EPI Investment Case Study: Competitiveness of Georgian Agriculture – Georgian Wine and Spirits

Georgian Wine and Spirits (GWS) is a French-owned beverage company based in Telavi town, Kakheti region, engaged in viticulture and winemaking. Acquired in 2011 from French beverage giant Pernod Ricard by Marussia Beverages, the enterprise has recently been aggressively investing in management reform, administrative reform, technical innovation in vineyards, expansion of areas under vine, and quality management.

This study examines the existing shortcomings in the business enabling environment and how GWS has been dealing with them. A key shortcoming identified is managerial training and productivity, which the company is addressing by investing in staff training and the implementation of an Enterprise Resource Planning (ERP) system to monitor productivity parameters both physically and financially. Importantly for Georgia, many of the company’s technical innovations are imitated by suppliers and competing ventures.

Unlike some other large agribusinesses, GWS has been able to maintain constructive dialog with the local community and government. This seems to be a matter of the age of the business—the company has been operating in different guises since 1970s—and having an “inclusive” business model that integrates considerably with the local economy. GWS employing many locals, retains the services of local contractors, and outsourced grape production to smallholders. In particular, the enterprise purchases 70% of its grape requirement from small and medium-scale producers in the Alazani and Iori valleys of Kakheti, both of which are low-income regions. All told, GWS disburses almost GEL 8 million a year to the local economy in the form of wages, payments for grape and fees paid to local contractors, helping maintain a healthy symbiotic relationship.

The GWS experience carries many lessons to be learned for private investors, the first of which concerns the benefits of acquiring an existing enterprise instead of undertaking a greenfield development. In Georgia, the risks of a greenfield investment include the potential of a falling out with the local community before cooperative relationships can be developed. When considering this risk, and applying an appropriate discount to the Net Present Value of a greenfield investment, in many cases the acquisition of an existing enterprise may represent better value.

Second, continued improvements in Georgia’s access to export markets, as experienced by GWS, and the legislative requirements of Georgia’s Deep and Comprehensive Free Trade Agreement (DFTA) with the European Union, will provide an impetus for the Georgian food and beverage processing companies to expand their supply chains to keep up with demand. It will also require processors to implement internationally accepted food safety and quality assurance standards. To remain competitive, Georgian companies should:

  • Seek opportunities to integrate vertically by investing in their own land and/or developing long-term contractual relationships with commercial farms, farmer organizations and smallholders. Sourcing arrangements will eventually need to include rigorous safety and traceability protocols
    as part of their contracts.
  • Make better use of existing land assets by putting fallow land into production, investing in modern production and post-harvest handling technologies, and providing extension services to farmers and farmer organizations that form parts of their supply chains.
  • Implement other measures to improve productivity (and competitiveness), including modern IT solutions to monitor operational and financial performance and investing in foreign management when skills deficits are obvious and cannot be addressed by local hiring.

To enable Georgian companies to maintain their competitive edge and take advantage of new export opportunities, the Georgian government is advised to:

  • Repeal the ban on foreign investment in agricultural land and put in place a comprehensive set of land market regulations taking into account the needs and interests of both foreign investors and smallholder communities;
  • Maintain the current “cheap loans” policy framework, possibly with the help of EU and other donors, to facilitate the implementation of (expensive) food safety and quality standards, and investment in productivity-enhancing cultivation and post-harvest treatment technologies;
  • Exercise great care in the implementation of the EU-compliant regulatory framework concerning food safety and quality standards. The main concerns should be i) to provide Georgian businesses with sufficient time, knowhow and resources to make necessary adjustments, and ii) make sure that the new standards uniformly and simultaneously apply to all businesses in the each sector (to incentivize compliance and ensure fairness);
  • Carefully evaluate the unintended consequences of interventions in particular value chains (e.g. provision of price support in the grape market) and consider repealing interventions that do more harm than good;
  • Co-operate with technically advanced processing enterprises that are willing to integrate smallholder farmers and farmer groups into their supply chains and invest to lift yields and enhance product quality.

EPI Investment Case Study: Competitiveness of Georgian Agriculture – Marneuli Food Factory

Established in 2007, Marneuli Food Factory (MFF) is a classical story of an old Soviet factory brought back to life through the establishment a proper supply base and massive investment in new products, modern machinery and mallnagement. Yet, it is also a story of a unique friendship and business partnership between two families: the family of Avtandil Svimonishvili and his wife Nino Ramishvili, on the one hand, and that of Thomas Diem, a Zurich-based Swiss psychologist, on the other. The two stories are so intertwined that it is impossible to fully appreciate the business success of MFF without understanding the human and ethical aspect of this venture.

The Swiss-Georgian Margebeli Holding, of which MFF is a part, includes four subsidiaries: Tskhali Margebeli (producer of Nabeghlavi mineral water), Marneuli Food Factory (manufacturer of canned food), Marneuli Agro (producer of agricultural raw materials), and Engadi (food distributor, including own products and imported goods such as mustard and olives).

MFF was built on the foundations of a defunct factory that was a key supplier of canned food, brandy and wine to the Soviet Union. When it was purchased in 2007, none of the old machinery at the plant was suitable for production. Thus, the bulk of initial investment had to be made in renovation of the factory shell and new equipment, including a tomato paste line from Italy. Lack of a stable raw material supply base was quickly identified as a key constraint for the business. This bottleneck was addressed through the establishment of a sister company, Marneuli Agro, and direct engagement of Georgian suppliers, including both farmers and traders.

Since its inception in 2007, MFF has captured 30% of the domestic market of canned and bottled preserves, and it is a major buyer of fresh produce from throughout Georgia. Based in the rich horticultural districts of Marneuli and Gardabani, in southern Georgia’s Kvemo Kartli region, MFF is partly vertically integrated with Marneuli Agro, which accounts for 40% of its raw materials, while also maintaining longstanding supply relationships with more than 150 small and mid-sized farmers.

More than US$25 million has been invested in MFF and Marneuli Agro since inception, including purchase of land and agricultural machinery, renovation of physical assets and installation of new production equipment. After a number of start-up years, the company was able to generate positive earnings (EBIDTA) in 2013. Most importantly, however, the wide range of essential products it places on Georgian shelves provides a revenue and market base beyond bottled water, which is still a luxury for the majority of Georgian households.

MFF’s success demonstrates the viability of import substitution as a business strategy for investors in Georgian food production and commercial agribusiness. Its cooperation with the holding’s distribution and agricultural production arms (Engadi and M-Agro, respectively) point to vertical integration as a useful mechanism of overcoming deficiencies in market support systems, which in Georgia include a highly fragmented supply base and weak business services.

Based on the findings of this case, our main recommendation to the Georgian government is to proceed carefully in the implementation of EU-style food safety requirements, for which Georgian producers are far from being ready. The Government should also repeal the ban on foreign investment in farmland, offer tax breaks and other appropriate incentives to compete with rival FDI destinations, and reform VAT administration to reduce its impact on companies’ cash flow, The GoG should also reform welfare regulations to strengthen incentives for formal seasonal employment conforming to Georgian labor legislation.

Our main recommendations for foreign investors are to seek reliable local partners to develop and secure their assets, consider a vertically integrated structure combing processing with commercial production base and in-house distribution; and manage payment risk by maintaining a mix of large, mid-scale and small-scale retail customers. Large retailers can be enticing, but a good customer is one who pays his bills.

EPI Investment Case Study: Competitiveness of Georgian Agriculture – AgriGeorgia

AgriGeorgia started operations in March 2007, following a strategic decision by the Italian confectionary giant, Ferrero, to develop and diversify its hazelnut supply base. After six years, the company’s total investment stands at more than EUR 40 million, which has included the purchase of 4,000 ha of land, agricultural machinery, construction of facilities and operating salaries. The company has yet to turn a profit. The first 40-ton test harvest was collected in 2012, and full production capacity will not be reached before 2020.

While the overall investment is proceeding, Ferrero has faced significant issues with access to about a third of its landed properties. Ferrero has managed related disputes with the local communities with the active involvement of the Georgian government, resulting in compensation for affected smallholder farmers and land swaps.

Given AgriGeorgia’s self-sufficiency in local production inputs and services other than labor, the main “external” aspect of the company’s operations is related to a unique portfolio of Corporate Social Responsibility (CSR) activities. AgriGeorgia’s CSR portfolio is truly unique in that it includes a major component implemented as part of a Global Development Alliance (GDA) with the US Agency for International Development (USAID). Assisted by USAID’s Economic Prosperity Initiative (EPI), this Public Private Partnership (PPP) allowed for the implementation of a massive training program promoting modern but accessible cultivation and post-harvest handling methods. The USAID- and AgriGeorgia-supported training and extension services ultimately reached thousands of hazelnut growers in the Samegrelo region. The effort culminated in the creation of the Georgian Association of Hazelnut Growers (GHGA), which, while nascent, is mandated to propagate modern technologies, facilitate cooperation among smallholder farmers, and represent them in discussions with the government and other industry stakeholders.

Ferrero’s decision to set up its operation in Georgia can be said to reflect the country’s progress in securing investors’ rights. At the same time, the company’s early successes should also be attributed to Georgia’s generally liberal business environment and the Georgian government’s continuous attention and willingness to engage—at a sufficiently senior level—in redressing any grievances or legal complications concerning the company’s land acquisitions and relations with local communities. The need for Georgia to maintain this type of supportive engagement with foreign investors is the first key lesson of this study.

The second key message concerns the negative impact of Georgia’s current legislative drive to restrain foreigners’ access to agricultural land, introduce tougher labor market regulations, and impose a stricter visa regime with many non-EU nations. At best, the moratorium on foreign ownership of agricultural land can be used to gain time to sort out persistent land registration issues, but on balance it sends an overwhelmingly negative message to would-be investors. Because they have the clout and market pull to special government attention to solve their problems, large global players like Ferrero may still be willing to invest in Georgia despite these restrictions. But this favors large companies and depends on the continued willingness of GoG officials to intervene on their behalf. This has its own negative connotation, and it sends the wrong message about rule of law and transparency. Georgia should expedite the process of developing new land legislation allowing for foreign participation in the development of Georgian agriculture.

The third key message of the case concerns opportunities for Georgia to maximize the benefits of foreign direct investment (FDI) by promoting Public-Private Partnerships involving foreign companies, donors and government institutions. The challenge for Georgia is to make sure that Ferrero’s presence and willingness to engage in Georgia is fully utilized, not only for public relations purposes, but also to improve the lot of Georgia’s smallholder farmers. It may be years before Georgia sees the direct revenue benefit of significant tax revenue from AgriGeorgia and other greenfield agribusiness investment projects. But there are myriad more immediate benefits, from knowledge transfer and productivity gains to increasing integration of Georgian smallholder farmers into national and global value chains.

Ferrero’s partnership with USAID demonstrates that a strategy to attract investors for the dual purposes of making productive use of uncultivated land and helping local farmers thrive can yield outsize benefits. With the right strategic partnership between government, donors, and the private sector, the latter goal of raising the productivity and improving livelihoods of smallholder farmers becomes even more attainable.

As a result of expected improvements in access to Eurasian and European markets (e.g. under the DCFTA), the Georgian agricultural sector is very likely to receive considerable investment in modern primary production and processing. Such investments—and the export opportunities they will bring—will create ever stronger incentives for smallholder farmers to commercialize their activities, improve product quality and achieve market access. Under these circumstances, well-structured, win-winbased PPPs like Ferrero’s partnership with USAID present one excellent way to harness private sector interests to economic development goals.

EPI Investment Case Study: Competitiveness of Georgian Agriculture – HIPP Georgia

Hipp Georgia LTD is a subsidiary of Hipp Switzerland, part of a global organic baby food group owned by the Hipp family of Germany. A philanthropist with long-standing ties to Georgia, Klaus Hipp has been looking for an opportunity to do business while at the same time serving Georgia’s needs to enhance the livelihoods of poor smallholders. He identified a supply chain opportunity that remained untapped because of poor infrastructure and unsophisticated competitors, utilized his group’s global market reach for organic apple products, and worked closely with smallholders to maintain tight food safety standards.

The company made a decision to invest in organic apple processing in 2006, following the imposition of Russian embargo on Georgian agricultural exports. With no access to its traditional export market and limited storage capacity, the Georgian apple industry went into a protracted crisis, with supply of fresh apples greatly exceeding demand, particularly at harvest. Hipp also took notice of the dire state of apple growers in many uplands regions, such as Racha-Lechkhumi and Mtskheta-Mtianeti. Due to the high cost of transportation, smallholders in these upland areas could not capture neither the manufacturing nor fresh apple markets in the lowlands. The company attempted to transform these weaknesses of Georgia’s apple growing industry into a strength by sourcing conventional apple from the lowlands, and developing a network of 1000 apple growers complying with a rigorous in-house organic quality assurance program in the upland areas.

Hipp Georgia had initially commissioned organic and conventional apple juice products from other factories. In 2009, however, the company invested in its own plant in Agara, Shida Kartli – an economically depressed area bordering on Russia-occupied South Ossetia region that also happens to be home to a large population of Internally Displaced Persons (IDP’s). By creating 75 permanent positions and hiring additional 180 seasonal workers, the company is thus making a non-negligible contribution to job creation in a region stricken by chronic unemployment problems.

Developing the necessary skills in both labor and management to operate a food factory to the highest international standards of food safety and quality assurance was no easy task, but with assistance from a sister company in Turkey and with rigorous training, the enterprise was certified with ISO22000, HACCP and the in-house Claus Hipp Bio Segel, one of Europe’s most demanding organic certification schemes. The company’s organic products are currently exported to Germany, where they are incorporated in organic baby food production under Hipp’s brand. Its conventional products are supplied to the global market, including Coca Cola factories in Azerbaijan and Kazakhstan.

The study examines Georgia’s business enabling environment and how the enterprise was able to transform major challenges — old orchards, dilapidated infrastructure, loss of an export market for fresh apple, and lack of skills in QA management – from a major liability to a major competitive strength of the enterprise. We analyze the effect of Hipp Georgia on employment and smallholders’ welfare, government revenue and exports, process innovation and new product development.

Our key recommendation for government is about the need to promote Georgia’s fresh apple – both conventional and organic – to new export markets so as to trigger a round of private investment in internationally demanded apple varieties and organic production methods. Achieving access to the lucrative fresh apple markets is indeed critical because, in the long run, apple processors, such as Hipp Georgia, will not be able to secure their supply chain of manufacturing apple other than as a by product of a thriving fresh apple industry. Measures to achieve this may include government-led export promotion, improved communication with the various actors in the apple value chain, improvement of uplands road networks and storage capacity, finance for replanting of smallholders’ orchards, renovation of irrigation systems and finance for on-farm irrigation systems.

Investors are advised to take advantage of Georgia’s access to markets in Europe by targeting organic or other niche products in order to avoid competition with giant Chinese or Turkish producers. If contemplating organic food processing, investors have to conduct detailed market research and supply chain analysis before commencing investment. As far as local supply chain quality and stability are concerned, investors should be aware of the ample opportunities to collaborate with aid donors seeking to build the capacity of smallholder farmers, link them to relevant value chains and service providers. Likewise, investors should consider the opportunities to benefit from the recent changes in Georgia’s legislation and agricultural support policies which prioritize the development of farmer organizations and improve access to finance for agricultural producers and agribusinesses. Finally, given the sorrow state of Georgia’s vocational training systems, investors should be prepared to devote considerable resources to training for Georgian work force.

SERA Policy Research Brief: Cross-Border Transmission of Food Price Shocks

Food price volatility has a profound impact on the lives of the poor in developing countries, but much remains to be learned about the sources of food price volatility. Food prices may be influenced by internal factors such as supply shocks or external factors such as demand shocks emanating from neighboring countries or world markets. The influence of external factors is commonly assumed to be transmitted from one external, typically international, market to the largest domestic city or port. This Policy Research Brief reports the results of research that aims to better understand the cross-border transmission of demand shocks using a network approach that identifies the sources of price volatility for 18 regional maize and rice markets in Tanzania.

The findings have important trade policy implications. If shocks to domestic food markets are transmitted through Dar es Salaam, then border controls will be more effective at controlling food price volatility than if shocks are transmitted from regional sources through more informal trade channels such as across land borders and lakes. Further, understanding the channels through which regional food market disturbances are transmitted to local Tanzanian markets will serve to improve forecasts of domestic food price volatility. The research concluded that Dar es Salaam is not a demand or supply focal point and that most external demand shocks to the domestic maize and rice market do not emanate from or go through Dar es Salaam. This suggests that border controls that are primarily directed at imports coming through the port in Dar es Salaam will not be very effective at controlling food price volatility.

Dar es Salaam does not connect the main surplus producing areas (i.e. the southern zone for maize and rice, and the lake zone for rice) with the main regional demand centers of Nairobi (Kenya) in the north and Nampula (and the rest of Mozambique) in the south and much of this trade is through informal channels. That limits the effectiveness of protectionist trade policies since informal trade is more difficult to control than trade through major ports such as Dar es Salaam. In particular, Songea (for maize) and Shinyanga (for rice) are focal points for local price formation, and these markets are influenced by other markets in the region. For maize markets, Nairobi has the largest influence on Tanzanian markets during the harvest season, while Nampula has the largest influence during the lean season. For rice, Bukoba (an important Lake Victoria port) has the largest influence during the harvest season, while international markets (Vietnam and Pakistan) have the largest influence during the lean season.

These findings suggest a more effective policy than trying to control cross-border food movements would be to remove impediments to food flows within the country. While Dar es Salaam is the largest city and economic capital of the country, the demand from Kenya and Mozambique are more significant determinants of prices and policy makers need to be aware of the policies of neighboring countries when formulating a national food trade policy. The main policy message from this Policy Research Brief is that border controls for maize and rice are not likely to be an effective way to provide improved price incentives to producers because demand shocks are primarily transmitted through informal channels from neighboring countries. Other measures such as reducing inefficiencies that stem from inadequate rural infrastructure are likely to be more effective at increasing agricultural productivity.

SERA Policy Research Brief: Drivers of Maize Prices in Tanzania

Maize is the most important food crop in Tanzania. It accounts for nearly 50 percent of total calories in the diet and 40 percent of cropped area. Maize production is concentrated in the Southern Highland regions of Iringa, Mbeya, Ruvuma and Rukwa; but occurs in all regions and by an estimated 85 percent of farmers. This SERA Research Brief summarizes a study that quantifies the domestic and external drivers of Tanzanian maize prices. The objectives of the study were to better understand the impacts of trade policies, as well as the influence of other domestic external factors that drive maize prices.

An econometric error correction model (described in Box 1) was estimated to determine the price relationship between 18 markets in Tanzania (Figure 1) and regional and global prices using monthly data from July 2002 to July 2014. The study extends the literature on price transmission in several ways. First, it considers several external markets as drivers of Tanzanian maize prices. Second, it separates long-run co-movement from short-term price variability. Third, it measures the influence of harvest cycles, weather anomalies, export bans, inflation and fuel prices.

The study finds that long-run Tanzanian maize prices are determined by external markets (proxied by Nairobi and other regional and global prices), but in the short run price movements are driven by domestic factors. The export bans delay the adjustment of domestic maize prices towards long-run equilibrium and lowers domestic maize prices. The short-run influences of weather shocks on domestic prices are more pronounced during periods in which an export ban is imposed. Harvest cycles have a strong influence on maize prices, signalling the importance of improving storage and transportation in order to reduce seasonal price variations which currently are 40 percent from trough to peak. Inflation and fuel prices were also found to influence maize prices.

SERA Policy Brief: Food Demand in Tanzania

Food demand in Tanzania is very sensitive to prices, but much less sensitive to incomes. That is one of the important and surprising conclusions that comes from a comprehensive study of food demand based on more than 10,000 Tanzanian households. That suggests that most consumers, except those in the highest expenditure groups, are concerned with achieving an adequate diet rather than with achieving a diet that satisfies their taste preferences. The finding has important policy implications because it shows that reducing food prices would be an effective way to improve diets and reduce undernutrition.

The study estimated a large demand system for Tanzania for 18 food groups and four expenditure groups. The study found that the households within the lowest quartile (25%) of expenditures spent 72.6% of their expenditures on food and only those with the highest quartile (top 75%) spent less than half of their household expenditures on food. This conclusion is consistent with the low calorie consumption of all expenditure groups, but especially for the lowest two expenditures quartiles who had average daily per capita consumption of 1,299 and 1,795 calories, respectively, which is well below the FAO recommended daily calorie allowance for a healthy active life of approximately 2,100 calories (Table 1). The survey data also showed that the mean per capita expenditures on food for the lowest expenditure group was 740 TZS ($0.46) per day.

SERA Policy Brief: Rules-Based Transparent System for Emergency Food Imports

Tanzania imports large quantities of basic food staples such as palm oil, rice, sugar, and wheat and occasionally has large imports of maize. While imports are needed to meet local demand, they often disrupt domestic markets when quantities imported exceed market requirements or when large imports are authorized by the Government but not anticipated by the private sector. This can lead to price volatility and increased risks for producers, traders, and stockholders. A more transparent and predictable staple foods import policy could encourage increased development of the staple food crops sectors, provide additional tariff revenue to Government, and reduce market uncertainty. It would also reduce the need for ad hoc policy decisions that can lead to regional trade disputes, and provide a more stable market environment for the commodity exchange that is currently being developed.

One of the challenges of implementing an effective staple foods import policy is the difficulty of controlling illegal imports that enter Tanzania from neighbouring countries and through major Tanzanian sea ports. They are illegal in the sense that they don’t have import permits as required, and they don’t pay the import tariff. The magnitude of these illegal imports is unknown, but they can be estimated by comparing the reported exports to Tanzania from other countries to the imports reported by Tanzania. For example, exports of rice to Tanzania reported by all exporting countries were two to three times as large as imports reported by Tanzania during 2011-2015. That suggests that large imports were unrecorded, but even that may underestimate actual imports because some exports going to neighbouring countries actually get diverted to Tanzania. A similar situation existed for sugar, with exports to Tanzania being reported as about twice as large as imports reported by Tanzania (Table 1). Other staple food crops showed less divergence between reported exports and reported imports.

Controlling illegal imports is difficult because Tanzania has long and porous land borders with neighbouring countries and a long coast which allows easy access for small quantities of food staples. Illegal imports also enter the mainland Tanzanian market through other channels, including transit goods that remain in country and improperly labelled imports that are not detected by customs. However, large quantities of illegal imports are also reported to enter through Tanzania’s major sea ports. The loss in tariff revenue from illegal imports is substantial and could provide funding for upgrading customs as well as general budget support. The loss of tariff revenue from rice was approximately 60 million USD per year during 2011-2015 based on the difference between reported exports and reported imports, and the loss of tariff revenue on sugar was approximately 62 million USD per year over the same period. If only one-half of this tariff revenue could be collected in the future, it would be a substantial contribution to the Tanzanian budget.

Tanzania has higher import tariffs on food staples than many of its neighbouring countries and that creates incentives to import staple food crops into neighbouring countries and sell them in the Tanzanian market without paying the tariff. Kenya, for example, has a 35 percent tariff on rice imported from Pakistan while Tanzania has an import tariff of 75 percent. That provides incentives for Kenyan traders to import at the lower tariff and sell in Tanzania. Zanzibar also has a lower import tariff of 12.5% on rice compared to the mainland and that encourages traders to import more than is required for Zanzibar’s consumption and sell the surplus on the mainland. The approximate magnitude of these surplus imports in Zanzibar can be estimated and have been as much as 30,000 tons of rice per year beyond the quantities required to meet domestic demand in Zanzibar.

With such large tariff differentials and the relative ease with which illegal imports can enter by land and sea, it is very difficult to control illegal imports from neighbouring countries. In response to this situation, the Government of the United Republic of Tanzania (GoT) has often relied on quantitative controls and occasional bans on imports of rice and sugar (The Citizen, March 15, 2016) in an effort to control illegal imports. Quantitative controls are implemented by restricting the issuing of import permits; however, Tanzania has not been very effective in monitoring and controlling illegal imports. In some cases, import permits were issued for a specified quantity but actual imports exceeded the quantities authorized. This occurred in 2013 when duty-free rice imports were authorized, but the actual imports were much larger than the quantities authorized and the imports disrupted the domestic market causing prices to fall sharply. There are also reports of import permits being issued for larger quantities than required to balance the market (The Daily News, February 19, 2016) which also disrupts local markets. The longer term consequences of such disruptions are to cause greater price volatility and greater uncertainty for producers and other stakeholders and, therefore, less investment.

A staple food import policy that relies on established tariffs would be less disruptive to domestic markets, generate greater tariff revenue to Government, and would operate automatically under normal market conditions. It would also be more compatible with policies of the East Africa Community and less likely to create regional trade disputes. However, in order for such a policy to operate effectively, it would be necessary to control illegal imports. Some illegal imports would continue, but more effective monitoring and enforcement of staple foods import policies and tariffs could reduce illegal imports especially through major sea ports.

SERA Policy Brief: Food Basket Costs in Tanzania

Food is the largest expenditure item for the typical Tanzanian household and accounts for significantly more than half of total expenditures for the poorest. Consequently, food prices and food costs are very important to consumers and to the Government of the United Republic of Tanzania (GOT) as it addresses food security concerns. Since the typical diet and food prices vary greatly across Tanzania, it is important to consider the cost of the entire food basket in each region in order to fully understand the implications for food security. The SERA Policy Project and the Economic Research Service of the U.S. Department of Agriculture worked closely with the Department of Food Security and the Department of Policy and Planning of the Ministry of Agriculture, Food Security, and Cooperatives to develop and pilot a comprehensive and systematic approach to measuring food costs. This approach is referred to as the Food Basket Methodology (FBM), and it is used to measure the monthly costs of the typical food basket.

This Policy Brief explains the Food Basket Methodology and provides estimates of the monthly food basket costs from January 2011 to July 2015 for 21 regions in Tanzania and considers the implications for food security. Food basket costs can be used to provide early warning of regional food cost increases, but they can also provide valuable insights into broader food security issues by showing how prices of individual food items affect overall food basket costs and how food prices are related within a region and between regions. This information can be used to assess the impact of a particular food price increase on food basket costs. For example, maize is the main food staple in Tanzania accounting for about 40% of total calories in the typical diet; but it accounts for only 14.5% of the cost of the typical food basket and less than 8% of the food basket cost in Dar es Salaam. Consequently, an increase in maize prices has less of an impact on food costs and food security than implied by its calorie share or market visibility. Such detailed knowledge of food basket costs can contribute to better understanding of food security in Tanzania and lead to better policy decisions and better targeting of food assistance by identifying vulnerable regions and their consumption patterns.

SERA Policy Brief: Policy Options for Food Security, Agricultural Growth, and Poverty Reduction in Tanzania

Tanzania has a unique opportunity to improve food security by increasing agricultural growth and rural incomes through exports of food crops to the East Africa region. Tanzania has an abundance of natural resources that can be used to increase food crops production, and it faces a regional market that is food deficit and expected to remain food deficit for the foreseeable future. Tanzania’s exports will depend mostly on its ability to increase production and access regional markets. Enabling policies are essential for Tanzania to achieve its export potential both in order to provide incentives to farmers to increase production and in order to maintain access to regional export markets. These policies should focus on private sector-led growth, encouraging exports, and allowing market forces to guide the economy. Key policy areas include policies to: Increase Food Crops Production, Encourage Exports of Food Crops, Improve Systems to Identify Food Insecure and Vulnerable Groups, Hold Adequate Food Grain Reserves for Emergencies, and Establish a Transparent Rules-Based System for Emergency Food Imports. If Tanzania can make the right policy choices in these key areas, it can expect to improve long-term food security, experience more rapid growth in the agricultural sector, and reduce rural poverty.