Home / Economy / Partly Suspension of Vintage Subsidization Damages the Sector

Partly Suspension of Vintage Subsidization Damages the Sector

Bustling vintage has become a traditional environment in Georgia. For many years peasants accustomed to state subsidies and they frequently find grape prices unacceptable.

This year Government plans to suspend state subsidization of vintage in Kakheti Region. The program will be maintained in Racha-Lechkhumi Region for Khvanchkara varieties – Aleksandrouli and Mujuretuli – 2 GEL per kilogram.

Moreover, winemaking companies will receive additional 35 Tetri if they pay 70 Tetri for one kilogram of Rkatsiteli and Kakhetian Green for production of brandy spirits and concentrated grapes syrup.

Georgian Agriculture Minister Levan Davitashvili said that the government will show new mechanisms for the 2017 vintage because of current situation in winemaking field.

«Wine exports is growing and winemaking field has considerably recovered over the past years. We have expectations that the vintage process will proceed in organized form and private sector will show much interest and demand for purchasing grapes. Consequently, state subsidies will not be necessary for main industrial varieties such as Saperavi, Rkatsiteli and Kakhetian Green», Levan Davitashvili said.

The Minister also noted that Government continues promotion of brandy production through various mechanisms, including preferential agro loans.

“Over the past years we have seen that quality of Georgian brandy and consequently, production process was improved and we will receive 35 Tetri compensation for Rkatsiteli and Kakhetian Green if companies produce brandy and concentrated grapes syrup,  so as their price policy be competitive and they have more motivation to join the process. In this way, we promote brandy spirits production”, Levan Davitashvili said.

Certain new mechanisms will be applied in Racha-Lechkhumi regions for the field recovery, the Minister said.

“For the purpose of protection of place of origin of  Khvanchkara, we have changed wine specifications, under which starting 2019 Khvanchkara processing will be carried out only in the zone of origin and this is a very important  issue for the region’s residents and domestic winemakers.  This should be a painless transition and we will give a time to winemaking companies to get ready for 2019”, Levan Davitashvili noted.

Over the past period, as a result of state measures, today we have the following situation in viticulture-winemaking field: 24 new enterprises are financed in addition (strong drinks production, brandy production), 48 enterprises have enlarged (winemaking, brandy production). As part of agro insurance state program, vineyards have been insured on 5 123 hectares. Exports markets are actively diversified, exports of wines and strong drinks grows in stable regime and consequently, the demand for grapes has also increased.

Based on the above-mentioned, there is no necessity of issuing state subsidies for high-quality grapes during the 2017 vintage in Kakheti Region.

Under the government decision, winemaking companies will receive additional 35 Tetri from the Authorities if they pay at least 70 Tetri forone kilogram of Rkatsiteli and Kakhetian Green for production of brandy spirits and concentrated grapes syrup.

For the purpose of protection of place of origin, in the 2017 vintage period, state subsidization will be maintained in Racha-Lechkhumi region on Khvanchkara varieties – Aleksandrouli and Mujuretuli – 2 GEL for one kilogram.

It is worth noting that starting 2019 transportation of Khvanchkara grapes (Mujuretuli, Aleksandrouli) will be restrictedfrom Racha-Lechkumi region to other regions for processing. The Government’s decision to subsidize Mujuretuli and Aleksandrouli as part of the 2017 vintage aims at promoting a development of winemaking companies in Racha Region.

For the purpose of conducting the 2017 vintage in an organized way, under the government decision, a coordinating board will staffed by LEPL National Wine Agency, Ministry of Agriculture, Ministry of Economy and Sustainable Development and Ministry of Interior, Agriculture Project Management Agency and representatives of State Governors (Kakheti, Racha-Lechkhumi and Kvemo Svaneti Region). Special places will be allocated in self-governed cities for sales of grapes.

For the purpose of growth in production,  loans will be issued to wine and strong drinks companies as part of preferential agro credits project.

Economic expert Gia Khukhashvili explains that the Government’s decision for partly suspension of vintage subsidization is a wrong step. Vintage subsidization should be suspended, but not now, Gia Khukhashvili said.

Subsidization program cannot achieve initial goals in several years. This is a strategy designed for tens of years and if Georgia aims at expanding exports markets, the decision to suspend subsidization today, will frustrate this strategy, Khukhashvili noted.

“I do not mean specific social themes and peasants promotion on local level. I do not mean social aspects. I talk about field development strategy that cannot be implemented in several years. We know that wine market is saturated and supply exceeds the demand and if our strategy is to develop exports markets, Government should continue the sector support to develop exports markets, not to support peasants”, Khukhashvili noted.

As a result of the mentioned decision, Georgia’s winemaking sector’s condition will further worsen, he said.

Professor Rati Abuladze, doctor of economics, explains that agriculture sector is a field, where political goals and government programs are of decisive importance for the field development. Consequently, agriculture sector subsidization is one of the important efforts for attaining state objectives.

Subsidy, as a state form of assistance, should be perceived as social-economic, political and strategic necessity that, first of all, strengthens farmer families, he noted.

  • The policy of subsidies should be considered as:
  • instrument for stimulation of economic activity;
  • the strategy for maintaining local population in rural areas (migration restricting process);
  • Price reduction mechanism (that we need amidst imports of huge volume of food products);
  • measures for protection of domestic manufacturers from foreign competitors;
  • risks reduction measures, support in low-productive land tillage and growth in production capacity.

Rati Abuladze noted that change in subsidization policy should be based on research and analysis. Preliminary evaluation needs the following factors:

  • How production, as well as number of farmer families, tillage of low-productive lands will decline due to geographical locations;
  • How the subsidization policy will affect agriculture sector employees, migration paces and other factors;
  • How agriculture sector development tendency will change;
  • How will it affect economic potential of farmer families;
  • How will it affect ecosystem management, existing space scales;
  • If farmers families become unable to plough and sow or cover expenditures for picking grapes, how the negative affects of subsidization policy will affect on long-term state goals?
  • How many economically active farmers will bear losses and go bankrupt (because of climate change and agro loans). It is easy to change subsidization policy, while development of agriculture sector efficient programs is difficult.

For conclusion, Rati Abuladze explained that, based on social and economic condition of regions, the country needs agro subsidization regime;

  • Subsidization measures should be a flexible instrument for attaining social and economic benefits.
  • Each farmer family needs various sorts of assistance. Therefore, they should be categorized and this will enable the Government to satisfy the demand of each family through various schemes of subsidization; subsidization should be carried out purposefully and this purpose should be controlled scrupulously;
  • It is recognized that inefficient governance preconditions inefficiency of subsidization system. In certain cases subsidization may be unjustified, but it is necessary for social purposes. The reality suggests that subsidization is necessary to lower food imports volume; overcome heavy social-economic background ( that cannot be eradicated by only social assistance);
  • Naturally, subsidization policy should be revised for long-term perspective, however, amidst existing economic volume and economic programs, it is not expedient to change subsidization policy;
  • When the country achieved economic progress, then subsidization regime should be corrected/abolished.

How the private sector meets the decision by Agriculture Ministry? Is it still relevant to issue subsidies in the regions and how this decision may affect grape prices?

Zurab Ramazashvili, head of supervisory board of Telavi Wine Cellar winemaking company, hails the Government’s decision. According to his information, in this case market mechanisms will be applied for pricing of grapes and neither Government not other parties will make influence. Grape prices will reflect real market value, he said.

This will increase our competitive environment and grapes quality will be improved in long-term perspective. Producer of low-quality grapes will lose motivation to produce low-quality products. In this case, farmers will have to work in competitive environment and they will have to produce better grapes to sell it at higher prices, Ramazashvili noted.

When the Authorities subsidize vintage, the motivation disappears and farmers  maintain chances for reception of minimum price, Ramazashvili said.

“Ultimately, this decision will bring better results for everybody. Today this decision may make someone discontent, I mean farmers, who fail to reap high-quality grapes and sell them for desirable price. After this decision,  both farmers and winemaking companies will make benefits, because farmers will receive real market price and the companies will buy high-quality products, consequently, better wines that will be sold for higher prices”, Ramazashvili noted.

As to grapes market price during the 2017 vintage, Ramazashvili noted that the price is determined by market principles and it is difficult to preliminary forecast the price.

“This look like a preliminary determination of price of shares at the exchange. Everything depends on demand and supply”, Ramazashvili said.

Telavi Wine Cellar will buy grapes in 2017 too, Ramazashvili said and added that the Government decision proves there is real demand for grapes. Winemaking companies sales grow. Both exports volume and sales have increased on domestic market too, he added.

Gia Shengelia, director of Badagoni winemaking company, noted that it is time to improve grapes quality in the country and the government decision will stimulate the issue resolution.

When farmers receive subsidies, they feel more confident and do not care much for sales market and they have guaranteed minimum revenues. Therefore, after the government decision they will pay higher attention to grapes quality, Shengelia said.

We expect high demand for grapes in 2017 and grapes price will also increase, he said.

“Anyway, as compared to the previous year, grapes price will be higher. Winemaking companies have enlarged, sales have grown. Several new companies have entered the market. In Kakheti region additional 4 000 hectares vineyards have been arranged”, Shengelia noted.

This year Badagoni company will buy a quite huge volume of grapes.

As reported, Government started subsidizing grapes in 2013. As part of the 2016 vintage, the Authorities allocated 25 million GEL for subsidization program and a subsidy for a kilogram of Rkatsiteli and Kakhetian Green made up 45 Tetri, one kilogram of Saperavi – 20 Tetri, 1 kilogram of Aleksandrouli and Mujuretuli – 2 GEL.

In November 2016 Prime Minister Giorgi Kvirikashvili noted, when introducing the 2016 vintage results, that 178 companies had taken part in purchasing and processing of grapes in Kakheti Region. As a result, more than 100 000 tons of grapes were processed and Kakheti residents’ revenues exceeded 97 million GEL. As to vintage in Racha-Lechkhumi, 24 companies bought grapes and more than 500 tons of grapes were processed. Racha residents’ revenues in the vintage period exceeded 2.5 million GEL.