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.

Hazelnut Industry Review from Galt and Taggart

A concise summary of Georgia’s hazelnut sector, from local investment bank Galt and Taggart.

Worth reading in its entirety, the government estimate for establishment cost of hazelnut orchard is in our opinion underestimated. Clearing and elimination of woody weeds can cost almost half the budget provided. Also, tissue-cultured seedlings are significantly more expensive than conventionally produced seedlings budgeted for, but have the advantage of great consistency, longevity and freedom from infections.

Hazelnut production in Georgia increased at a compound annual growth rate (CAGR) of 6% over 2006 – 2014, from 24,000 to 37,000 tons. If Georgia is able to integrate efficient farming practices in order to increase quality and productivity and expand the planted area, the country has an opportunity to land a place among the top 3 hazelnut suppliers in the world, after Turkey and Italy. The American hazelnut industry, even though technology-intensive, is facing difficulties at growing and harvesting the hazelnut, as the hazelnut type most demanded on the world commodity market is being affected by a region-specific disease. USA has only 1.4% of total hazelnut planting area (~12,200 ha), but its yield is much higher than in Georgia, as American hazelnut growers integrate innovative farming and best practices.

Turkey is a price setter on the hazelnut market. In 2014 when the hazelnut harvest suffered from a severe frost in Turkey and output almost halved, hazelnut prices on the world market doubled from US$ 5.5 to US$ 11.5. This was rather beneficial for other nut exporting countries, including Georgia. In August 2015, prices were back to $4.5-5.0, and dipped further in September as the harvest outperformed forecasts. In 2015, according to the Istanbul Exporters Union, Turkey has already earned US$ 2.67bn in 7M15 and exported 208,000 tons of hazelnut. Georgian hazelnut exports in 1H15 increased 163% y/y in dollar terms and generated US$73.4mn in export revenues, up from US$ 28mn last year. Roughly ¾ of Georgian hazelnut exports went to the EU, where prices were 43% higher on average than in the CIS countries (2014 World Bank estimates). Italy, Germany, and Spain jointly imported 46% of hazelnuts exported from Georgia. The largest importer from the CIS countries was Kazakhstan, accounting for 8% of Georgian hazelnut exports.

From “Hazelnut – Georgia’s Precious Commodity“. Georgia Today

Agricultural Internships Abroad

Today our agronomist Albert leaves for China, where he will serve a three month internship in Central China’s Hunan Province, improving his skills in cereal cropping and vegetable production.

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This is Albert’s fourth foreign internship, having worked in vegetable greenhouses in Massachusets, USA twice and in a floriculture enterprise in South Australia for an extended period.

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We notice employees returning from internships bring back fresh new ideas, have improved problems solving skills and can more effectively research solutions independently without supervision. I could not recommend this for Georgian agribusinesses too strongly; a 3-12 month sabbatical for promising young professionals can yield very substantial results.

The Great Convergence? Changing Patterns of Global Alcohol Consumption « The Wine Economist

This neat graph, courtesy of The Economist, gives a pretty good indication where wine export promotion should logically be directed. To a large extent, wine consumption and total alcohol consumption track each other.

The Great Convergence? Changing Patterns of Global Alcohol Consumption « The Wine Economist

via The Great Convergence? Changing Patterns of Global Alcohol Consumption « The Wine Economist.

Environmental Benefits of GMO’s; Lower Methane Emissions from Rice Paddies

This recently published paper on GM rice designed to abate methane production from the paddy, with its substantial environmental benefits, is fascinating. With rice production trials proceeding in Georgia and with free access to the EU market developing, this is of interest for Georgian irrigators.

One engineering and management reform that eliminates methane production from rice is to abolish paddies and irrigate rice under centre pivots, using the methodology pioneered by US irrigation engineering firm Valmont. This short video gives a good introduction.

This massively reduces maintenance, water and capital costs, as well as allowing sloped land and soils with a low water-holding capacity to be used for rice. However, a key limitation is low overnight temperatures at a key development period of the rice plant; exposure to temperatures below 15 degrees at that stage results in sterility and poor yield. Paddy-produced rice experiences some buffering of temperature effects due to water’s ability to retain heat overnight in the flooded paddy. Pivot irrigated rice does not have this attribute, and so varieties that are cold-tolerant must be selected, planting time carefully planned, and production areas selected where low overnight temperatures during critical development phases are rare. Hence this technology is seen extensively in the subtropical and tropical zones of the Americas, Africa and Asia.

Alternately, genetic modification may produce excellent results in conventional paddy-grown rice.

A concise review from WUWT explains the discovery

Rice serves as the staple food for more than half of the world’s population, but it’s also the one of the largest manmade sources of atmospheric methane, a potent greenhouse gas. Now, with the addition of a single gene, rice can be cultivated to emit virtually no methane from its paddies during growth. It also packs much more of the plant’s desired properties, such as starch for a richer food source and biomass for energy production, according to a study in Nature.

With their warm, waterlogged soils, rice paddies contribute up to 17 percent of global methane emissions, the equivalent of about 100 million tons each year. While this represents a much smaller percentage of overall greenhouse gases than carbon dioxide, methane is about 20 times more effective at trapping heat. SUSIBA2 rice, as the new strain is dubbed, is the first high-starch, low-methane rice that could offer a significant and sustainable solution.

Researchers created SUSIBA2 rice by introducing a single gene from barley into common rice, resulting in a plant that can better feed its grains, stems and leaves while starving off methane-producing microbes in the soil.

The results, which appear in the July 30 print edition of Nature and online, represent a culmination of more than a decade of work by researchers in three countries, including Christer Jansson, director of plant sciences at the Department of Energy’s Pacific Northwest National Laboratory and EMSL, DOE’s Environmental Molecular Sciences Laboratory. Jansson and colleagues hypothesized the concept while at the Swedish University of Agricultural Sciences and carried out ongoing studies at the university and with colleagues at China’s Fujian Academy of Agricultural Sciences and Hunan Agricultural University.

“The need to increase starch content and lower methane emissions from rice production is widely recognized, but the ability to do both simultaneously has eluded researchers,” Jansson said. “As the world’s population grows, so will rice production. And as the Earth warms, so will rice paddies, resulting in even more methane emissions. It’s an issue that must be addressed.”

Channeling carbon

During photosynthesis, carbon dioxide is absorbed and converts to sugars to feed or be stored in various parts of the plant. Researchers have long sought to better understand and control this process to coax out desired characteristics of the plant. Funneling more carbon to the seeds in rice results in a plumper, starchier grain. Similarly, carbon and resulting sugars channeled to stems and leaves increases their mass and creates more plant biomass, a bioenergy feedstock.

The results, which appear in the July 30 print edition of Nature and online, represent a culmination of more than a decade of work by researchers in three countries, including Christer Jansson, director of plant sciences at the Department of Energy’s Pacific Northwest National Laboratory and EMSL, DOE’s Environmental Molecular Sciences Laboratory. Jansson and colleagues hypothesized the concept while at the Swedish University of Agricultural Sciences and carried out ongoing studies at the university and with colleagues at China’s Fujian Academy of Agricultural Sciences and Hunan Agricultural University.

“The need to increase starch content and lower methane emissions from rice production is widely recognized, but the ability to do both simultaneously has eluded researchers,” Jansson said. “As the world’s population grows, so will rice production. And as the Earth warms, so will rice paddies, resulting in even more methane emissions. It’s an issue that must be addressed.”

The master plan

Upon discovery of the transcription factor SUSIBA2, for SUgar SIgnaling in BArley 2, further investigation revealed it was a type known as a master regulator. Master regulators control several genes and processes in metabolic or regulatory pathways. As such, SUSIBA2 had the ability to direct the majority of carbon to the grains and leaves, and essentially cut off the supply to the roots and soil where certain microbes consume and convert it to methane.

Researchers introduced SUSIBA2 into a common variety of rice and tested its performance against a non-modified version of the same strain. Over three years of field studies in China, researchers consistently demonstrated that SUSIBA2 delivered increased crop yields and a near elimination of methane emissions.

Growth Rate in Georgia’s Agricultural Economy and the Effect of Government Spending

Zviad Khorguashvili of the thinktank GRASS has produced a concise and rather elegant analysis of the growth rate in Georgia’s agriculture sector, and raised two excellent questions that are posed altogether too infrequently.

Has the massive expenditure of taxpayers’ money on Georgian agriculture since October 2012 resulted in greater growth than if the State had restrained its spending?  

If Georgia has a small proportion of its GDP contributed by agriculture, is that necessarily a bad thing?

The article can be read in its entirety here , but the charts are quite illuminating.

Real Growth Rate of Agriculture

Source: Geostat

The Russian Embargo on Georgian wine and other food products imposed in 2006 had a serious effect that continued to be felt until 2013. The large increase in growth in 2013 arguably can be attributed mostly to increased market access to the lucrative Russian market. Growth was still positive in 2014 but the drought seriously curtailed output amongst those farmers not using irrigation.

GDP Per Capita vs % of GDP generated by Agriculture

Source: World Bank

This World Bank data is common knowledge amongst development economists. The most productive and competitive agricultural producers in the world, such as Australia, New Zealand, Canada, USA and the EU (to a point) all concurrently have quite a small proportion of agriculture in their economies, while GDP per capita and living standards are nonetheless quite high. For some reason elements within the Georgian political spectrum find agriculture occupying a small proportion of the Georgian economy a badge of shame, which is irrational.

One should be careful what one wishes for; if the aim is to have agriculture at 50% of GDP, all one needs is to incite a vicious ethnic conflict, destruction of most infrastructure and the collapse of the formal economy, as witnessed in Somalia or Central African Republic, and one’s target will be achieved in short order.

Zviad’s call for a rigourous cost-benefit analysis is a sound one; of course taxpayers should know whether the funds they spend on particular programmes are effective. However, I would apply the proviso that cost-benefit analyses based on only two years of data (2013 and 2014) can provide a skewed outcome, given the massive impact of market access and drought on the figures, which is largely independent of government spending.

It would also be very interesting to study the correlation between growth in the agricultural economy, and previous Foreign Direct Investment in the sector (as a leading indicator, as it can take up to 5 years after breaking ground for many commercial agricultural projects to generate any cashflow). Given the tepid FDI in the sector since the ban on farmland purchase came into play in June 2013, it may not be until 2018 that the effect is fully apparent, if indeed such an effect exists. Our previous study on the effects of agricultural FDI on competitiveness suggests that such an effect exists and we did identify that the effects are not instantaneously observed due to the lag mentioned above.