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Turkish Opportunities

Russian sanctions against Europe and Turkey provided a great opportunity for the Georgian agricultural sector which could have replaced, to the best of its ability, the needed supplies of fruit and vegetables to Russia and thus regain its positions on the vast neighboring market.

 Article by Dr. Andrei Maximov Maximov&Partners LLC; am@maximov.com www.maximov.ge

It is unlikely that anyone would contest the idea how useful that would have been both for the stability of the country’s agricultural production and for testing its export and gradually raising the quality of its agricultural products to the level of the most

demanding European and Asian markets.
Speaking of the missed opportunity I have in mind a genuine local production for export and not those “black” or “shady” schemes that involve changing the certificates of origin for the products (made in Turkey). Georgia was in on a very good thing: Russian market that was hit by the economic blockade became well-disposed to and interested in any propositions from its neighbors. Unfortunately, the suddenly available grocery niche, with products characteristic for Georgia, was filled by many countries, some of which are quite far away from Russia: South Africa, Kenya, China, Morocco, Israel, Egypt, Uzbekistan, Iran, Serbia, Syria. This drawback is not related to politics. It is the result of existing business models that are ineffective with regard to export and that are prevalent in the traditional Georgian agricultural sector.

To clarify please allow me sharing our experience as an exporter.Today, however, as Russia and Turkey have, in practical terms, “made peace”, it can be stated that Georgia missed out on its chance. Which was not the case with its neighbors that realized their opportunities not necessarily within the legal framework. For example, Turkish export of tomatoes to Azerbaijan grew 50-fold—what an appetite! Kazakhstan could increase tenfold its supplies of meat and meat products to Russia—and that without increasing its internal production.

Not to mention Belarus that could become a prominent exporter of sea food… I am not in any way suggesting that Georgia should have followed their example, and I am proud that this country where I live has a legal system which does not allow its businesses to give in to the temptation of “easy money”.

The first issue is related to the logic of peasants, small farmers and agricultural cooperatives with regard to price determination. In our many negotiations with the producers, when our representatives wanted to know how did they determine their stated asking price, the answers was, for example, as follows:

“I spent money for building the glasshouse, so I must pay back my bank loans and for my daughter’s university education plus my younger son will go to school this year”, etc. That was the logic based on expenses which is hopeless at the market where the prices are determined by the buyer. Georgian suppliers would not listen to my arguments when I was trying to explain that there existed other suppliers at the export markets whose sale conditions were such that Georgians could not compete with them in price.

Over the last four years our company worked with tangerines, bay leaves and culinary herbs, with potatoes, tomatoes, peaches and nectarines. We experienced the same scenario in any case. We provide guarantees for buying their product and ask about their bulk price some three months before the harvest. The answer is always: “We will tell you at the day when you shall be buying”. As an exporter I have contracts with strict liabilities that I signed with retail chains, in which penalty fees are specified and, beyond that, I must show my wholesale price there.

If I were to state “I will tell it at the day of shipment”, I will see nothing more than a condescending smile. As a result, this is what happens, on and on: everyone waits for the price to be specified, and it is in the beginning too high for export, then it goes down, then even way down, “below the ground level”, but by that moment “the train has left the station” as they say: other suppliers have fully satisfied the demands of the export markets, so it is practically impossible to get in any more.

This is difficult issue, but not the main one. It is more or less possible to come to terms with those who work on the land themselves: after several unsuccessful years, our partners in Western Georgia who produce bay leaf and green herbs could understand our logic and eventually they increased their export manifold becoming leaders in their commodity items. The problem is much more difficult when dealing with brokers who mediate between the exporter and many peasants, small farmers and small cooperatives. This is one more repeating scenario. Three months before the harvest we visit our potential partners in Bolnisi, Kutaisi or Gurjaani telling them “We shall buy everything if…”

No one is able, however, to hear the word “if”, and the famous Georgian feast will convince the buyer that everything will be just fine if not better… When harvesting starts, however, you will find out, for no explainable reason, that the broker fee you, a novice, had negotiated three months ago was two and a half times larger than a seasoned buyer (let’s say, from Azerbaijan) pays—someone who simply knows the prices.

Well, that all is not the main issue, yet again. The buyer may agree to the producer’s price or budge from the broker’s inadequate service price. The broker, however, will not guarantee the good quality of the delivered goods—well, just the opposite… Whether tangerines, peaches or nectarines, in Georgia, unfortunately, it is the exporter who must control the process with his own effort. Otherwise, you will find small and unseemly tangerines in the boxes lying below the upper row of large and great-looking fruits. My reliable customers in Gurjaani, whom I believe on their say-so, will not take this responsibility upon themselves.

They tell me: “We will give you good workers, and they will do the grading”. But I do not want any workers! I want good, evenly sized peaches in accordance with agreed upon specifications and pricing. This is what happened in Gurjaani last harvest: a family from St. Petersburg saw what went into the boxes and they offered: “We want to sort and grade the fruit ourselves”. The answer was: “No, never!”

One more comment: the topic permanently under discussion is whether it is expedient to subsidize agricultural producers. In my view, subsidizing is always a bad decision. There may be exceptions, but that is a different topic. If, however, there can be funds allocated in the state budget, it is worth considering what would be the goal of their spending: do we want to produce or to export? Since the answer is obvious, the subsidies should be directed to the support of the exporters who can take the produce out of the country. Otherwise, the harvest can either stay in the garden where it was grown or, in the best case scenario, become a non-standard product. Subsidizing the producer will play a purely social function, and it does not have anything to do with the market economy.

Here is, at last, the truly most important issue in our work. Georgian exporters lose out to their competitors in terms of their payment conditions. Just imagine this: my representatives may explain away in Moscow, St. Petersburg, Novorossiysk or anywhere else in Russia just how tasty and advantageous are potatoes from Bolnisi or nectarines from Gurjaani. What they hear back is: “We have offers in Moscow for the delivered potatoes from Syria, Egypt and Israel with payment postponement for up to 60 days, and you are asking for the onsite payment during loading plus your price is higher… Isn’t it ridiculous?”

The support of the state is certainly needed, and in other countries the state supports our competitors in the most active way. Financial arrangements can be manifold. For example, providing state guarantees for the revolving (renewable) bank credit for the period of 30 to 60 days upon presentation to the bank of the goods export declaration. No one takes any risks in this case, and Georgian agricultural products would become competitive along this criteria.

There are other options as well. The main issue is to become competitive in today’s markets where conditions are dictated by the buyer. However, please be advised that this short article did not even touch upon the issues of standardization, certification, packaging and marketing of Georgian agricultural products.