EPI Investment Case Studies: Competitiveness of Georgian Agriculture – Landmark and Foodland

Jagpal Singh is a Canadian national, born and raised in Punjab State of India. Having taken interest in Ayurvedic medicine, Mr. Singh investigated growing medicinal herbs in Georgia, noting that much of the country’s climate was similar to Himachel Pradesh state in India. Operating in Georgia since 2009, Mr. Singh currently owns an Ayurvedic medicine store in Tbilisi and a number of businesses which seek to identify export commodities that can be grown cost-effectively in Georgia, to produce them on his own properties, and/or to contract Georgian farmers to grow them using the same technology.

In 2010, Mr. Singh registered Foodland Ltd. as his own landholding and agricultural production company in Shida Kartli, to farm licorice and other herbs. In 2012 he established Landmark Ltd. in Tsalka district, Kvemo Kartli. In the same year, encouraged by the Georgian National Investment Agency, Mr. Singh created Agricultural Investment and Development of Georgia LTD as a consulting firm servicing Indian investors in Georgian farmland.

At present, Foodland’s properties in Shida Kartli (a total of 95ha) are occupied by squatters. Landmark Ltd is currently engaging in trials of novel crops in Tsalka, and is yet to yet to turn a profit.

On the one hand, this case demonstrates the critical role of foreign investors in developing potentially lucrative production and processing of non-traditional crops such as Ayurvedic herbs. Mr. Singh’s concept of providing canola seed, lentil seed and training to farmers, and buying back the crop at harvest, is an interesting one with potential benefits for local farmers, improved national food security and enhanced exports. As Georgia’s oilseed production is negligible, with only one sunflower seed crushing plant in Kakheti and one soybean crushing plant in Poti, and no crush for canola or any other oilseed, innovative programs like those represented by Landmark Ltd in Tsalka could reduce Georgia’s reliance on imported staples like oil.

But the conflict surrounding Foodland Ltd activities has also attracted significant media attention and has done a great deal to impair investor confidence in the Georgian agricultural sector.

The lessons learned and recommendations related to this case fall into two categories: those concerning national and local government on the one hand and those concerning foreign investors on the other. We recommend that government maintain consistent and transparent long-term policies on foreign ownership of farmland and immigration, improve communications with the private sector regarding farm investment, improve co-ordination between national, regional and local governments regarding farmland privatization, establish guidelines for compensation of displaced grazers from public funds, disperse tax revenues generated in rural districts from commercial enterprises to local jurisdictions rather than remitting all taxes to national government, and to strengthen investor aftercare and supporting services.

Investors should take care to integrate Georgians into their permanent workforce, consider measured and culturally sensitive responses to conflict, to engage the local community before commencing operations, to manage the risks of theft prudently, and to fence their properties.

EPI Investment Case Studies: Competitiveness of Georgian Agriculture – Habibco Agriculture and Agrowest

Habibco Agriculture Ltd and Agrowest Ltd, both established in 2012, are two Georgian agribusiness companies owned by the Habib family of Egypt. Habibco Agriculture operates a mixed dry land cereal and pulse cropping enterprise in Bolnisi, Kvemo Kartli on 692 ha, and Agrowest operates a mixed dryland cereal and pulse cropping enterprise on 1650 ha in Ulyanovka, Kakheti. The owners have a seven-decade history of trading and manufacturing in Egypt, and they plan to fully develop both properties with irrigation, establish a vertically integrated livestock operation, and develop vineyards in Ulyanovka.

Upon taking possession of their land in Ulyanovka, it quickly became apparent to the investors that relations with the neighbors were going to be a serious issue. Both parcels included substantial areas that had lain fallow for a number of years, and the neighboring villagers had long used them as common grazing land. At the same time, many Ulyanovka residents had not received their full quota of freehold land during land reform, and they were distressed at being denied free grazing access to what had previously been open to them and free.

When Agrowest arrived with farm machinery, villagers denied them access to the land, threatening violence against the machinery operators and property managers. When Agrowest sought support from the local authorities to mediate the dispute, for reasons that still remain unclear they were unsuccessful.

Nevertheless, Agrowest was in a good position to respond directly to the challenges raised by the local population. They hired a respected local operations manager who was effective in negotiating with villagers and reaching agreement on a package of benefits that would accrue to the local population. The package, which included local sourcing of contractors from the village, employment of some of the key agitators, utilization of Interior Ministry Security Police to secure property rights, and a local social welfare program, sufficiently ameliorated local concerns to allow operations to commence without further conflict. However, some of the locals still have mixed feelings about an commercial operation in their midst.

Once Habibco and Agrowest were able to begin operations, the broader benefits of the investment started to become clear. The companies have been using western technical advisors as well as a skilled Egyptian technical manager with a strong record in cereal cropping. Using modern dry land farming methods and novel crops, the companies are likely to displace a substantial quantity of imported grain. Their first harvest will already see them exporting oilseeds and pulses. The introduction of novel forage crops and raw materials for pharmaceutical manufacture are firsts for Georgia, and the companies are planning to outsource some of their production to neighboring farms. Agrowest is likely to plant around 350 ha of vineyards, which will be a substantial employer of both full-time and seasonal staff from the village, potentially making Agrowest the second largest wine grower in the country. Finally, although it will take as long as six years to come to fruition, the development of labor-intensive dairy enterprises on the properties will eventually create many more jobs for the local population.

Still there is impatience among the local population, and by their timelines the benefits they have been promised are slow to accrue. Given the regional uncertainty and comparatively high risk of doing business in rural Georgia, it is not unusual for investors to execute investment plans in stages, with clear milestones to be met along the way. Local residents who lose access to grazing land have a much higher level of urgency than the cautious investor’s pace is likely to match. Hearing government promises of economic and technical benefits from foreign agricultural investment, villagers become frustrated and impatient with the slow pace of benefits accruing to the local community.

The lessons learned and recommendations related to this case fall into two categories: those concerning national and local government and those concerning foreign investors. We recommend that government track investment pipelines, actively engage with incoming investors, and proactively manage disputes with the community to avoid collateral damage to investors. At the same, time there is an urgent need for the government to finalize the land reform process that began more than a decade ago. The process needs to enable local communities to be more financial viable and give them (and local government) a greater voice in decisions—like land privatization and investment in infrastructure—that will directly the livelihoods and well-being of their constituents

At the same time, investors need to work with a knowledgeable Georgian with ties to the local community. They should actively engage the local government while they are making investment plans, not as a reaction to inevitable concerns raised by local stakeholders. This should include communicating with the local community before commencing operations, developing a Corporate Social Responsibility (CSR) strategy to mitigate any negative impact of the investment on individuals and the community, and considering training, extension services and other capacity building measures for neighboring farmers.

EPI Investment Case Study: Competitiveness of Georgian Agriculture – Chateau Mukhrani

This case analyzes a joint venture involving two prominent Georgian entrepreneurs and a Swedish investor to restore a unique Georgian château dating back to the second half of the 19th century. The business concept is, first, to use a mix of modern and traditional methods and leverage the 19th century story of the château to create a premium brand of Georgian wines on the international market, and, second, to develop the winery, castle and other historical assets to provide wine tourism and hospitality services, in line with the European small luxury hotel model.

The project took advantage of Georgia’s liberal business environment to acquire full ownership of the entire estate, including 160 ha of land and historical buildings. At the same time, the investment phase has taken much longer than originally envisaged. To date the company does not have full access to about a third of the land it lawfully privatized in 2009, and the project has had to deal with many of the bottlenecks that seem to characterize doing business in Georgia. These include limited access to long-term finance (particularly after the 2006 Russian trade embargo and the armed conflict in 2008), an inadequately educated workforce, low labor productivity due to an inadequate management culture and resistance to learning, a very small number and low quality of local suppliers, and very small foreign and domestic markets.

The group of Georgian investors, which had initially received Château Mukhrani in a 50-year lease in 2001, changed in the process. Frederik Paulsen, a Swedish businessman, academic, philanthropist and explorer, joined the company in 2006, buying out the shares of other partners and bringing a much needed infusion of cash. Paulsen currently owns 80 percent of Château Mukhrani shares through Marussia Beverages (which also owns Georgian Wine and Spirits Company (GWS).

The enterprise was ultimately a great success thanks to a unique constellation of factors, including long-term vision, a well-executed branding and marketing strategy, and access to significant equity funding from a foreign partner. The project also benefited from an excellent international management team, which combines knowledge of Georgian and global best practices in wine production, hospitality business, and marketing. The investment carries many benefits for the local community and Georgia’s economy as a whole.

  • While its self-sufficiency in grape production—integral to the château concept—means that the Château does not buy the output of local farmers, the company brings many benefits to the local community. The main one is employment, which peaks at harvest time, and Château Mukhrani plans to expand the breadth and depth of services it already procures locally once the wine tourism and hospitality business reaches full scale.
  • Château Mukhrani’s business concept provides a key reference point for the Georgian wine industry as a whole, with modern wine production coupled with the branding and marketing possibilities of Georgia’s rich history.
  • Finally, the company’s prominent shareholders and senior management play a crucial role in organizing the Georgian wine industry, facilitating its dialog with the Georgian government, and promoting Georgian wines on the international scene.

EPI Case Study: Georgia Agricultural Competitiveness – Chirina

This case study analyzes a unique green field investment project initiated, financed and managed by a prominent member of the Georgian-Russian diaspora. Having earned his personal wealth in the Russian chemical industry, Mr. Revaz Vashakidze chose to repatriate a part of his fortune to Georgia to invest in a modern, fully integrated poultry production plant capable of competing with the cheap imports of frozen meat products dominating the Georgian market until 2013.

Designed and built as a turnkey project by Israel’s Agrotop in 2011-2013, Chirina is a unique, vertically integrated complex that includes production of maize and wheat, drying and storage facilities, a modern feed mill, hatchery, parent stock farms, broiler farms, a meat processing plant, distribution fleet and a mobile retail network. The company’s production facilities are located in Marthopi, Gamargveba, and Sartichala (a total of 172ha of land in freehold), and in immediate proximity to the Tbilisi International Airport and nearby Customs Clearance Zone. This latter area is very well served by air, road and rail transport networks.

After only a year on the market, Chirina’s products – fresh and frozen chicken meat sold under the BiuBiu brand – already account for about a sixth of Georgia’s total consumption. With its plans to double processing capacity by the end of 2014, Chirina will become a major food industry player in Georgia. Its operations will integrate Georgian agricultural producers into its supply base, apply downward pressure on prices, and expand the range and quality of products available to Georgian consumers.

This study carries many lessons learned with implications for Georgia’s economic development. One thing Chirina’s case teaches us is that Georgia, once a powerhouse of food production for the entire USSR, should at least be able to feed itself. Modern agronomic and processing technology is readily available on the global market, and Georgia has the people and the soil and climate conditions to regain the economic territory it once controlled. To achieve this and much more, Georgia should make a serious effort to re-integrate and bring home some of its best talent who left the country during many years of emigration.

In this context, engaging the Georgian diaspora is a first recommendation to the Georgian government from this case. Second, it is abundantly clear that Rezo Vashakidze’s investment would not have happened in the business-hostile context of 1990s. Safeguarding the business-friendly policy environment that has been built in Georgia since 2003 is a necessary condition for Georgian diaspora investors to come back. For instance, a mechanism has to be created to swiftly review and react to complaints about inefficiencies in the tax administration or other bureaucratic hurdles. Finally, the government should avoid using agricultural policy as a primary means of achieving social policy objectives. Rural employment is important, but instead of trying to subsidize smallholder agriculture the Georgian government should encourage investment into large/medium size food processing businesses, which will in turn create demand for agricultural products, integrating smallholders or providing jobs for those not able to survive in agriculture.

As far as investors are concerned, Chirina’s experience provides ample evidence for the benefits of working with international production management and technology partners to design production facilities, install modern equipment, and acquire the necessary management and technological knowhow. Another recommendation is to avoid starting too small in scale-sensitive sectors. In the absence of tariff and non-tariff protection measures, investors have to invest in sufficient capacity to be able to compete with larger foreign competitors. Finally, given the underdeveloped nature of Georgia’s market and supporting environment, investors in food processing should find opportunities to for vertical integration. This means investing in agriculture and basic production capacity to ensure control and stability of raw materials. It also means investing in downstream service capacity like distribution capacity, and, if necessary, even retail channels.

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.