institute (EWMI) with the financial support of the USAID. Purpose of the project is to assess current state of agriculture in Georgia. The project aims at identifying obstacles in the development of agriculture, evaluating the situation with agricultural land, analyzing the agriculture policy of the country, and based on the international experience, drawing up recommendations to overcome identified problems. This report analyzes the current policy in the agriculture sector and evaluates various agricultural programs initiated by the government. This is the second report published within the framework of the project. The first report discussed the situation existing in the agricultural land market of Georgia.
MaIN FINDINGS
Small-size fragmented family farms dominate the agricultural sector of Georgia. The sector does not apply modern technologies and is characterized with low productivity; With the 50% of the countrys labor force engaged in the agriculture, the sectors share in the Gross Domestic Product (GDP) stands at a mere 8 or 9 percent, whilst the share of agricultural processing enterprises comprises 4 percent of the GDP; Among the main reasons causing the current situation in agriculture are: technological underdevelopment of the sector; shortage of qualified human resources; problems related to dilapidated infrastructure; a severe shortage of capital; underdeveloped land market; a high degree of fragmentation of small-size farms; weakness of a relevant state policy; and lack of state funding; A downward trend is observed in plant growing and production as well as in the size of croplands; Concentration of perennial plants is low in the country. It is precisely in this field that Georgia has a competitive advantage and the largest potential to generate export revenues; Animal husbandry, against the backdrop of decreasing plant growing, is also in stagnation; Lack of access to veterinary and plant protection services poses a serious threat in terms of spread of various diseases and pests; A certain improvement is observed in the access to agricultural equipment, machinery and trailers, though shortage is still apparent; With increased engagement in international trade, the growth is observed in both exports and imports with the latter growing at a higher speed though. The country imports an absolute majority of even such food products which can be produced locally; The existing situation in the sector makes Georgia vulnerable in terms of food security; Results of programs implemented in the recent past (programs on supporting corn production; on intensifying wheat seeds; wine production; and the program on establishing 100 new agricultural enterprises) failed to meet expectations for various reasons; The effect of ongoing programs (the rehabilitation of melioration infrastructure; training and consultations; sup-
AGRICULTURE: CHaLLENGES aND CURRENT POLICY
port of small-size farmers; and soft agricultural loans) cannot be evaluated at this stage because the results of these programs are yet unknown; The rehabilitation of irrigation systems can be clearly evaluated as a positive development; however, it is impossible to tackle melioration problems in the country through one-off programs and measures. This necessarily requires institutional development and establishment of optimal structures; The lack of demand for obtaining information and knowledge among producers is a serious problem. Encouraging producers to obtain information and acquire knowledge will be necessary for the development of the sector (introduction of technologies, increase in productivity, etcetera); The program on the support of small-size farmers obviously pursues social assistance goals. An especially arguable element is the transfer of various agricultural tools, which is clearly of social nature and its economic effect cannot be evaluated. The implementation of such type of programs should better be stopped in the future and the needs of beneficiaries be met within the scope of general social policy of the government; The amount of agricultural loans issued this year will assumedly be three times higher than in the previous year. On the one hand, this is an impressive increase but on the other hand, the share of agriculture in the total loan portfolio is still very insignificant, comprising three percent of the entire banking sector portfolio; Despite an increased government interest towards the sector, agriculture will still remain a sphere of social policy in Georgia in the foreseeable future, because, considering existing problems, it will be very difficult to achieve cardinal improvements in the short term; An objective of the government must be creation of a favorable environment for the development of agriculture that will encourage innovations and investments in the sector, boost interest of the private sector towards it and intensify its competitiveness.
METHODOLOGY
To assess the existing situation and potential of the agricultural sector and to analyze separate implemented or planned programs in the general context of the countrys agriculture, we used the results of the 2004 agricultural census of Georgian, also materials of the 2011 yearbook on the Georgian agriculture and regional passports developed by the government of Georgia in 2007. Even though the 2004 agricultural census might seem outdated, we, proceeding form the set task, deemed this material useful for the following reasons: 1) The 2004 agricultural census provides the most comprehensive and detailed information on the agriculture by regions and key fields of the agricultural sector. 2) During the past few years, a long process of stagnation was still observed in Georgias agriculture. The information on the dynamics of labor and capital productivity and other efficiency indicators, especially broken down by regions, is either unavailable or requires serious additional efforts which is not always possible. Moreover, stagnation processes in the agriculture can easily be evidenced by viewing them in combination with relevant statistical yearbooks and other sources. Consequently, we believe that the information recorded in 2004 is satisfactory for evaluating the agricultural sector. 3) The Georgian agriculture does not experience such significant changes by regions and fields that would, over time, clearly indicate the prospects of this or that region or field. Therefore, considering the resource basis and development potential in the countrys general context is methodologically justified. Moreover, the above mentioned literature is also valuable because it clearly shows both the current situation of agriculture and general direction of its development. The discussion of that is provided in the introductory part of this report.
INTRODUCTION
Agriculture is the only large sector of the Georgian economy which has been developing at a very slow speed over the past 20 years. The lag of this sector as compared to the rest of the economy has become especially notable in the past decade. It is true that the decrease in the share of agriculture against the GDP is characteristic for the majority of countries and is seen as a normal trend, but at the same time, the stagnation and even decrease in the absolute amount of production is also observed in the Georgian agriculture. This trend is quite strange because the rest of economy shows an obvious general upward trend in productivity. At the same time, the increase in the countrys imports makes us assume that the living standards of citizens have been gradually improving, which must create an additional demand for locally produced and processed agricultural food products; unfortunately, however, the materials of the National Statistics Office do not prove this assumption. Even though positive tendencies are observed in separate fields of agriculture, there is still a long way to go to reach the point where the situation will stabilize and competitiveness of agriculture will be ensured. For a general evaluation of tendencies existing in the Georgian agriculture and the countrys international competitiveness, it is important to review the dynamics of exports and imports in the past few years. Along with the higher engagement in the international trade, both exports and imports have increased though the latter grows at a higher speed. In 2012, the import of food products to Georgia exceeded 1,2 billion USD whilst the export from Georgia exceeded 500 million USD.
Figure 1 Export/Import tendencies of food and agricultural produce in thousand USD
Source: Geostat
The dynamic of foreign trade in food and agricultural products mirrors the general situation with Georgias foreign trade in a sense that the trade balance of Georgia has been negative for many years now. At the first blush, this is an absolutely normal and acceptable tendency, especially considering that the openness to foreign trade implies such a restructuring of the production process which implies moving towards producing more competitive goods. Nevertheless, Georgias increasing dependence on the import of even such products which, due to existing favorable natural and climatic conditions, can be produced locally is a regrettable tendency. The analysis of the dynamic of 10 top import and export commodity groups over the period from 2009 to 2012 provides a very good picture to assess the existing situation and it also rather accurately describes the degree of Georgias international competitiveness. Table 1 Import dynamics of major import products
Product import in million USD Wheat and meslin Cigars, cheroots, cigarillos and cigarettes Sugar Meat and edible offal, of the poultry, fresh, chilled or frozen Sunflower-seed, safflower or cotton-seed oil and fractions thereof Chocolate and other food preparations containing cocoa Frozen fish Undenatured ethyl alcohol, spirits, liqueurs and other spirituous beverages below 80% alcohol content Bread, pastry, cakes and the like Meat of swine fresh, chilled, or frozen Margarine 2009 105,506 57,425 50,408 37,230 28,789 42,863 22,505 26,662 19,221 12,668 15,814 2010 174,156 78,990 74,233 47,954 46,878 46,616 26,881 27,435 22,352 13,454 20,846 2011 184,232 86,743 89,738 66,104 64,659 50,523 30,894 32,867 29,226 18,858 27,283 2012 239,953 90,565 84,682 69,844 56,228 53,074 33,638 32,847 30,061 28,813 28,525 Average 175,962 78,431 74,765 55,283 49,139 48,269 28,479 29,953 25,215 18,448 23,117
Source: Geostat
The import shows the dependence on wheat, tobacco products, meat products and vegetable oils as well as food products manufactured as a result of grain processing. The majority of above listed products requires vast land resources and a high level of mechanization. Moreover, they are the products of the type which are called commodities and which have a relatively low possibility to create high value. The dynamic of top 10 export commodity groups is promising though here as well one must take into account that
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the leading product, hazelnut, which has become one of significant export products in the past few years, is also the product which belong to the commodities, and its success will largely depend on the dynamic of prices on land and labor force in the foreseeable future. Table 2. Export dynamics of major export products
Product exports in million USD Other nuts, fresh or dried Undenatured ethyl alcohol, spirits, liqueurs and other spirituous beverages below 80% alcohol content Wine of fresh grapes Waters, natural or artificial mineral Wheat and meslin Live bovine animals Waters, mineral and aerated waters, containing added sugar Live sheep and goats Fruit and vegetable juices Maize Citrus fruit, fresh or dried 2009 69,956 54,019 31,997 24,675 3,248 16,903 10,684 17,054 2,883 1,097 15,703 2010 75,134 55,705 41,138 36,917 7,242 19,310 14,666 13,427 6,201 2,650 12,143 2011 130,086 67,852 54,103 47,607 6,169 28,213 15,051 14,944 6,312 995 5,263 2012 83,659 80,027 64,871 59,341 52,062 39,267 20,888 18,162 12,537 7,678 7,670 Average 89,709 64,401 48,027 42,135 17,181 25,923 15,322 15,897 6,983 3,105 10,195
Source: Geostat
At the same time, the dynamic of the listed leading export products shows that the majority of these products has a potential to create high value and requires a relatively larger amount of labor force in which Georgia definitely has a competitive advantage. The dynamic of leading export and import products makes us think that the state policy should be largely concentrated on supporting those fields which have competitive advantage internationally. As regards state measures for supporting productivity of other fields, the state should aim at maintaining maximum efficiency and interfering at a minimal level which should be expressed in facilitating the introduction of new technologies and spread of knowledge and know-how. Given the above said, also considering the fact that the Georgian agriculture is one of the most lagging sectors in the post-Soviet space, it is desirable and necessary to reach higher rates of growth in this sector because given a higher level of the development of other countries, the Georgian agriculture will find it very difficult to compete with them in future. Against the backdrop of economic achievements of the past few years, one could have expected a speedy growth of agriculture too. However, the transition onto the market economy, the establishment of private ownership, and
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the openness to foreign investments have yet failed to bring about any notable result for the agricultural sector. This sector lags behind in use of technologies and 50 percent of the countrys labor force employed in the agriculture creates only 8 or 9 percent of the GDP. Interestingly, the share of agricultural processing enterprises in the GDP was approximately 4 percent, according to the official 2011 data. In the absolute majority of countries the share of food processing industry in the GDP is at least twice as many as the share of primary production; hence, the share of food processing in Georgia should at least be at 15 or 20 percent of the GDP; however, this is not the case in Georgia. As a result, the country imports an absolute majority of even such food products which can be produced locally. Moreover, the number of enterprises in the primary agricultural production is extremely small. In particular, according to the National Statistics Services annual publication, Entrepreneurship in Georgia, a total of 370,900 registered enterprises existed in Georgia in 2012, of which only 3,392 were registered in agriculture, which is less than 1 percent of the total number of enterprises. Unfortunately, the number of agricultural enterprises did not virtually increase during the period from 2007 to 2012. True, the turnover of these enterprises sharply increased in 2012, but the share of this turnover comprised a mere 0.5 percent of the total turnover of all enterprises. It is also worth noting that the irrigation and drainage infrastructure is almost totally inoperative in agriculture; the bank capital invested in the sector is very insignificant; the institutional environment necessary for the development is not established yet; the sector experiences an acute shortage of qualified personnel; and so on and so forth. Hence, without implementing a serious rational policy geared to support agriculture, it will be almost impossible to achieve tangible results in the short term. The situation created in the agriculture sector is complex and diverse though it can be categorized into the following main problems: Technological underdevelopment of the sector and the shortage of qualified human resources; Dilapidated and inoperative infrastructure; Acute shortage of capital; Undeveloped land markets; Weak state policy and scarce public financing.
Table #3 shows the dynamic in physical volumes of agricultural produce and size of croplands over the period from 2000 to 2011. A dramatic decrease in croplands raises doubts about the reliability of data; however, although in 2005 the state statistics service switched to a new methodology, a general downward trend is till maintained. This indicates that the agriculture as one of significant sectors of the economy, gradually loses its significance as a possibility to make profitable investments.
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Table #3 Main Agricultural Tendencies 2000-2011

Year 2000 2005 2006 2007 2008 2009 2010 2011 Croplands ha 610,800 539,600 330,200 297,200 329,300 308,300 275,300 281,000 Bovine 1,177,400 1,190,600 1,080,300 1,048,500 1,045,500 1,014,700 1,049,400 1,087,600 Swine 443,400 455,300 343,500 109,900 86,400 135,200 110,100 105,100 Sheep and goats 627,600 815,300 789,200 797,100 769,400 673,800 653,900 630,400 Share of agriculture in GDP (%) 20.20% 16.80% 11.20% 10.70% 9.40% 9.40% 8.40% 8,8%
Source: Geostat
The dynamic of animal husbandry is relatively stable, but against the backdrop of observed stagnation in plant growing productivity, one may assume that the animal husbandry is also in stagnation. A dramatic decrease in the number of pigs indicates that the African swine fever still remains a serious problem in the country and consequently, without effective implementation of sustainable measures, the development of this field cannot be expected in the nearest future. Table #4 Production indices of agricultural products 2003-2011
Total Production Meat (thousand tons) Milk (1000 liters) Eggs (million) Wheat (thousand tons) Maize (thousand tons) Potato (thousand tons) Vegetables (thousand tons) Fruits (thousand tons) Grapes (thousand tons) 2003 108.9 765.1 458.1 52 106 98 99 60 46 2005 104.7 755.7 504.6 44 98 101 102 62 58 2007 69.4 624.8 438.1 17 68 52 43 52 52 2008 57.3 645.8 437.5 18 75 44 38 36 40 2009 54.3 551.4 430.6 12 66 49 37 41 34 2010 56.7 587.7 444.5 11 32 51 39 28 27 2011 49.3 582.1 483.1 22 60 61 41 42 35 As compared to 2003 % 45.27% 76.08% 105.46% 42.31% 56.60% 62.24% 41.41% 70.00% 76.09%
Source: Geostat
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The dynamic of physical production indices of main agricultural produce over the period between 2003 and 2011 clearly shows a decline of competitiveness in the majority of agricultural categories, save eggs which, as a rule, is less involved in the international trade. With the physical indices of production showing a downward trend, Georgia becomes increasingly dependent on imports, which, in turn, is a somewhat negative tendency against the observed stagnation in productivity. On the other hand, it must be noted that Georgia will still remain dependent on imports of most of products listed in Table #4; however, the degree of this dependence can decrease only if the countrys producers manage to speedily master new technologies and skills. More realistic in the foreseeable future seems achieving self-sustainability in potatoes; meeting the demand for vegetables on the local market; and increasing the production of fruit and grapes to such an extent that enables exporting this category of products or the production received by processing thereof. Table #5 Financing agricultural sector by commercial banks 2003-2011
Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Agriculture 15,816 13,674 13,030 20,337 82,100 100,825 64,728 56,990 80,996 59,878 Total Credit portfolio 1,139,685 2,236,201 2,634,651 3,547,559 4,875,360 4,090,090 3,284,206 5,265,505 6,224,875 5,958,376 Share of agriculture in the portfolio 1.39% 0.61% 0.49% 0.57% 1.68% 2.47% 1.97% 1.08% 1.30% 1.00%
Source: National Bank of Georgia
That the Georgian agriculture is losing its positions is not the result of only global trends and the shortage of modern technologies. The sector does not virtually receive formal capital; the reasons of that must be sought in the undeveloped land market, a small size and extremely small number of agricultural enterprises. Table #5 proves that without a radical increase in agricultural funding, one cannot expect serious improvements in the sector in the near future. The situation is further aggravated by the fact that in the past few years the pubic funding of agriculture was extremely small and the need for the development of the sector was virtually ignored.
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Table #6 Public financing of agriculture

Million GEL Budgetary expenditures on agriculture Total budgetary expenditures % 2005 41.35 2006 63.17 2007 111.1 2008 70.87 2009 75.16 2010 30.64 2011 79.95 2012 229,951
2,618.55 1.58%
3,822.51 1.65%
5,237.10 2.12%
6,758.83 1.05%
6,754.11 1.11%
6,972.34 0.44%
7,569.73 1.06%
8,091.50 1.06%
Source: Ministry of Finance of Georgia
2012 saw a significant increase in public funding of agriculture, clearly indicating the increased attention towards the sector. At present, it is difficult to assess how consistently agricultural financing will increase; however, the final outcome will still depend on the efficiency of the government in implementing long-term infrastructure projects, establishing a fair and equal competitive environment, supporting the spread of technologies and knowledge and rendering such types of services to the private sector which the private sector cannot provide. This implies the prevention and fight against mass plant and animal diseases; timely communication of relevant information to farmers and speedy response to food security challenges; also facilitation of creation of alternative spheres of employment in rural areas. Proceeding from the above reasoning, the agriculture in Georgia, despite an increased state interest towards it, will still remain a sphere of social policy for some time, because bearing in mind a large number of employees in the agriculture sector, high degree of land fragmentation and other above listed factors, cardinal improvements cannot be expected in the nearest future. At the same time, the objective of the government should be the creation of such a favorable environment for the development of agriculture which will encourage innovations and investments in the sector, increase the interest of the private sector towards it and make it possible to raise the level of competitiveness. This must translate into the improved competitiveness of producers, increased revenues of agricultural employees, a gradual shift of the sector towards higher technological fields creating added value and a long-term stable development of the entire sector. Consequently, this report basically offers the analysis of a resource base of the Georgian agriculture and the general condition of the sector which is dominated by family farms; and also reviews implemented and ongoing state programs in the light of existing resource base, general level of development and above mentioned objectives faced by the state.
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RESOURCE BaSE OF aGRICULTURE

CLaSSIFICaTION OF FaRmS aND LaND FUND
The agricultural sector of Georgia is dominated by family farms. The number of agricultural enterprises is so small that they cannot essentially influence the development of the sector and in the foreseeable future, the picture will probably remain the same. Such a distribution of agricultural resources means that the degree of formalization in the sector is very low and the hired work is relatively scarce. On the one hand, such an arrangement of the sector may seem desirable in terms of maintaining social stability as almost every household has a plot of land helping household to meet their basic requirements. On the other hand, such an arrangement makes it very difficult to attract investments, to undertake needed infrastructural measures, to carry out re-equipment and introduce new technologies. Thus, in our opinion, the agriculture will remain on the level of family farming and continue a relatively extensive development. Table # 7 Number of agricultural farms
Number and classification of agricultural farms Total 729542 Family households 728247 Enterprises 820 Other types of households 475 Georgia
Source: Agricultural census in Georgia, 2004
Georgia is a land-scare country. Figure #2 shows that the size of absolute majority of plots ranges between one and three hectares. Figure 2 Percentage distribution of plots by size in Georgia
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Table #8 shows an average size of agricultural lands and the degree of their fragmentation in Georgia. The degree of fragmentation is high and given a small size of plots, this fragmentation creates problems in the development. In particular, the arrangement of basic agricultural infrastructure such as entry roads, irrigation systems, etcetera, requires higher costs. Table #8. Average size of agricultural plots and the degree of fragmentation
Georgia Average farm size (ha) 1.22 Number of plots 2.33 Average plot size (ha) 0.52
According to the 2004 agricultural census, approximately 840,000 hectares of agricultural land were in use of farms in Georgia. The figure #3 below shows the distribution of land plots by intended purposes. The concentration of perennial plants is low in the country, though it is in this very sphere that Georgia has a competitive advantage and the highest potential to generate export revenues.
Figure 3 Percentage distribution of Agricultural Land by purpose of Use
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ANNUaL CROpS
Small size and fragmentation of lands most adversely affect a commercial production of annual crops. Basic annual crops include corn and wheat accounting for more than 70 percent of annual crops production. It should be noted that corn is cultivated in every region to larger or smaller extent, whilst wheat is mainly grown in the Kakheti region. According to a popular opinion, the development of crops is especially important in terms of food security, however, in our opinion, Georgia does not have a comparative advantage in this sphere and consequently, it is better for the country to concentrate on commercially more profitable crops.
Figure 4 Share of annual crops
PERENNIaL CROpS
STRUCTURE OF ORCHaRDS
As it has been noted, the concentration of perennial crops is rather low in Georgia. However, a certain growth has been observed in recent times. Fruit processing capacities are actually unused. Apple, peach as well as hazelnut which is a leading export product of Georgia, have a big potential to generate revenues.
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Figure 5 Percentage distribution of fruits in orchards
VINEYaRDS
Wine growing is one of traditional and at the same time, perspective fields. For the development of this field, we believe that the orientation on local demand, which shows substantial reserves for commercial wine production, is no less important than the orientation on exports. Table #9 Vineyards and number of roots
Size of vineyards (ha) Georgia 37419 Number of roots in vineyards 112408526 Bearing among them 106129338 Number of separate roots 2847126 Bearing among them 2743497
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HaZELNUT
Hazelnut is grown in Georgias every region to a various extent (except for mountainous and Samtskhe-Javakheti regions). Nevertheless, a commercial production of hazelnut is concentrated in Samegrelo region, followed by Guria and Imereti regions. An intensive establishment of hazelnut orchards is underway in the Kakheti region; this move is prompted by a favorable conjuncture on the world market and favorable soil and climatic conditions in Georgia. As a profitable crop, hazelnut will probably strengthen its positions in the years to come and in combination with the processing industry, it has serious prospects to become a leading field in agriculture. Table #10 Size of hazelnut orchards and number of roots
Georgia Size of orchards (ha) 15547 Number of roots 8583715 Bearing among them 7279640 Number of separate roots 1586765 Bearing among them 1452352
CITRUS
Citrus in Georgia are almost entirely concentrated in Adjara and Guria and to a lesser extent in Samegrelo. Tangerine accounts for more than 80% of citrus plants. Citrus has always been a significant source of export revenues. If modern technologies are introduced and standards of protection of orchards are observed, this field can develop significantly. Regardless of current low level of technological intensification and average harvest (from seven to ten tons), citrus and particularly tangerine growing still remains a promising field. This is proved by a rather favorable dynamics in tangerine exports of the past few years. Table #11 Citrus orchards and number of roots
Size of orchards (ha) Georgia 8715 Number of roots 5488492
ANImaL HUSBaNDRY
Animal husbandry is marked with deep structural problems. Among them an especially acute problem is the concentration of cattle and fowl in small family farms. The absence of selective activities, extremely low efficiency, scarce production of fodder, makes a further commercial development of the field impossible. Lack of availability of the veterinary services poses a serious threat in terms of spread of various diseases.
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Table #12 Cattle livestock

Cattle, among them buffalo, sheep and goat livestock (all farms) Cattle Georgia 1157781 Cow 670385 Buffalo 29541 She-buffalo among them 17358 Sheep 648717 Female among them 377939 goat 97824
The table below does not reflect negative changes in swine population caused by the spread of African swine fever. Here we assumed that this problem affected every region in Georgia to a more or less extent. Table #13 Number of swine and beehives
Georgia Swine 489936 Total Beehives 152364 Swine 0.20 Per village resident Beehives 0.06
MECHaNIZaTION
According to the 2004 agricultural census, 15,096 tractors 20,537 hand tractors and 1,181 combine harvesters were available for Georgian farms. Taking into account the multitude of small size plots, these indicators cannot be viewed as catastrophic by any means. The problem lies elsewhere an absolute majority of machinery is depreciated, thereby significantly decreasing its efficiency. An especially acute shortage is observed in equipment necessary for agricultural operations (plows, cultivators, et cetera). In this regard, some progress has been seen since 2009-2010. The state limited liability company, Mechanizatori, possesses up to 1,000 modern tractors today and a rather diverse assortment of equipment and trailers. The private sector has also stepped up its activity. Dealers of almost all leading world brands operate in Georgia. This process is indeed a welcome development, but some questions emerge regarding the efficiency (especially with regard to the operation of the state limited liability company): how are the priorities identified with regard to what type and capacity machinery is needed? How efficient is to purchase of expensive stateof-the-art machinery instead of second-hand ones (for example, one or two years old with 400-500 tractor service meters)? And so on and so forth. Naturally, the process of renewal of the technological fleet must follow the logic of market demand. In this regard, we believe that the state should assume the following function: - - - - Supporting retraining of technical personnel; Providing information and training; promoting advantages of full implementation of agricultural operations; Supporting the development of standards for agro-technical operations; Supporting smooth operation on each unit of logistics and value chain.
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Table #14 Machinery in farms

Machinery per 100 hectares of arable land Georgia All types of tractors (wheeled, tracked, Mini) 3.20 Hand tractor 4.35 Combine 0.25 Truck 3.98 Other types of vehicles 12.99
FOOD SECURITY
Fragmentation of lands, broken down infrastructure, technological lagging and other problems in the agricultural sector condition a very unfavorable level of food security. Results of the 2004 census, if directly interpreted, provide the ground for such a conclusion. To a question whether there was an instance over the past 12 months when a household lacked those food products which it normally consumes (see Table #15 below), almost 70 percent of interviewed households answered positively. Table #15 Food Availability in households Question: Was there an instance over the past 12 months when a household lacked food products that it normally consumes?
Georgia Number of households 790552 Yes 559816 No 228683 No answer 2053
At the same time, to a questions whether there was an instance over the past 12 months when a household developed a fear that it would not have sufficient food products (see Table #16 below), 71 percent of interviewed households answered positively. Table #16 Food Availability in households Question: Was there an instance over the past 12 months when a household feared it would not have sufficient amount of food?
Georgia Number of households 790552 Yes 563540 No 224910 No answer 2102
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The provided tables allow us to conclude that Georgia is very vulnerable in terms of food security. Due to combination of multiple social and economic factors, the countrys agriculture fails to ensure the rural population with sufficient monetary income. At the same time, one must also admit that Georgia does not face a threat of mass famine only because all types of food products are produced in the country. The level of food security can be increased along with the growth of economy, including by gradual increase in agricultural productivity. A well considered state policy can significantly contribute to achieving this aim.
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INSTITUTIONaL ENvIRONmENT
The Ministry of Agriculture implements the agriculture policy through its subdivisions which are shown in the organizational chart provided below. This report does not discuss strengths and weaknesses of current institutional arrangement of the Agriculture Ministry. The need for that will arise if it transpires that the implementation of ongoing and planned measures by the Agriculture Ministry necessarily requires institutional restructuring. This report briefly overviews main aspects of ongoing programs. Since these programs have been recently launched, it is impossible to properly evaluate their effect. We will evaluate ongoing projects in the light of their relevancy to the action plan of the Ministry of Agriculture and against the world practice. At the same time, proceeding from program goals and interim results, it is possible to compare ongoing and earlier implemented projects in terms of their general efficiency.
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CURRENT pOLICY
Since 2013, the agricultural policy of the country experiences significant changes. Agriculture is becoming a priority. According to an action plan published by the Agriculture Ministry, the following strategic goals have been set for the development of the sector: - - - - - - Increasing competitiveness of farmers and agricultural employees; Supporting the development of full cycle production that creates added value; Institutional development and training; Development of regional and agricultural infrastructure; Food security; Environment and biodiversity.
To achieve these goals, a list of concrete measures was drawn up. A number of these measures have already been launched. We will provide a brief overview of several ongoing programs which, considering certain factors, may have a significant impact on the sector. In describing programs and assessing the progress, we used information from the action plan published by the ministry, available on the webpage of the ministry and disseminated by the press service of the ministry.
MELIORaTION
Irrigation of crops is one of most significant problems for farms in a number of regions in Georgia. Rehabilitation of irrigation systems is necessary in order to improve the regulation and management of water and irrigate more agricultural lands, thereby ensuring increased yields. Rehabilitation of melioration infrastructure is being performed by the United Melioration Systems Company. According to the data of the Finance Ministry, the budget financing of rehabilitation and modernization works increased almost fivefold this year and comprised 64,4 million GEL. In 2013, the United Melioration Systems Company started repair works on 195 facilities of which works have already been completed on 180 facilities. As of now, the following facilities have already been cleaned and repaired: a 680-kmlong main canal of irrigation systems and first grade dispenser; dispensers of various grades along up to 3,000 km line; canals of drainage systems along up to 148 km line. All this allows to additionally irrigate 25,200 ha arable lands. It is noteworthy that for the first time ever the state financed the cleansing of internal farm network and as of now, up to 1,000 km-long inter-farm canal has been cleaned. Last year only 20 to 25 percent of main canals were cleaned and the state did not repair first grade dispensers at all.
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At present, almost all main canals and dispensers of irrigation systems have been cleaned countrywide and upon the completion of the irrigation season, it is planned to undertake rehabilitation works on them, something which has not been done for the past two decades or even more. The company purchased 3.6 million GEL worth modern land excavation mechanisms and also 4.5 million USD worth the equipment under Chinese warranty, increasing the total number of special machinery to 100. As regards the progress of irrigation season, water is running in all systems, save the Tbilisi-Kumisi irrigation system (because of low level of water in Algeti reservoir), and the irrigation season is underway. Moreover, contracts have already been signed with water consumers on irrigating 35, 000 hectares of land (last year it was up to 24,000 ha for the entire year). In total, till the end of this year three times more land will be irrigated than in the previous year. Rehabilitation of irrigation systems can be evaluated as a positive development; however, it is impossible to solve melioration problems in the country through one-off programs and measures. Institutional development and establishment of optimal structures are necessary. It would be beneficial to engage private structures in this process too. It must be defined at what stage the state operation can be maximally efficient and concentrate the efforts of the Ministry (subdivisions) on corresponding directions. One can evaluate the efficiency and effectiveness of the melioration programs after the crops have increased and the spectrum of products diversified.
TRaINING aND CONSULTaTIONS

To provide consultation services to farmers and agriculture employees, 12 consultation (extension) and farmer service centers have been opened across Georgia. Service centers established in Gurjaani, Dedoplistskaro, Kareli, Kaspi, Marneuli, Bolnisi, Akhaltsikhe, Zestaponi, Samtredia, Abasha, Ozurgeti and Ambrolauri provide various types of services to local population. All centers are equipped with modern agricultural technique. The aim of centers it to familiarize population with modern technologies and to introduce them. A target group comprises students, farmers and people employed in agriculture. They have possibilities to consult qualified specialists and enhance professional skills. The key objective is to train qualified cadres, to improve agricultural system and approximate it with European standards. The service centers house modern labs conducting analysis of soil samples, studying plant pests and diseases, quality of seeds and fertilizers as well as animals. It is also worth noting that centers can also forecast weather conditions. A training center for 30 people is also arranged in service centers, offering local population short and longer courses in various areas, envisaging both theoretical and practical training. One should note that a number of farmer training programs were implemented in Georgia in the past but their effect was almost always less than expected. In our view,
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the problem is not only in lack of access to information and knowledge but also in the absence of the demand for this information and knowledge. The extension centers may prove more effective because they operate for a longer period, but a proper planning and implementation of activities will be of decisive importance. It is yet unknown how efficient are extension specialist in performing their jobs as against costs allocated for them. Of utmost importance for this sphere to operate successfully will be the involvement of private extension operators in the processes, which must translate into the increase in crops.
SUppORT OF SmaLL-SIZE FaRmERS

Within the framework of the project Support of small-size farmers in conducting spring works envisaged under the Georgian governments 2013 spring program, farmers received nominal and combined agricultural cards countrywide. Until 1 August, beneficiaries could purchase agricultural goods and tools. The program also envisaged another assistance for small-size farmers (owner/holder of up to five ha of land) - the plowing and tilling of furrows over the space from 0,25 to 1,2 ha. Up to 710,000 landowners received assistance within the framework of this project. The cost of project comprised 195 million GEL. Up to 200,000 ha of land has been cultivated across Georgia (including 110,000 ha was plowed). Smallsize farmers received for free: fertilizers worth 53 million GEL, pesticides worth 24 million GEL, seeds worth 5 million GEL and agricultural tools worth 39 million GEL.
Figure 6 Project Expenditures for supporting spring works of small land farmers.
Source: Report of the Ministry of Agriculture -2013
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Thus, the highest share in the costs of the program accounts for various agricultural goods and tools which were given to farmers for free; this underlines the social connotation of this measure. The figure below shows distribution of granted goods and tools by types.
Figure 7 Expenditures on goods and inventory provided for free in the framework of the program.
Source: Report of the Ministry of Agriculture -2013
Especially arguable element in this project is the transfer of various agricultural tools, which, we believe, is a measure of social nature alone and its economic effect cannot be evaluated. Overall, the mentioned program pursues clearly social aims, though one can also speak about certain economic effects too. The point is that a large part of cultivated lands belong to the category of virgin lands, consequently, one can expect a sharp increase in agricultural production this year and with it a short-term increase in the share of agriculture in the GDP. It is difficult to judge a medium- and longer-term economic effect, which will depend on multiple factors. Moreover, this program is not a part of strategy of the Agriculture Ministry and consequently, is reflected in the state budget only partially (renewal of technological fleet). In general, the implementation of such types of programs cannot be effective; nor do they create prerequisites for longer-term growth of production. The reason of that, in our view, is an unconditional support to beneficiaries which lowers competition and may undermine the motivation of successful farmers. Moreover, such type of assistance creates a probability of larger scale assistance program in the future, which sooner or later must be reflected in the budget; however, the country lacks resources for that. We believe that the implementation of such programs must be stopped in the future and needs of beneficiaries must be met in the context of general state social policy.
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SOFT aGRICULTURaL LOaNS

Initially, the project on soft agricultural loans consisted of three components. The first component envisages the issuance of interest-free commodity loans (payment in installments) to small-size farmers for the period of six months, with the upper limit of 5,000 GEL and the interest rate at 0 percent for farmers. On the basis of negotiation between banks and stores, a farmer/entrepreneur can take out needed inputs (seeds, pesticides, veterinary means, except fertilizers) from stores throughout the entire production cycle. The second component is a soft agricultural loan, with the maturity of up to two years, for medium and large size farmers in the amount ranging from 5,000 to 100,000 GEL and for the interest rate of maximum 8 percent for farmers. This type of loans is designed for financing working capital of farmers and purchase of supplies, whilst the maturity of the loan depends on its purpose. The third component implies a soft agricultural loan, with the maturity of up to seven years, for agricultural enterprises; the upper limit of the loan amount is set at 1 million GEL (or equivalent in USD) and the interest rate comprises maximum three percent. This type of loan is designed to provide a long-term monetary support to processing infrastructure projects (for example, storage, warehouse, packaging, refrigerator facilities and processing enterprises) as well as other types of infrastructure projects (for example, modern farms, greenhouses, irrigation systems). In September, the project was expanded to include two more components the fourth and the fifth. The fourth component envisages financing the lease of various machinery and equipment by entrepreneurs. As of 1 October, no activity has been observed under this component. The fifth component of the project is designed to finance wine producing enterprises alone. Interest rates established by banks under second, third and fifth components will be paid, in parallel with borrowers, by the fund in accordance with the identified schedule. Consequently, the interest rate to be paid by an entrepreneur will range between three and eight percent. As of 1 October 2013, within the framework of the first component, some 1,106,478 GEL worth commodity loans had been issued to 2,685 beneficiaries. Under the second component, a total of 63,567,973 GEL loan was issued to 3,213 beneficiaries. Under the third component, some 31,737,671 USD loan was issued to 245 beneficiaries, whilst under the fifth component the corresponding numbers are 21,327,608 GEL loan and 23 beneficiaries. In total, the financing within the framework of the project made up 117,5 million GEL. In economic terms, especially interesting are the second and third components (the fifth component is in essence the same and envisages only field-wise differentiation). According to legal status, the majority of beneficiaries of the second component are non-entrepreneurial physical persons 2,907 in total, whilst the total number of entrepreneurial
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physical persons (sole entrepreneurs) and legal persons makes up 306. Of financed fields, the highest amount of loans was issued to animal husbandry. Table # 17 Loans issued in the second compact per sectors
Purpose/Direction Number Fish processing Production Storage facilities Production storage refrigerators Livestock Pig breeding Fisheries Poultry Beekeeping Greenhouse Mushroom Production Gardening Viticulture Vegetable production Horticulture Grain Production Mixed Sheep breading Total 1 2 1 1,749 19 67 41 66 291 2 61 28 14 182 206 104 379 3,213 Individual entrepreneur or legal entity Amount in GEL 67,000 50,000 17,000 33,345,700 280,000 1,833,450 967,300 628,100 3,608,248 30,000 768,700 510,900 305,800 2,950,000 5,965,850 1,902,075 10,336,850 63,566,973 % distribution per sectors 0.11% 0.08% 0.03% 52.46% 0.44% 2.88% 1.52% 0.99% 5.68% 0.05% 1.21% 0.80% 0.48% 4.64% 9.39% 2.99% 16.26% 100.00%
Source: Project Management Agency of the Ministry of Agriculture
All the 245 beneficiaries of the third component are individual entrepreneurs (sole entrepreneurs) or legal entities, whilst the majority of loans was issued to the fields of animal husbandry, winery and warehousing. Of total loans issued under the third component, eight million USD was issued for financing start-up projects.
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Table # 18 Loans issued in the third compact per sectors

Purpose/Direction Meat Processing Fish Processing Milk Processing Wine Production Cognac Production Tea production Fruit processing Berry processing Nut processing Oil production Animal feed production Mixed Product storage warehouses Grain dryers Product Storage Refrigerators Production of packaging material Livestock Pig breeding Fisheries Poultry Beekeeping Greenhouse Mushroom production Gardening Viticulture Horticulture Grain Production Mixed Sheep Total Individual entrepreneur or legal entity Number 1 3 13 29 1 1 2 1 7 1 3 1 14 3 4 2 66 4 5 14 2 26 2 2 5 2 2 8 21 245 Amount in USD 60,000 945,000 1,060,000 9,523,775 240,000 50,000 925,000 80,000 1,116,000 31,000 162,000 430,000 1,909,600 680,236 512,000 330,000 4,737,861 804,700 403,000 1,654,500 80,000 1,719,800 432,700 695,000 237,500 477,000 635,000 766,000 1,040,000 31,737,672 % distribution per sectors 0.19% 2.98% 3.34% 30.01% 0.76% 0.16% 2.91% 0.25% 3.52% 0.10% 0.51% 1.35% 6.02% 2.14% 1.61% 1.04% 14.93% 2.54% 1.27% 5.21% 0.25% 5.42% 1.36% 2.19% 0.75% 1.50% 2.00% 2.41% 3.28% 100%
Source: Project Management Agency of the Ministry of Agriculture
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Presumably, the amount of loans issued to agriculture this year will treble as compared to the previous year. This is an impressive increase, on the one hand, but on the other hand, the share of agriculture in the loan portfolio is still very insignificant and does not exceed three percent of the entire banking portfolio. We think that today, neither the banking sector nor farmers are ready to effectively use financial instruments in the agricultural sector. In case of processing enterprises, this program can be viewed as the subsidizing of the banking sector. We can speak about tangible results only in case funding schemes are adapted to the requirements of the sector (for example, risk assessment of separate projects with the involvement of specialists; setting conditions for financing start-up projects, et cetera). As we have noted above, it is yet premature to talk about the results of ongoing projects. In general, we deem a programmatic approach to this or that problem justified, however, the concrete programs/projects must have clearly identified goals and objectives, must be correctly prioritized and must follow from the general strategy. In this regard, it will be extremely beneficial to take into account the past experience. Below, we will review several programs implemented in Georgia in the past, which, based on the comparative analysis, will allow to better identify future prospects.
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PROGRamS ImpLEmENTED IN THE mOST RECENT paST

In this report we discuss four programs implemented under the aegis of the Agriculture Ministry, namely: three programs designed to support corn and wheat growing and wine production and a program on the establishment of 100 enterprises. In due time, these programs pursued quite ambitious goals; however, it is difficult to analyze their design and achieved results because of scarcity of relevant written materials. Nevertheless, each of the four programs is discussed below based on the analysis of the materials available to us and the assessment of their relevance in the general context of the agricultural development.
PROGRam ON SUppORTING CORN pRODUCTION OF

AImS aND OBJECTIvES OF THE pROGRam
During the study we found it very difficult to identify program aims and objectives formulated in advance. The essence of the program was the following: 1. Selecting hybrid corn seeds; 2. Distributing/selling selected seeds to farmers. The program had a very large-scale information support. Out of declared aims, the main message was turning Georgia into a corn exporter country. In assessing the program we used information obtained during face-to-face interviews with representatives of the Agricultural Projects Management Agency, Agricultural Corporation, Mechanizatori LTD as well as telephone conversations with farmers involved in the program.
PREpaRaTION aND ImpLEmENTaTION

Within the framework of the program, the Ministry of Agriculture selected four types of corn seeds from the US company, Pioneer. By 17 December 2010, the interest towards the program was shown by 13,307 applicants. They declared that if they meet eligibility criteria for the project they wanted to plant hybrid corn seeds. According to a tender announced on 18 December, the amount of seed material to be purchased was estimated for 25,000 ha of land. On the preoperational stage of the program, no effort was undertaken to identify a qualitative indicator of soils in the regions. Research of soil and climatic conditions is the first and most important step in order to select out of numerous seed species that hybrid corn seed which can ensure high yields (provided that other agro-technologies are also observed). We were unable to find a list of agricultural consultants who would provide thematic consultations in the process of selecting hybrid corn seeds, i.e. when drawing up terms of reference for the tender. It can be said that the terms of ref-
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erence were drawn up by such people who did not have required and necessary professional knowledge; this affected the quality of the terms of reference. In particular, technical/objective and quality parameters of the product to be purchased are not clearly and comprehensibly described. For example, out of technical characteristics of the commodity to be supplied the terms of reference indicates, apart from a requirement that it must not be genetically modified, only one requirement which defines; it is well known, however, that apart from vegetation periods, hybrid corn seeds have many other important indicators which define not only the efficiency of the process of growing corn but also the amount of costs needed. These indicators are: maturity group (FAO), resistance against climatic conditions (frost, drought), the steadiness of the corn at the end of vegetation period when reaching a full maturity phase, moisture content, resistance against illnesses and pests, etcetera. Terms of reference did not indicate either a purpose of the use of the commodity (silage or grain) which is also important because it defines a genetic inclination of hybrid corn seeds. Informational booklets, including the agricultural calendar, were published and handed over to the Agricultural Corporation for distribution in March 2011. Consequently, the agricultural calendars which described agro-technological measures to be undertaken from October to September were distributed to farmers after March, i.e., with the delay of six months.
RESULTS OF pROGRam
To evaluate results of the program, we conducted a telephone survey of beneficiaries registered in the Agricultural Corporation. By random selection, 115 physical and legal persons were interviewed. The survey covered 2,975 ha in total, which comprises 19 percent of the total seed material (calculated over the size of land 15,460 ha) realized within the framework of the program. Respondents who grew corn before 2010, used to harvest 5,08 tons per hectare on average whilst program participants harvested 2,94 tons. There were instances when farmers were not able to use needed machinery either because they had to wait for their turn to use the machinery which would prevent them from timely performing agricultural procedure, or there was not a concrete piece of equipment available in their region. Only a small segment of program participants (about 25 percent) received profit whilst the rest either only covered the costs or incurred loss. The above said led to the termination of the program. Considering the volume of corn production in Georgia and harvest gathered under the program, it is clearly impossible to speak about any tangible effect of this program on the corn production. Table #19 shows that after a sharp decrease there was a sharp increase in corn production in 2011, but we cannot link this increase to the implementation of the program. Table # 19 Corn production (thousand tons)
Corn 2006 217.4 2007 295.8 2008 328.2 2009 291 2010 141.1 2011 269.6
Source: Geostat
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Figure 8 Corn production (thousand tons)
Source: Geostat
By comparing the data on corn production and export-import, it becomes clear that the corn production in Georgia actually meets the local demand which means that there no additional state effort is needed in this area. Table #20 Corn export/import (thousand tons)
2006 Export Import 28075 41974 2007 17255 16400 2008 6716 15511 2009 5432 31566 2010 9641 14504 2011 2076 25555
Source: Geostat
Figure 9 Corn Export/Import (tons)
Source: Geostat
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It is difficult to speak about the results of the program which lasted only one year. It is clear, however, that due to poor preparation stage it became impossible to implement the program successfully. It is necessary to draw up a medium- and long-term strategy for the entire sector and specifically, for the corn production. To this end, the following must be done first: 1. Assessment of the potential of the growth in demand (for forage and food, processing); 2. Assessment of the export potential (comparative advantage); 3. Assessment of the necessity and possibility of structural reform (intensification, fragmentation of land plots, land registration, regional concentration). In the process of implementation of action plans in accordance with the strategy, various technical issues will become significantly easier, such as the selection of seed species by soil and quality indicators, informational support and retraining of farmers. Taking into account these factors, the implementation of corn program in such a manner is not justified. We think that it would have been more profitable to limit the program to providing relevant consultations and explanations to farmers in order to enable them to create a demand for modern seeds and in a relatively longer period, find sales market through market mechanisms, which, in turn, would have contributed to a gradual increase of the production base (land plots), improvement in equipment and introduction and improvement of post-harvest technologies.
PROGRam ON INTENSIFICaTION OF WHEaT SEEDS

GOaLS aND OBJECTIvES OF THE pROGRam
The program on the intensification of wheat seeds was actually planned and implemented similarly to the corn program. The timeframe of program implementation was also somewhat similar. Declared goals of the program was the popularization of high quality, certified seed among farmers in various regions, introduction of new technologies and the increase in harvest per ha. The objectives of the program were formulated as follows: - To increase total size of cultivated lands for the production of wheat; - To double the indicator of harvest per hectare; - To treble the indicator of wheat supply to the country. In assessing the program we used the presentation of the program prepared by the Agriculture Ministry, the projects terms of reference drawn up by the Agricultural Corporation and information obtained through direct interviews with representatives of the Agricultural Projects Management Agency.
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PREpaRaTION aND ImpLEmENTaTION

Within the framework of the program, the Ministry of Agriculture selected American wheat seed, Jagger. Alike in case of corn program, the Agricultural Corporation was responsible for the implementation of the program. The program envisaged the transfer of seed wheat to farmers the cost of which they would pay in installments during one year.
Program Implementation Scheme
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At the preparatory stage of the program, rather ambitious plans were set. In particular, it was planned to import seeds for 50,000 ha. This totals 15,000 tons if calculated as 300 kg per hectare, whilst in terms of money, it amounts to 26,25 million GEL. In reality, the Agricultural Corporation imported 2,000 tons of wheat seed (3,5 million GEL). It was planned to involve insurance companies in the program but this issue has not been elaborated and consequently, not implemented.
RESULTS OF THE pROGRam

The results of the wheat seed program are very similar to those of the hybrid corn program. Identical shortcomings were observed on every stage of planning and implementing the program, which translated into more or less analogous results. However, one significant difference must necessarily be noted. The thing is that in contrast to corn, wheat is largely concentrated only in three regions of Georgia. A share of medium and large farmers is much higher in wheat production and the value chain is far better developed, consequently, wheat is a commercial product in Georgia, in contrast to corn which is mainly concentrated in family farms. Because of this difference, agro-technological conditions of wheat production were observed much better which, in turn, ensured a relatively stable harvest. One cannot speak about the increase in harvest as a result of the program, but problems related to the corn program were largely neutralized. Considering the size of wheat production in Georgia and harvest collected within the framework of the program, one cannot speak about any tangible impact of this program on the wheat production in Georgia. Table #21 shows a sharp increase in wheat harvest in 2011 after a sharp decrease in it. However, it is difficult to link this increase with the program as the program was implemented only on 14 percent of the total croplands. Table # 21 Wheat production (thousand tons)
Wheat 2008 80.3 2009 53.9 2010 48.4 2011 96.8 2012 80,7
Source: Geostat
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Figure 10 Wheat production (thousand tons)
Source: Geostat
Figure 11 Wheat harvest per 1 ha
Source: Geostat
Comparison of indicators of the production and export-import of wheat makes it clear that Georgia largely depends on wheat imports.
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Table #22 Wheat export/import (thousand tons)

2008 Export Import 14 613 2009 16 624 2010 36 797 2011 20 677 2012 176 970
Source: Geostat
Figure 12 Wheat export/import (thousand tons)
Source: Geostat
It is a widely spread opinion that the dependence of a country on the import of wheat is one of key risk factors for food security. In our opinion, the significance of such risks is exaggerated. The point is that the country does not have a comparative advantage in this area. A possibility of extensive development is limited whilst measures necessary for the intensification must fit into the logic of market demand. Considering the above described factors, the implementation of whet as well as corn programs in such a form is not justified. We think that it would have been more advantageous to limit the program to consultative and explanatory works for farmers. The problems of irrigation and soil erosion in the areas where wheat is grown are quite acute.
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PROGRam ON SUppORT OF WINE pRODUCTION

IDENTIFICaTION OF pROGRam GOaLS
The program on support of wine production, implemented over the period from 2007 to 2011, starkly differs from other programs implemented in other fields of the sector during the same period. This difference can be formulated in two points: 1. Measures implemented within the program on supporting the wine production involved the entire value chain, including the primary production, processing, sales; 2. The program was implemented over a longer period of time and involved the entire complex of measures. A strategic goal of the program can be defined as the support of local production through increasing export potential. Concentration of state resources on the development of wine production became especially urgent after Russia Imposed its embargo on Georgian wines in 2006.
ImpLEmENTaTION OF pROGRam
The following measures of the wine support programs were implemented: - Drawing up a strategy and conducting a marketing research of international markets with the involvement of foreign experts; Subsidizing the conduct of grape harvests; Providing financial assistance to wine factories; Promoting Georgian wine in the international market.
- - -
It is worth noting that farmers received subsidies before the strategy was developed as well as after that. The tables 23 and 24 below show costs of measures implemented within the framework of the program and percentage shares of these measures by years.
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Table # 23 Amounts spent on wine promotion activities (GEL)

Wine development activities (preparation of a strategy, market research, foreign expert visits) Vintage Promotion Measures Financial support of the factories Vineyard renewal supportive measures Replacing the vineyards Replacing the vineyard plantation Measures to promote the popularization of wine products The program of the Wine World Congress Wine Laboratory Research 2007 5,425.0 1,000.0 69.1 1,994.3 8,488.4 2008 416.9 6,394.5 729.0 474.8 1.2 8,016.4 2009 3,000.0 5,609.0 93.7 332.4 9,035.1 2010 4,812.2 192.9 203.9 1,406.0 2.8 6,617.8 2011 8,828.3 651.8 9,480.1
Source: Ministry of Finance
Table #24 Expenditure distribution per activities within the framework of wine promotion program
Wine development activities (preparation of a strategy, market research, foreign expert visits) Vintage Promotion Measures Financial support of the factories Vineyard renewal supportive measures Replacing the vineyards Replacing the vineyard plantation Measures to promote the popularization of wine products The program of the Wine World Congress Wine Laboratory Research 2007 64% 12% 1% 23% 100% 9% 6% 100% 2008 5% 80% 2009 33% 62% 1% 4% 100% 2010 0% 73% 3% 3% 21% 100% 2011 0% 93% 7% 0% 0% 100%
Source: Ministry of Finance
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In total, amounts spent on separate measures made up 41,6 million GEL. Almost 75 percent of this amount accounted for support/subsidies to grape harvests/farmers. It can be said that the wine support program is the concrete-product-oriented largest scale program implemented in the agriculture sector of the country.
RESULTS OF THE pROGRam

One of undeniably positive results of the wine support program is a significant improvement of quality and standardization indicators. In this regard, the enactment of regulations and quality control mechanisms in the field had a positive effect. Taking into account a rather fierce competition on the international market, the above noted is definitely insufficient for increasing export potential. Table #25 shows balance of locally produced grapes by years. Indicators of wine export/import, amount of supplies and wine consumption are calculated over grapes. Table # 25 Grape balance resources and usage
Resources (thousand tons) Stock at the beginning of the year Production Import Resources total Usage (thousand tons) Grape consumption Wine consumption Loss Export Stock at the end of the year Total usage Self-sufficiency ratio% 13 140 5 28 202 388 117 7 138 5 25 178 353 118 9 129 4 32 127 301 133 210 176 2 388 202 150 1 353 178 121 2 301 2008 2009 2010 2011 127 160 1 288 8 135 5 37 103 288 129 2012 103 144 1 248 9 138 4 32 65 248 127
Source: Geostat
Clearly, over the past five years, the volume of grape production has not increased consistently, although during the same period, 31 million GEL was spent for the aim of subsidizing farmers. The picture is almost similar in terms of exports. A rather small volume of exports against the volume of grape production in the country is notable (see figure # 13).
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Figure 13 Exports as a percentage of production and supplies according to different years
Source: Geostat
The above said reveals several factors which question the expedience of the implementation of the program and its results. Firstly, one must note a large budget of the program. Irrespective of historical importance of grapes and wine production, it is only one field of the agricultural sector. Therefore, a priority should be given to programs designed for the development of the entire sector in general. Under the conditions of limited resources, it is unacceptable to concentrate on separate directions unless a field, by its importance, is a driving force of the sector or have a potential to bring about exceptional results. In this context, especially noteworthy is a very high share of subsidies in the entire program. In the conditions of Georgia, subsidizing may be justified within a relatively short period of time, in exceptional cases as it was the Russian embargo on Georgian wines, though this must not degrade into inefficient use of resources. In our opinion, more critical for the development of wine production is the development of local market, decrease of risks in primary production, identification of perspective species and replacement of existing one with them.
PROGRam ON 100 NEW aGRICULTURaL ENTERpRISES

PROGRam GOaLS aND OBJECTIvES
In 2007, the Georgian government drew up a program on establishing 100 new agricultural enterprises in the regions (the Georgian government Decree #74, dated 26 March). The declared goals of the program were: the development of primary production, processing and agribusiness; creation of new jobs through putting into operation new agricultural enterprises in regions; increase in revenues and as a result, improvement of welfare of rural population.
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Program objectives were determined as following: Supporting creation of agricultural enterprises; Developing food processing industry and marketing; Increasing the share of local production in the domestic market; Increasing agricultural production and promoting export; Attracting investments to regions; Creating new jobs in regions.
ImpLEmENTaTION
The Ministries of Agriculture and Economy were jointly made responsible for the implementation of the program. State owned agricultural lands were selected and grouped into more than 100 lots. Apart from these lots, investors were allowed to choose desired land plots themselves from the agricultural land fund owned by the state (minimum five ha), or state owned enterprises which had at least five ha of agricultural land. Investors were required to submit projects on establishing enterprises and in the event projects were deemed satisfactory, to pay 20 percent of the price of a lot, whilst in the event they fulfilled conditions agreed in advance, would be granted a 80 percent discount on the lot. Anyone who wished so could participate in the program. To this end, such persons were required to submit the following documents to the Ministry of Agriculture: Filled in application form; An excerpt from the Public Registry and a cadastre map; A business plan of the project; A bank guarantee worth five percent of the total cost of the lot; If the amount of investment exceeded the price of the entire lot, the size of bank guarantee would be five percent of the investment amount.
Tree types of projects were considered under the program: Primary production animal husbandry, cattle breeding, swine breeding, poultry breeding, bee farming, silkworm raising, fish breeding, et cetera. Also, plant growing: fruit, tea, vine, vegetable growing, etc.; Processing packaging, chilling and secondary processing, freezing, canning, preserving; Value chain the entire cycle of storing, processing, manufacturing and marketing an agricultural product.
RESULTS OF pROGRam
Processing enterprises under the program of 100 new enterprises, launched in 2008, were established only in a few regions. The review of various internet resources reveal that six agricultural projects with the total value of 175,000
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USD were to be implemented in Samtskhe-Javakheti, Kvemo Kartli, Shida Kartli and Imereti regions as early as in 2008. These projects envisaged the production of ecologically clean honey, cheese, meat and vegetables (potato, cabbage, et cetera). All in all, according to the data of the Ministry of Agriculture, only seven or eight enterprises were set up. According to the government, the project failed due to economic crisis of 2009, although in 2010 the program was to be continued. Since 2010, the implementation of the program has been actually suspended. The failure of the program can be explained by various reasons: - In the conditions of the 2008 war with Russia and world financial crisis, the activity of investors in the market slackened which, even all other things been equal, would make the implementation of the program impossible; The program definitely accommodated market demands as it imposed fewer restrictions both on selecting investors and purposefulness of projects to be funded. The problem, however, was whether the demand for establishing such enterprises really existed on the market with the access to foreign markets limited and the local market underdeveloped.
Overall, the program on 100 new enterprises can be assessed as an attempt to privatize state owned property or redistribute state owned resources. In our opinion, the land component is less critical for foreign investors (given a relatively lower price of land) whilst the access to capital and technologies is way more important for local investors.
ASSESSmENT aND mODELING

It is impossible to assess a separate program or project without having a strategy just like it is unacceptable to launch any program if it does not fully fit with the strategy. Bearing in mind that a strategy for the development of agriculture has not been implemented so far, it is impossible to talk about the development of the sector based on separate implemented local programs. However, the analysis of the experience gained in the process of these programs may prove very useful for the development of various projects in accordance with the strategy of the sector in the future. At the given stage, our aim was to evaluate recently implemented and ongoing programs in terms of their comparative significance and prioritization. In the table #26, the programs that were implemented in the agricultural sector are rated according to four criteria. The modeling is aimed at prioritizing those programs the implementation of which would be expedient in the conditions of limited resources. We used a 10-score scale for evaluation.
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Table # 26 Determining priorities of the programs

Possible social and economic impact Expenditure size Difficulty of implementation
Risks
Criteria weight Melioration Support of small-size farmers Extension Centers Promotion of corn production 100 Agricultural enterprises Wheat seeds Wine promotion
1 4 3 6 8 9 8 4
1 8 7 4 6 8 6 5
2 2X8=16 2X7=14 2X7=14 2X6=12 2X5=10 2X6=12 12
3 3X9=27 3X7=21 3X8=24 3X5=15 3X7=21 3X5=15 18 55 45 48 41 48 41 39
It is worth to note one important difference between implemented programs. Some of the programs is of local nature (corn, wheat) whilst others (melioration, extension, 100 enterprise) extend to the entire sector. We took this difference into account when evaluating possible effects of programs, in particular, we rated local programs by a lower scores. General sector-wide programs may be characterized with higher risks and difficulties in the implementation, but the minimization of these risks and difficulties is much easier in case of infrastructure projects. Indicators of prioritization of implemented programs are divided into three groups in chart #3 and are compared with the quality of implementation of these programs, i.e. to what extent the set goals and objectives were attained. It must be noted that some of the programs are still underway and we consider their interim results which, after the programs have been completed, may significantly change. Nevertheless, it is absolutely possible to perform comparison at this stage. If we abstract the absence of the strategy of the sector, the implementation of programs falling within the green zone can be evaluated somewhat positively, whilst those falling within the red zone get clearly negative evaluation. Naturally, this assessment is relative and consequently, if we evaluate new, ongoing programs, the picture will significantly change.
Total
47
Name of the Program
Priority Matrix
48
CONCLUSIONS aND RECOmmENDaTIONS

he analysis of programs implemented in the recent past and programs being implemented now show that the ongoing programs are more relevant to challenges posed to the agriculture development. Nevertheless, the final assessment of the latter is impossible because final results of these programs are yet to be seen. Increased transparency of programs is obvious, even more so against a clear increase in funding of programs. Under the previous government, agricultural programs were mainly of inconsistent nature and therefore, it is difficult to conduct an objective evaluation of those programs. Moreover, programs implemented earlier did not fit into a general context of supporting agricultural development. This means that the role and functions of the state as an institution facilitating the development of the sector was not well understood as well as mechanisms of stimulating development. At present, one can say that some positive improvements in the agricultural sector have been observed, in terms of the level of state involvement in the development of the sector. The programs are no longer of inconsistent nature, though the relevance of some of them, for example, the program on supporting small-size farmers is rather arguable. This is especially conspicuous if we evaluate them not only through comparing them with the programs implemented in the past. In terms of ensuring sustainability of results, the government should, as soon as possible, develop and implement measures designed to raise the level of commercialization of small farmers and integrate them into the market. A special attention should be paid to the improvement of knowledge and skills among entrepreneurs (production, storage, marketing); entrepreneurs should be given a possibility to see and grasp all those benefits which improved knowledge and skills bring about; consequently, those measures should be necessarily implemented which stimulate the demand for the improvement of knowledge and skills among entrepreneurs. Considering problems discussed in this report, the government, within the next few years, should implement measures facilitating the formation of land market, also the attraction of capital in agricultural production and the rehabilitation of basic infrastructure. In cooperation with financial institutions and private sector, the government should develop various financial instruments and create a favorable environment for their introduction in order to improve the access of entrepreneurs to various inputs, working capital, et cetera. Plans regarding the formation of land market are yet unknown, though without the effective operation of this market it will be impossible to attract serious capital to agriculture. Consequently, a soft loan program, despite the fact that it significantly increased the volume of means channeled towards the sector, may come to face a serious problem in terms of sustainability, especially when a corresponding source of financing will no longer exist. The rehabilitation of main infrastructure, especially melioration systems, is definitely a positive development though here as well sustainability will be a problem without an efficient operation of land and loan markets.
49
We believe that in future the state should not spend means on the support of small-size farmers or similar programs which are of social nature, because they create unneeded expectations on the market, distort competition and can by no means ensure any essential qualitative increase. At the end of the day, the success of the countrys agricultural policy will largely depend on the ability of the government to draw up the policy and measures based on the qualitative and quantitative analysis of a concrete issue; to introduce a budgeting process which will rest on the plan of activities to be implemented and not vice versa; and the efficiency of the government in creating necessary institutional and legislative as well as physical infrastructure.
50
Economic Policy Research Center (EPRC) 85/24 Paliashvili/Mosashvili str. Building I. Floor IV. 0162. Tbilisi.Georgia. Tel/Fax: (995 32) 2 207 305 e-mail: info@eprc.ge www.eprc.ge

Agriculture - Challenges and Current Policy

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Agriculture - Challenges and Current Policy

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CHaLLENGES aND CURRENT POLICY

CHaLLeNges aNd CuRReNt POLicY

Economic Policy Research Center (EPRC). All rights reserved. 2013

ABOUT THE pROJECT

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

Figure 1 Export/Import tendencies of food and agricultural produce in thousand USD

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

Table #3 Main Agricultural Tendencies 2000-2011

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

Table #6 Public financing of agriculture

Source: Ministry of Finance of Georgia

RESOURCE BaSE OF aGRICULTURE

Source: Agricultural census in Georgia, 2004

Source: Agricultural census in Georgia, 2004

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

Source: Agricultural census in Georgia, 2004

Figure 3 Percentage distribution of Agricultural Land by purpose of Use

Source: Agricultural census in Georgia, 2004

Figure 4 Share of annual crops

Source: Agricultural census in Georgia, 2004

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

Figure 5 Percentage distribution of fruits in orchards

Source: Agricultural census in Georgia, 2004

Source: Agricultural census in Georgia, 2004

Source: Agricultural census in Georgia, 2004

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

Table #12 Cattle livestock

Source: Agricultural census in Georgia, 2004

Source: Agricultural census in Georgia, 2004

Table #14 Machinery in farms

Source: Agricultural census in Georgia, 2004

Source: Agricultural census in Georgia, 2004

Source: Agricultural census in Georgia, 2004

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

TRaINING aND CONSULTaTIONS

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

SUppORT OF SmaLL-SIZE FaRmERS

Source: Report of the Ministry of Agriculture -2013

Source: Report of the Ministry of Agriculture -2013

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

SOFT aGRICULTURaL LOaNS

Source: Project Management Agency of the Ministry of Agriculture

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

Table # 18 Loans issued in the third compact per sectors

Source: Project Management Agency of the Ministry of Agriculture

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

PROGRamS ImpLEmENTED IN THE mOST RECENT paST

PROGRam ON SUppORTING CORN pRODUCTION OF

PREpaRaTION aND ImpLEmENTaTION

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

Figure 8 Corn production (thousand tons)

Figure 9 Corn Export/Import (tons)

PROGRam ON INTENSIFICaTION OF WHEaT SEEDS

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

PREpaRaTION aND ImpLEmENTaTION

Program Implementation Scheme

RESULTS OF THE pROGRam

AGRICULTURE: CHaLLENGES aND CURRENT POLICY

Figure 10 Wheat production (thousand tons)

Figure 11 Wheat harvest per 1 ha

Table #22 Wheat export/import (thousand tons)