From the ISET Economist news (http://www.iset.ge/news/?p=3311)
By Eric Livny
(Summary of a debate hosted by ISET as part of SDC-supported Inclusive Growth Dialog series.)
There are many reasons to love the concept of farmer cooperation (and cooperation more generally). To begin with, there is a great aesthetic value in seeing people coming together, sharing resources and helping each other. After all, instinctive collectivism was the basic condition of human existence from time immemorial. But, there are also powerful economic reasons for farmer cooperation.
Smallholders are often too small to independently access markets, and can be easily exploited by middlemen and local monopolies. Service cooperatives can increase the bargaining power of smallholders versus banks, service providers, input suppliers, processors and … government. This light form of cooperation is quite effective and relatively easy to manage and sustain, which explains its prevalence in North America and Western Europe.
A more ambitious (and far more demanding) form of cooperation is about pooling fragmented smallholdings into larger farms. Examples of such production cooperatives are the Israeli kibbutz and Soviet collective farms. These are said to benefit from economies of scale in primary agricultural production.
Yet, despite its aesthetic value and compelling economic reasons, farmer cooperation (of both types) has been a spectacular failure in many transition economies, and particularly on the territory of the former USSR, including Georgia. In the words of Tim Stuart, development practitioners in the post-Soviet space are often confronted “with the reality of failed farmer groups that evaporate once the project ends, with unused equipment rusting in the corner of a field, an image, which has become a cliché of dysfunctional development in the popular press. And for many people engaged in development, farmer groups are a byword for failure.”
Of course, failure and success are terms to be defined relative to expected results. For the likes of Juan Echanove, coordinator of EU’s ENPARD program, the journey of a thousand miles in farmer cooperation begins with a single step. His expectation is that the dramatic changes in the legal and financial context for agricultural cooperation in Georgia will encourage the creation of bottom up farmer organizations based on traditional forms of mutual help and resource sharing that have always existed in Georgia. According to Juan, Georgian farmers have been always establishing informal groups and associations, in many cases without any external support and by their own initiative. Such groups often focused on a very narrow but functional scaling up of everyday economic activities including joint arrangements for pasture management and feeding, livestock management, collective work on plowing and harvesting, etc.
WHO IS TO TAKE FARMER COOPERATION TO THE NEXT LEVEL?
While bottom up cooperation may indeed flourish in the new policy context, there is agreement among all analysts that for farmer cooperation to move to the next level – beyond its primitive forms – Georgian villagers have to be provided with the prerequisite skills and resources. A related question, posed by Simon Appleby, an Australian agronomist and agribusiness consultant with many years of experience in South East Asia and Georgia, is “If development agencies are the “wrong” people to be involved in farmer groups and co-ops, who are the “right” players to be involved?” To his mind, “while it may be jarring to the collectivist sensibilities of some, it is worth looking at corporations as enablers and incubators of co-ops.”
Indeed, Juan sees a very wide spectrum of possibilities for private sector involvement, with or without donor assistance. For instance, some farmer groups will emerge to gain access to better and/or cheaper inputs (fertilizers, seeds, fuel) or services (mechanization, vet services, artificial insemination). In these cases the key business partners are not the buyers of the products, but providers of services and inputs. And, importantly, donors – ENPARD, and USAID’s REAP program – will target these businesses rather than farmer groups.
Juan is quick to admit that the issue becomes trickier if the goal is to create farmer groups jointly selling their primary products. Anyhow, even in this case there will be groups such as mandarin or hazelnut co-ops who will face no problem selling their products to a myriad of middlemen, processors and exporters. If these coop do things the right way, argues Juan, they will have more or better quality product to sell. The buyers are already there, and farmer groups won’t need any help in engaging with the private sector.
Finally, there will be co-ops directly placing their products in the local markets, and there is nothing wrong with that, according to Juan. Producing more and/or at a lower cost in the nearby town marketplace would be an easy and realistic improvement. In many parts of Georgia there is simply no alternative, and we don’t always have to be looking for complex solutions.
One problem with Juan’s arguments, however, is that in none of the simple cases private sector actors would have the incentive to provide Georgian villagers with the skills and resources to do things the right way and to manage cooperation. For instance, while input providers would be quite interested in marketing their products (e.g. fertilizer) to individualfarmers, there is no advantage for them in helping organize and train groups of farmers who, once organized, i) would be much tougher to negotiate with and ii) could switch to competing providers. For exactly the same reason, no single buyer of hazelnuts or mandarins would invest time and effort to help organize and train farmer co-ops even though it may be more convenient for him/her to deal with larger and more reliable growers.
Thus, while businesses may be the (only) right players to be involved in enabling and incubating farmer co-ops, special government or donors schemes would have to be developed to incentivize potentially interested corporate actors. While costly, such schemes could be justified if the resulting supply chain relationships have the potential to be sustained without additional subsidies beyond the necessary period of incubation.
As Simon Appleby explains based on his experience in South East Asia, the government could compel large food processors to take on co-ops as supply chain partners. Government (and donors) could also use carrots, such as tax holidays, low interest loans, or grants. That said, there would be no need for the government to play an active role in micromanaging farmer groups. With corporations providing suppliers with a comprehensive support package (finance, inputs, training, and guaranteed forward contracts), co-ops would pop up in response to business opportunities. Given their small size (3-5 families) and blood or friendship bonds on which they are often based, internal management issues of typical co-ops would not be very complicated. According to Simon, over time co-ops could diversify their activities from basic post-harvest treatment, storage, and logistics, to deep processing, foodstuffs trading and financial services, but this process may take many decades. Rushing the process, however, carries huge operational and financial risks.
THE CASE OF TKIS NOBATI
The challenge of incentivizing corporations to integrate smallholder co-ops into their supply chains is not a trivial one. Mind it that corporations – e.g. large processors – have other options. They can choose to go it alone by developing own supply base or contract large farms that don’t need incubation, and can be trusted to deliver on time and in consistent quality.
Yet, as one can also learn from the recent Georgian experience, there would be situations in which businesses have the incentive to engage in nurturing formal or informal farmer groups. While exceptional, these situations provide an excellent sense of the underlying economics.
In 2008, upon graduating from ISET, Gaga Abashidze has taken over a small family business which has been for years buying and processing rose hips gathered by Georgian villagers in the Shida Kartli region. The business model was extremely simple. Villagers harvested and delivered the fruit. Gaga processed and exported rose hip juice to Europe and Japan. Villagers saw no advantage in cooperation, and Gaga saw no need to engage them as a group.
Things changed when Gaga “discovered” the lucrative market of organic rose hip products, which required adopting a more complicated business model. First and foremost, moving to organic production required certifying all stages in the process, from harvesting to post-harvest treatment/storage to processing. Now, as Gaga quickly understood, there was simply no way to certify hundreds of villagers. To acquire international organic certification his supplier had to be a legal entity which could be trained and certified. Of course, once incorporated, his supplier could also come into possession of necessary equipment, contributing to the efficiency of harvesting, post-harvest treatment and storage, reducing processing costs and improving the quality of the final product.
Gaga had two options of re-organizing his supply chain: help create, and work with, a farmer organization, or expand own business. In weighing these two options, Gaga chose the farmer organization/outsourcing alternative for two main reasons.
- Many of the startup costs could be shouldered by the village community, including labor and land. While there was little to be saved in labor costs by hiring own workers, the co-op could be eligible for donor assistance to offset capital, training and certification costs.
- Gaga knew that the co-op would be a reliable business partner. On the one hand, he had a long history of working with individual members of the group and trusted its leadership. On the other, having access to a lucrative export market he could afford paying a premium for organically certified rose hips, essentially killing any incentives for the group to switch to a different buyer. As much as Gaga needed the group to supply him with a certified product, the group needed him to gain access to the organic export market. Thus, both parties were to be locked into a sustainable win-win relationship.
This particularly account of Tkis Nobati, a small Georgian cooperative in the vicinity of Saguramo is not meant to detract from the role of other players (e.g. the Regional Communities Development Agency, which channeled donor funding, and Elkana, which assisted in the bio-certification process). Rather, the point is to draw attention to the economic rationale for private sector engagement with Georgia’s budding agricultural co-op movement.
The most important insight to be gained from the exceptional story of Gaga Abashidze and Tkis Nobati cooperative is that while the costs of private sector engagement in incubating smallholder “supply” co-ops could be subsidized by donors or governments in the short term, supply linkages thus created are likely to be quite fragile. In the presence of alternative suppliers, co-ops would have to be very well managed to maintain consistent quality and reliability. Otherwise, we may see many more disturbing images of “equipment rusting in the corner of a field”.
To conclude, farmer co-ops can indeed serve many different purposes. Yet, significantproductivity improvements in Georgia’s agricultural sector would only be possible on the basis sustainable supply relationships between farmers and downstream processors and retailers. Only such linkages (embodied in explicit or implicit forward contracts) can provide the basis for new technology adoption and investment.
As Georgia starts exporting to new markets—to Europe under the DCFTA, for example—there will be stronger incentives for smallholder farmers to come together in order improve product quality and achieve market access. Cooperatives and farmer associations may certainly provide the organizational vehicles to take advantage of new export opportunities. Additionally, however, the Georgian parliament and government may want to consider amending the Law on Cooperatives in a manner facilitating corporate involvement in the creation of smallholder co-ops. For example, corporations could be allowed to acquire a stake in co-ops (or “smallholder partnerships”) in return for investment in commonly managed storage or processing facilities.
Referred to as Liquid Gold, for its color and perceived health benefits, Erbo the Georgian word for melted butter is a well-kept secret in Georgia. Traditionally made at home Erbo is much used in local traditional cuisines. Butter is an important fat in Georgia, very common in Azeri cuisine and in mountainous regions where both the harsh winter climates and distance from markets increased the importance of butter which can be stored, in communities dependent on dairy farming.
Now thanks to Milkeni Ltd who have started to produce and sell Erbo as part of their products made under the Georgian Milk Mark, quality assured Erbo is now available commercially for the first time in Georgia in Madagoni and Libre supermarkets chains. Interest and demand is growing rapidly.
Of all regions, perhaps Ajara is most famous for its use of Erbo. Most traditional Ajarian dishes contain Erbo. Borano is a dish of melted butter containing traditional Chechili cheese, a dish which been awarded the status of Intangible Cultural Heritage and Khavitsi a sauce made with flour and Erbo.
So what is special about Erbo? People believe that it is a healthy fat, processed differently and beneficially in the body and is well absorbed in the human body; it does not contain lactose and casein, so it is recommended for those with lactose intolerance. Mountain people believe Erbo boosts metabolism and energy, improving brain function, memory and their immune system.
In summer 2019, ten new Jara hives were placed in the Goderdzi Alpine Garden (GAG), Jara Beekeeping area, an area which aims to publicize Jara beekeeping and teach people interested in taking it up. With the help of the Jara Beekeepers Association (JBA) they were moved for wintering to Paksadzeebi Village in Khulo last autumn. Last week, all the hives were checked and fortunately, all the bee colonies are alive and working productively.
This Jara apiary is currently undergoing the Bio certification process and is due to obtain certification in July this year. It will be moved back to the GAG (Goderdzi Pass, 2000m above sea level) in May and be the focal point of Jara beekeeping workshops for school students and garden visitors.
The Goderdzi Alpine Garden is a tourist and environmental hub in the rural part of Ajara, Western Georgia. It involves and develops a sense of ownership for rural inhabitants in the field of biodiversity and environment, showcases the beauty and ecological assets of rural Ajara and generates added value from rural tourism for locals.
The Government of Georgia declared a curfew on March 30th, 2020 to restrict the spread of the COVID-19 virus which imposes restrictions on the movement of transport from 9:00 PM to 06:00 AM. However, producers and distributors of key commodities may apply to the Ministry of Environmental Protection and Agriculture (MEPA) for a permit to continue distribution. The Business Institute of Georgia (BIG) is currently helping GMM dairies to apply for this permission.
To gain permission follow these instructions:
- A producer/distributor should contact the MEPA on the hotline number - 247 01 01 or 1501 - and provide information about their activities and the need for permission.
- The MEPA will send the applicant an email address and an application form to send to this address. The application form requires information about the distribution driver (ID number, name, surname, date of birth, phone number, workplace and title) and distribution car (registration number of vehicle, brand, model, type, ID number of a company who is the owner of a vehicle, a type of business).
- The MEPA will respond to the company about issuing permission.
- After that, the company should call the Emergency Number 112 and check whether the information about the distribution car and driver is listed in the Ministry of Internal Affairs database.
Amidst the negative news and stories of unthinking behaviour, some stories have emerged globally of people and business who have responded to the crisis with kindness and generosity. These stories fill all of us with a sense of hope and comfort in our ability to work together. So we are delighted to be able to share the stories of some of the ALCP clients who have been contributing to the common good over the past week:
Roki Ltd, the largest veterinary input supplier and producer in Georgia, has started the production of a new hand sanitizer Septer as a response to increased demand. Supplies sold out in a day to banks, the Ministry of Education and clinics and there is a new order for four tonnes of Septer from the government. The company closely cooperated with the government in developing the product trying to use its resources for the benefit of all;
A GMM cheese distributor has organized the collection of cheese from eleven Georgian Milk Mark dairies: Milkeni, Tsintskaro +, Cheese Hut, Shuamta, Tvisis Kveli, Tsifora –Samtkhe, Tsezari, Coop. Khiza, Coop. Disveli, Teleti Ltd, I.E. Hakob Hambaryan and distributed it to theInfectious Diseases and AIDS Center in Tbilisi to support medical staff during the outbreak;
GMM dairy Tsipora Ltd in Samtkhe-Javakheti has supplied cheese to the Abastumani Lung Center.
Tsivis Kveli Ltd Kakheti brought cheese to the hotel Chateau Mere in Kakheti - for those under quarantine;
The Georgian Beekeepers Union initiated the collection of honey from local beekeepers across the country to supply people in vulnerable groups.
The KTW group offered the government the use of their forty-one rooms hotel-complex Akhasheni Wine Resort &Spa, for arranging a quarantine zone in Kakheti region.
In a country first, eighteen Jara beekeepers in Ajara have received Bio certification. Jara honey was not even commercially harvested and branded until 2018, however the market for the honey has proved its strength so successfully that the beekeepers saw the opportunity to further promote their product through bio certification.
The conversion was relatively simple and certainly achievable as Jara honey is based on the capture of wild swarms and is relatively hands off. Since November 2018, the Jara Beekeepers Association (JBA) has been facilitating training and on-site recommendations; it also provides treatment of hives with a Bio vet medicine and special equipment for the mentioned Jara beekeepers. The beekeepers now follow the bio requirements; including keeping records, better husbandry, use of bio vet medicine. This allowed for smooth journey through the minimum one-year conversion period for certification.
Caucascert, the only organic certification company in Georgia issued the internationally recognized Bio certificates after laboratory results and field checks, which did not show any incompliance.
‘I am very proud that I was able to get Bio certification. It was challenging, as I did not have any kind of information before, but support from the JBA was crucial. I can already see the outcomes, because the process already contributed to minimizing disease risk and increase productivity of a Jara hive by thirty percent’ – Bio certified Jara beekeeper from Keda municipality.
Six more Jara beekeepers, including the Jara apiary in the Goderdzi Alpine Garden, are currently undergoing the certification process and might obtain certification by the end of this year.
The Jara honey mark was registered in February, 2020 and both its production and the market for it, including export is growing. More details on Jara honey to be found on www.jarahoney.com.
As part of the agreement which allows Georgian Honey to be exported to the EU, the government annually carries out a Residue Monitoring survey. Worryingly high residues of prohibited antibiotics were found in previous years (see infographic below). 2019 however saw national information campaign carried by the Georgian Beekeepers Union, who developed and disseminated Do’s and Don’ts Antibiotic Use Infographic and facilitated breakthrough legislation adopted by the Government of Georgia, which prohibits registration of the beekeeping vet medicines containing restricted antibiotics, among others. As a result, this year, only eight percent of honey samples tested positive for prohibited substances, compared to fifty-four percent of the last year, according to the Residue Monitoring Plan results, made by the National Food Agency in the BIOR laboratory in Riga, Latvia.
It is a significant achievement for Georgian honey export opportunities and expanding markets.
