Georgia and Bilateral Free Trade Agreements; What’s Next?

 

The Deep and Comprehensive Free Trade Agreement between Georgia and the EU, brought into effect in 2014, was hailed at the time by many as being of great importance to Georgian manufacturers and food/beverage producers. Skeptics commented that 7000 articles under the pre-existing GSP+ agreement with the EU were already duty-free and quota-free for many years, yet very few exporters had ever taken advantage of the concessions. Nonetheless, exporters of alcoholic beverages were keen for the deal to go ahead; while the EU makes up a small proportion of wine and spirits exports, free access to the world’s largest consumer goods market would facilitate steadily rising market share. This very basic treatise will look at alcoholic beverages as representative of Georgia’s primary industry; to a certain extent conclusions drawn here can be applied to other food commodities also.

Note that for all analyses that follow, wines sold are not confined to bottled wines. Cask wines and bulk wine in flexitanks are included in the totals.

Georgia traditionally has been a very Russia-focussed wine production country, as the following charts indicate.

Georgian Wine Exports by Value

Georgian Wine Exports by Volume

Source: UN Comtrade

A quick visual assessment of these charts indicates that Russia is a higher volume/lower price market for Georgian wine than the EU.

Coincidentally, 2014 was a boom year for Georgian alcohol producers; the Russian market that reopened in 2013 was robust and pent-up demand for Georgian wine meant that sales volumes were robust, while prices were acceptable.

Georgian Wine Exports to Russia, Value

Georgian Wine Exports to Russia.jpeg

Source: UN Comtrade

In the face of this, the urgency for diversifying into challenging new EU markets was probably dulled by the lure of familiar markets in Russia, despite the higher price capable of being captured in Europe if quality attributes were addressed. A few shrewd operators maintained a counter-cyclical approach, leveraging their Russian sales revenues into aggressive European and Asian marketing campaigns. Those producers are doing rather better now than their solely Russia-centric competitors.

Sales volumes of Georgian wine into the EU have shown satisfactory growth since the DCFTA was implemented, but the the average price per hectalitre has increased by almost 40% in dollar terms. Granted it is only two year’s worth of data points. It is also possible that the mix of products reaching the EU market has changed and that higher-end wines are a larger proportion of imports from Georgia. It will be interesting to observe whether exporters will restrain prices to aggressively capture market share, or continue with relatively high margins but with slower sales growth. It appears that the devaluation of the Euro in 2015 has had some impact upon dollar-denominated trade statistics. Why average price per HL goes up and volume sold goes up, but total $ revenue goes down, is something of a mystery.

Georgian Wine Exports to EU, Value

Georgian Wine Exports to EU, Litres.jpeg

Source: UN Comtrade

There are challenges in the European market; European consumers, especially in the West and South of the continent, have quite well-defined preferences and in many cases have been drinking the same wines from the same appellations for hundreds of years. Changing those preferences will not be easy. The proverbial “wine lake” of Europe means that table wine in Europe is cheaper than mineral water in many cases; Georgia does not effectively compete in this market segment, lacking the subsidies or economies of scale to do so. Data suggests that much of the Georgian wine entering the EU is premium or super-premium.

The next major Free Trade Agreement being pursued is with the People’s Republic of China. Until recently one of the fastest growing centres of wine consumption in the world, China is poised to exceed Russia as a wine consuming country before the end of this decade. However, the two-year Anti Corruption Campaign launched by the Chinese Central Government has constrained sales growth somewhat. In China, a substantial proportion of wine sold is used for gifts, for people from whom one desires a favour, so the anti-graft campaign has dulled the growth of this sector. That said, Georgian wine exporters have been capturing market share in China, from a very low base, at an encouraging rate despite economic slowdown and the anti-graft campaign. Import tariffs on wine imports into China are 14%; exporters from countries with a Free Trade Agreement with China do not have to pay this tariff.

Georgian Wine Exports Asia-Pacific by value

Georgian Wine Exports to Asia-Pacific.jpeg

Source: UN Comtrade

As one can see from the charts, China and Japan account for the majority of volume, and other markets are very much in “test-phase”. Wine sold in quantities of less than a full 20-foot container load have a very high freight price and slow transit time, which limits market uptake.

Until early this century, what little wine that was consumed in China was mostly domestic and of very poor quality. I can vividly remember buying a bottle of “Great Wall” Cabernet in 2000 in Shanghai, which had a can of Coca Cola taped to the neck of the bottle as a free gift. The serving suggestion was to blend the two, which would make the wine almost drinkable; otherwise, it tasted like furniture polish. In only 15 years, wine drinking has become a prestigious activity in China indicating sophistication, and China is poised to have one of the largest areas under vine in the world soon. Vineyard management and winemaking quality is dramatically improved. Wine imports have also boomed, with over a third accounted for by French wine, and New World exporters taking advantage of the fact that many Chinese consumers entering the wine market for the first time have yet to establish fixed habits regarding country of origin of their wines.

It is interesting to observe the average price per hectalitre commanded by exporters to the East Asian markets. France commands the highest premium, and Georgian and Australian wines fit a niche in the next tier, commanding significantly higher prices than Chilean or South African wines.

Wine Export Prices by Market

Source: UN Comtrade

Note that these prices per hectalitre are calculated on an FOB basis, not CIF. When freight and insurance are included, the picture is different and between-country discrepancies in pricing are reduced somewhat.

 

East Asia Wine Imports, Prices by Exporter

Source: UN Comtrade

This may change with time now that rail transport from Georgia across the Caspian to China has become faster and, hopefully, cheaper than sea freight. This could put Georgian wine exports at a competitive advantage to those from South America, Africa, Australasia and western Europe.

Interestingly, on average wines imported into Mainland China from France, Australia and Georgia are priced roughly the same on average on a CIF basis. This does not take into the account the price distribution of different products in the product mix, but it is still an interesting finding.

If we consider that Australia and Georgia have some similarities in this market (similar average price point), then it is worthwhile looking at Australia’s experiences in capturing emerging market share.  The following infographic from Wine Industry Insight Magazine’s Lewis Perdue should be interesting.

WineIntelligence-china-infographics-2-855x1024

Australia is a zero-subsidy jurisdiction. Georgia maintains floor prices for grape produced by smallholders, but there is no substantial subsidy for commercial-scale vignerons. Australian exporters have been able to capture significantly better prices on average than most of their competitors, through rigourous quality management, national and regional branding, and aggressive export marketing.

Concurrently, the Free Trade Agreement with China has significantly reduced the cost of Australian wine to Chinese distributors (the tariff of 14% of the Cost-Insurance-Freight value is now abolished for Australian wine) which allows flexibility for discounting to capture market share, or capturing better margins, or a mix of these strategies. It is still too early to see the effect on the Free Trade Agreement with China, effective December 2015.

Australian Wine Exports to China

Australian Wine Exports to China volume.jpeg

Source: UN Comtrade

A weakening Australian dollar over the past two years has substantially improved Australia’s trade competitiveness, so even though the drop in price per HL appears steep, in AUD terms it is much less pronounced and counteracted by a greater volume of sales.

Australia also implemented Free Trade Agreements with Japan (January 2015) and South Korea (December 2014) , and the effects on sales and average price can be seen here.

Australian Wine Exports to South Korea.jpeg

Australian Wine Exports to South Korea by volume .jpeg

Source: UN Comtrade

A 25% increase in sales turnover in one year after an FTA comes into force in USD terms is quite a good result.

In Japan’s case, the response to a FTA is a more mixed result

Australia Wine Exports to Japan by value

Australia Wine Exports to Japan by volume

 

 

 

 

 

 

 

Source: UN Comtrade

An substantial increase in wine sales in litres to Japan was noted in the first year of the FTA, with a tripling in bulk wine sales. Average price per hectalitre in USD terms has dropped in that period as a result of the change in product mix, compensated by the concurrent weakening of the AUD and improved terms of trade. Japan’s economy is still rather shaky so dramatic growth in wine prices is unlikely in the near future.

Granted these datasets only involve a few years and prices are averaged over many product classes. The next 2-3 years will yield very interesting data on the cost-benefit of FTA’s for wine exporting countries.

Hiro Tejima, Wine Australia’s Head of Market for Asia Pacific, comments on the short-term effects of these two FTA’s and how they see the future.

 

Non-traditional markets for Georgia have been core markets for Australia for some decades. The $6 billion a year wine import trade in the Asia Pacific region still has plenty of growth potential, and for wine producers in countries other than France, the opportunity exists to capture market share amongst first-time wine drinkers who are not yet firmly wedded to European wines.

Asia-Pacific Wine Imports

Source: UN Comtrade

Steady growth within the ASEAN (Association of South-East Asian Nations) FTA in wine imports is encouraging. Singapore is a Free Port, with no import duty on wines, but other neighbouring countries with high tariffs are showing good growth potential. Australia’s establishment of an FTA with New Zealand and ASEAN in October 2015 should provide impetus for further growth in wine exports. Currently ASEAN countries import between 15% (Singapore) to 50% (Malaysia) of their wine from Australia.

Asean ex-Singapore Wine Imports

Source: UN Comtrade 

Only 20 years ago, Australian wine was unknown in Asia. Now it is ubiquitous. Export market promotion has evolved over time, with levies imposed upon wineries and grapegrowers to fund export market development, vineyard R&D, and biosecurity programmes with government co-operation.

Brand Australia” is now well known, and consumers understand the diversity of product available under that umbrella, from supermarket “critter wines” like Yellowtail at $5 to $3000/bottle Penfolds Grange. Regional/appellation identities like Barossa Valley, Margaret River, and Rutherglen are understood by consumers within the larger national wine identity.

The lessons that Georgia can learn from this:

  1. Effort invested in negotiating Free Trade Agreements potentially have a bigger effect upon exports, and bigger flow-on effect to grape growers, than subsidies can.
  2. Free-Trade Agreements can affect demand for different product types of different price points in different ways.
  3. Free-Trade Agreements in the short term may, but not always, result in higher FOB prices for exported goods, but volumes sold tend to trend upwards when tariffs are reduced.
  4. Export marketing requires an industry-led approach with government co-operation. National branding is an essential component.

To what extent these conclusions can also be apportioned to other agricultural exports can be argued. East Asia is a major importer of nuts of all types, including hazelnuts, and nut consumption is a pretty good proxy for economic development. Georgia is well positioned to be a major exporter of hazelnuts, walnuts, pecans, almonds and pistachios if it can get its act together, and a diversity of target markets with no import tariffs would make this investment class more attractive to professional investors. Nut orchards are expensive to develop and have terrible cashflow dynamics for the first five years, so it requires patient capital and a professional approach; such investments are more likely to occur if market access is more favourable.

Fresh produce exports are in a state of flux, as both the EU ($12 billion a year) and Turkey ($2.5 billion a year) have lost access to the Russian market, leaving large surpluses of produce heavily discounted in the region. After some adjustment to new market realities, some niche products like Kiwifruit, blueberries, honeyberries and blackberries will no doubt increase market penetration in Europe when GlobalGAP standards are implemented in supply chains and distribution in Europe is sorted out.

The EU DCFTA is an excellent development that may yield incremental gains for Georgian wine exporters, from a low baseline, in a very attractive consumer goods market. However, it should not be seen as an end unto itself, but the first of many Free Trade Agreements negotiated with non-traditional markets. Having gone through the process of DCFTA negotiations, increasing safety standards and dealing with non-compliance to satisfy the EU, Georgia is now institutionally equipped to push through deals not only with China, but with ASEAN, South Korea, Japan, Australia, New Zealand, India and NAFTA.

 

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Presentation on Precision Viticulture

UC Davis runs an excellent extension programme from its department of Viticulture and Oenology. The following seminar by soil scientist Dr Jean-Jacques Lambert provides an excellent precis on Precision Viticulture research which has already been commercialised, and technologies that are still in the research phase. The way in which map layers in GIS are used to assist vineyard design are particularly interesting.

jjl

The seminar can be viewed here

The accompanying Powerpoint presentation can be viewed here

 

Remote Sensing in Individual Vineyards

The cited article from Fortune Magazine neatly summarises how drones with multispectral digital photography equipment can improve vineyard efficiency and enhance profits.

ctd-drone-matchup

Objective data on vine vigour, in a mapped form, is tremendously useful. Very vigourous vines tend to yield more, but have a tendency towards poorer flavour concentration. Vines under modest stress will tend to yield less harvest but with enhanced flavour characteristics. Overdoing the stress, due to water deprivation, nutritional deficiency or disease, will be counterproductive. Ground-level validation after scanning can yield tremendous information as to vineyard management efficacy. Also, remote sensing and grape testing can be coordinated to schedule harvesting of different parts of individual parcels at different times.

Australian research shows that grape yield per vine can vary by a factor of 5 from different zones within even quite small vineyard parcels. Vineyard managers often will earmark lower vigour zones of the parcel for later harvest than the rest of the parcel, to allow sufficient time for full maturation and development of flavour. Chateau-style wineries in Australia and the USA report increased winery margins in the order of USD$20,000 per hectare as a result of differential harvesting. GPS devices on mechanical pickers make management of this process quite simple, but hand-picking crews equipped with cheap GPS devices and a proper plan can accomplish the same result.

One day last fall, a drone lazily circled above Hahn Estate Winery, home to 1,100 acres of grapes in California’s Santa Lucia Highlands.

The drone, a five-pound model airplane, wasn’t there merely to take photos. Fitted with visual and multispectral sensors, it was collecting various kinds of data—information to help Hahn monitor the health of its vineyard and resist the effects of California’s fourth consecutive year of drought.

CTD.02.01.16.PrecisionHawk.02Photo: Courtesy of Precision Hawk

Winegrowers worry about two things: the quality of their grapes and how many they can produce. By running software algorithms made for monitoring crops, a drone can help the winery determine both. Welcome to the connected agriculture business. Yes, even the Internet of things has gone farm to table.

ctd-launch

In November, Hahn volunteered a patch of its vineyard to test the concept. It teamed up with PrecisionHawk, a Raleigh, N.C., company specializing in drones and aerial data analysis, and Verizon VZ -0.04% , which developed an agricultural technology platform to synthesize and analyze crop data. Aerial data from PrecisionHawk’s drone let the winery infer canopy cover, an indicator of crop vigor, while ground sensors installed by Verizon monitored temperature and soil moisture.

PrecisionHawk analyzes crops in several ways. Multispectral imagery detects anomalies unseen by the unaided eye; a field uniformity algorithm helps quantify the relative density and health of vegetation.

“All of that data goes into the platform, which runs it against our analytics engine, which looks for patterns and anomalies to make recommendations,” says Mark Bartolomeo, who leads Verizon’s IoT Connected Solutions division. “The idea is, if you’re the farmer, it shows exactly what you should do.”

 

New Logistics Options for Georgian Wine and Nuts

This month, a train from Lianyunyang port in East China’s Jiangsu province arrived in Tbilisi. Performed as a test shipment, the exercise was designed to test how a shipment of non-perishable goods (in this case electronics) could travel through China’s domestic rail network to its border with Kazakhstan at Korgas, through the Kazakhstan rail network to Aktau, cross the Caspian on a ferry to Azerbaijan’s capital Baku, and then travel to Tbilisi.

image1

The duration of travel for this journey was 15 days, which compares with the current 10-15 days that container freight on trucks taking the same route. It is 25 days shorter than the same route by sea.

From Civil.ge

According to the state-owned Georgian Railway one more container train is scheduled to deliver cargo via Georgia through this Trans-Caspian International Transport Route. The Georgian Railway also said, without specifying figures, that it expects “several thousand” of containers to be shipped via this route in 2016. Georgia hopes that completion of the Baku-Tbilisi-Kars railway in 2016, that will link Azerbaijan with Turkey via Georgia, will increase efficiency of the route.

It is worth noting that this route runs in parallel with China’s planned high-speed rail network routed between Turkey and China via Iran.

railvision-graphic-1001

As can be seen, the planned high-speed link bypasses Georgia and the Caspian altogether, with no need for moving carriages onto ferries for a slow trip over the Caspian Sea. It also avoids passing through either Azerbaijani or Armenian territory, which may or may not be linked to regional security issues. Using standard high-speed rail technology, cruising at 200-250 km/hour, a trip from Julfa in northern Iran to China’s Eastern or Southern coastal cities( a journey of 8000 km), could be accomplished in 2-3 days. Likewise, freight from Julfa to New Delhi (around 4000 km) could be accomplished in 1-2 days.

A high-speed spur line from Julfa, through Azerbaijan to Tbilisi and onwards to Poti and Anaklia would make sense, but it is not yet known if that is planned.

The high cost of freight and ponderous speed of transit has been an impediment to Georgian exports of agricultural produce to East Asia and South Asia. Wine and hazelnuts are products that Georgia has certain competitive advantages in producing, and hopefully faster, cheaper freight with better temperature control will improve competitiveness of Georgian exports in those markets

 

 

World Trade Organization strikes ‘historic’ farming subsidy deal.

For many decades, a critical impediment to developing countries’ agricultural development has been unfair competition from the EU and US, dumping products in local and regional markets supported by taxpayer-funded subsidies. Thankfully, this may change soon;

38278008_cows300

“Countries in the World Trade Organization (WTO) have agreed to abolish subsidies on farming exports.

Developed countries agreed to stop the subsidies immediately and developing nations must follow by the end of 2018.

The WTO, which represents 162 countries, called it “the most significant outcome on agriculture” since the body’s foundation in 1995.

But longstanding talks on other trade barriers were left unresolved at the end of the summit in Kenya.

Removing agriculture export subsidies is intended to help farmers in poorer countries to compete more fairly.

“The decision you have taken today on export competition is truly extraordinary,” WTO chief Roberto Azevedo said at the closing session in Kenyan capital, Nairobi.

The summit of ministers, which finished on Saturday after five days of talks, was the first to be held in Africa. “.

Of relevance to Georgia are imports of milk powder used to make liquid milk, yoghurt and cheese in Georgia.

 

Grape Subsidy and the Way Forward

Factcheck‘s article lays out key data on the nature of Georgia’s grape subsidies, which have been wound back substantially this year. It is worth reading in its entirety, but the basic data is interesting reading. Various parties suggest that subsidy should be rerouted towards improving vineyard productivity, and hence reducing the cost of production per tonne of grape. This is worthy of serious consideration.

ISET Policy Institute also performed a brief review of this subject, and suggested that subsidies should be directed towards wine export market diversification, rather than grape subsidy. In this way, it is suggested that vignerons would hence be buffered from wild swings in price due to difficulties in Georgia’s traditional markets.

Aus Vineyard

It has already become a “tradition” in Georgia that the grape harvesting process is always paired with some sort of public agiotage with the 2015 grape harvest being no exception. The low grape prices have seriously angered farmers from the Kakheti region who were expecting continued subsidisation and not the prices for 2015 which are, for them, unacceptable. As a result, some farmers have joined in protests against the low prices. Given the importance of this issue, we attempted to analyse the situation in Georgian viticulture and winery over the past several years.

Vineyards occupy a total of 37,419 hectares in Georgia (according to the agricultural census of 2004) of which 22,227 hectares are located in the Kakheti region. A total of 5,000 hectares of new vineyards wereplanted in Georgia in 2013 and 2014 (4,700 hectares in Kakheti). According to the explanation of industry specialists, the planting of new vineyards (in 2013 and 2014) was due to the successful grape harvests of the past several years and the high incomes from the sold grapes.

According to the data of the National Statistics Office of Georgia, the largest amount of grapes, after 2007 (227,000 tonnes), was harvested in 2014 (224,000 tonnes). The share of the Kakheti region in the overall amount of harvested grapes varied from 51% to 71% from 2007 to 2015. The amount of grapes processed for industrial purposes over the years changed as follows:

Table 1: Amount of Grapes Processed for Industrial Purposes from 2009 to 2014

Year 2009 2010 2011 2012 2013 2014
Amount of Processed Grapes (Tonnes) 23,000 23,000 43,500 54,000 92,773 124,606

Source: Ministry of Agriculture of Georgia

The amount of revenues from processing grapes equalled GEL 116 million in 2013 whilst the revenues in the Kakheti region alone were GEL 102 million. The overall amount of revenues from processing grapes equalled GEL 177 million including GEL 114 million to Kakheti. As of today, the amount of processed grapes equals 143,167 tonnes of grapes and the revenues amounted to GEL 102,341,924.

It should be pointed out that, over the years, grape prices, including subsidies, changed as follows:

Table 2: Prices of White and Red Grapes (in GEL) from 2010 to 2014

Year 2010 2011 2012 2013 2014
White GEL 0.60 GEL 0.70 GEL 1 GEL 1 GEL 1
Red GEL 0.80 GEL 1 GEL 1 GEL 1.3 GEL 1.95
Racha (Red) GEL 3 GEL 3 GEL 4 GEL 8 GEL 8

Source: Ministry of Agriculture of Georgia

As for the role of the government in determining grape prices, the state has been subsidising the grape harvest since 2008. The government decided to subsidise the grape harvest in order to neutralise the negative effects caused by the Russian embargo and encourage the fields of viticulture and winery. The amount of subsidies for grapes by year was as follows:

Table 3: Amount of Money in GEL for the Subsidisation of Grapes from 2008 to 2014

Year 2008 2009 2010 2011 2012 2013 2014 2015
Rkatsiteli 0.15 0.15 0.15 0.15 0.25 0.40 0.35 0.35
Saperavi 0.25 0.25 0.25 0.25 0.35 0.35 0.15 0.15
Mujuretuli 1.0 1.0 1.0 1.0
Overall 6.1 Million 5.5 Million 4.7 Million 8.7 Million 14.8 Million 32 Million 32 Million 30 Million

Source: Ministry of Agriculture of Georgia

It should be noted that wine is among the top ten Georgian export goods and its share of overall export constituted 6.3% in 2014. The amount of exported wine by year was as follows:

Table 4: Wine Export from 2010 to 2015

Year 2010 2011 2012 2013 2014 2015 I-II Quarters
Wine Exports (0.75 Liter Bottles) 15 Million 19 Million 23 Million 46 Million 59 Million 13 Million

Source: National Wine Agency

Georgian wine was exported to 61 countries from 2010 to 2014. The top five export destination countries for wine from 2010 to 2012 barely changed (Ukraine, Kazakhstan, Belarus, Poland and Latvia). Since 2013-2014, after the abolition of the Russian embargo, it has firmly occupied the first place in export destination countries:  a total of 22,997,170 bottles in 2013 (49% of overall exports) and 37,615,052 in 2014 (63% of overall exports). The rest of the top five remains the same:  Ukraine, Kazakhstan, Belarus and Poland. According to the data of the first two quarters of 2015, exports have increased to markets such as:  China – 23%, Japan – 21%, Latvia – 20%, Estonia – 16%, Germany – 5%, Canada – 159%, USA – 61%, Kazakhstan – 6%, UK – 33%, Hong Kong – 230% and so on. However, the share of wine exports to these countries is so small that it fails to change the larger image. Hence, due to the decrease in exports to Russia and Ukraine in the first six months of 2015, exports of Georgian wine dropped by 49%.

Georgian Wine Pricing and the Chinese Market.

With French Vin de Table and Spanish Vino de Mesa typically arriving at Chinese ports for less than 1 Euro per bottle, Georgia has little room to move in the bottom end of the market. Grape prices, even in the midst of the current crisis, are significantly higher than most New World producers or indeed many EU producers, which is passed on to the wholesaler through the winery. Last year, Georgian wine exports worldwide on average were the third most expensive in the world per hectalitre, after France and Italy.

However, tight quality control, a capable national branding campaign and skilled company marketing can yield good results in China despite the worldwide glut of wine. From Wine Industry Insight’s Lewis Perdue

So, it can be done. Great quality wine with a good story behind it and effective promotion can make serious inroads in the Chinese market, at a respectable price.