VZCZCXRO4100
RR RUEHAG RUEHAST RUEHBW RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSI #0741/01 1231422
ZNR UUUUU ZZH
R 021422Z MAY 08
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC 9386
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHC/DEPT OF AGRICULTURE WASHINGTON DC

UNCLAS SECTION 01 OF 03 TBILISI 000741 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/CARC AND EEB/TPP/ABT/ATP 
MOSCOW FOR ERIC HANSEN 
 
E.O. 12958: N/A 
TAGS: EAGR ECON PGOV GG
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES 
-- GEORGIA 
 
REF: STATE 39410 
 
¶1. Summary: Food price inflation was 14 percent in 2007 in 
Georgia.  Higher food prices make meeting calorie intake 
needs more difficult for many Georgians, especially those 
living in poverty.  The government does not subsidize 
agriculture, other than to provide some equipment that can be 
rented by farmers and some vouchers for diesel fuel.  Plans 
to lower agricultural tariffs are on hold for now.  The USG 
is providing almost $3.5 million in assistance to the 
Georgian agricultural sector in 2008.  These programs can 
help reduce food price inflation by improving productivity of 
domestic agriculture.  End Summary. 
 
¶2.  Overall inflation for the year 2007 in Georgia was 11 
percent, but food prices increased 14 percent.  The price of 
bread increased 33 percent due to higher worldwide wheat 
prices, sunflower oil increased 65 percent and maize (corn) 
flour increased 50 percent.  However, prices for eggs, beans, 
sugar, potato and meat decreased.  Many of the prices for 
these commodities had increased greatly in 2006, due to a 
poor harvest and worries about avian flu, and the relatively 
slight decreases in prices were from historically high 
levels.  Prices are continuing to increase in 2008 with 
higher costs of petroleum and natural gas imports.  Georgia 
has benefited from a trend of appreciation of the national 
currency against the dollar which has helped reduce the 
impact of global price increases.  Agriculture has been 
declining as a percentage of GDP for several years, and made 
up about 10 percent of GDP in 2007. 
 
¶3.  Demand: Staples in the Georgia diet are bread, pasta, 
potatoes, meat, dairy products, fruit and vegetables.  As 
food prices increased 14 percent over 2007, average wages 
increased 21 percent from third quarter 2006 to third quarter 
¶2007.  Many Georgians are not involved in paid employment and 
are unemployed or self-employed in agriculture or other 
occupations, so wage growth may not necessarily reflect an 
increased ability to absorb higher food prices, especially 
among the 33 percent of the population that lives under the 
poverty line.  Urban residents are more affected by price 
increases because they purchase most of their food.  Many 
rural residents grow much of their food and preserve fruits 
and vegetables for winter consumption.  However, higher food 
prices reduce their ability to supplement their diet with 
purchased products such as flour or meat products. 
 
¶4.  Georgia is a net importer of agricultural products. 
Primary agricultural exports are fresh and processed fruits, 
wine and brandy, spring and mineral water, nuts and 
hazelnuts.  Primary imports are meats, sugar, grain and dairy 
products.  While exports are increasing and domestic 
production of meat and dairy is improving, Georgia has a 
widely negative trade balance for agricultural products (USD 
755.2 million in imports in 2007 versus USD 292 million in 
exports).  Agricultural products are 23.5 percent of 
Georgia's total exports.  Domestic demand is limited by 
Georgia's small population and low level of disposable 
income. 
 
¶5.  Wheat is Georgia's leading agricultural import, as 
domestic wheat production does not cover demand.  Land 
appropriate for wheat production is limited and producers in 
some traditional wheat producing areas are beginning to 
cultivate high value crops such as fruits and vegetables, 
which have greater potential returns.  Therefore, it is 
unlikely that local production will meet all consumption 
needs in the short and medium term. The Georgian market 
requires an availability of 45,000 metric tons per month to 
meet domestic needs.  Georgia is a net wheat importer, with 
Kazakhstan and Ukraine as its primary suppliers.  Despite the 
importance of bread in the Georgian diet, prices are not 
controlled or subsidized. 
 
¶6.  The Ministry of Agriculture is concerned about the impact 
of higher worldwide prices for wheat and sunflower oil. 
Median calorie intake fell in 2006 in both urban (by 12 
percent) and rural (by 7 percent) areas.  This reduction may 
have been connected with the poor harvest and in urban areas 
with the influence of higher prices.  At the same time, 
average incomes have been rising which may permit an increase 
in calorie intake in 2007 and 2008 if price rises are not so 
steep as before. 
 
¶7.  Supply: Domestic agricultural production is unlikely to 
respond significantly to rising food prices in the short and 
medium term, as the country lacks basic inputs and 
appropriate agronomic conditions to implement sudden shifts 
 
TBILISI 00000741  002 OF 003 
 
 
in production.  Domestic production has been increasing over 
recent years, as the country recovers from economic hardship 
resulting form the breakup of the Soviet Union.  Domestic and 
foreign investments are contributing to agricultural growth, 
but so far do not seem to be related to rising food prices. 
Arable land accounts for more than 35 percent of Georgia's 
total area, with only 10 percent planted in crops. Although 
agriculture will remain important to Georgia's economy, its 
production capacity is limited, and the country has no 
obvious comparative or competitive advantage in any crop or 
product.  Export markets will remain mostly niche markets. 
For example, 70 percent of the country's citrus crop is 
exported to Ukraine.  Hazelnuts are another major export 
crop.  The continuing Russian embargo on imports from Georgia 
of fruits and vegetables, wine and mineral water has been a 
constraint on agricultural production since 2006.  However, 
the embargo has forced the Georgian government and producers 
to seek markets elsewhere and to improve quality to meet the 
demands of new trading partners, notably Turkey and Ukraine. 
With continued improvements in quality and marketing, 
opportunities exist to develop export crops such as wine, bay 
leaves, mandarins and kiwi. 
 
¶8.  The Ministry of Agriculture has identified storage as a 
major bottleneck preventing an increase in fruit and 
vegetables.  Other constraints on agricultural development 
are small size of most farm plots, poor quality control, lack 
of investment in technology and equipment, transportation 
problems and high costs, lack of credit, and lack of 
technical and managerial expertise. 
 
¶9.  Political Impact: Georgia has recently experienced a 
period of political turbulence, but the themes of protest 
have emphasized political issues more than rising food 
prices.  However, continuing problems of poverty and 
unemployment have been an underlying cause of unhappiness 
with the current government, which are related to inflation 
concerns that affect the public's ability to buy food. 
 
¶10.  Economic Impact: Higher food prices have naturally 
contributed to Georgia's overall inflation rate, but price 
increases for housing, water, electricity, natural gas and 
other types of fuel have had a bigger impact.  Georgia's 
current account deficit is large and is one of the major risk 
factors for the economy.  The wide trade deficit in 
agricultural goods noted above is a significant contributor 
to that deficit.  Nevertheless, there is potential for 
increasing agricultural output and exports to the benefit of 
the economy.  Agriculture has attracted some significant 
investments recently, most notably by the Italian company 
Ferrero for production of hazelnuts.  Besides planting new 
trees, Ferrero is building processessing facilities. 
 
¶11.  Environmental Impact: Rising food prices have not had a 
notable impact on environmental issues.  Water is abundant in 
Georgia.  The government is trying to rehabilitate and extend 
irrigation systems built during the Soviet period.  Chemical 
and fertilizer use is limited but as agriculture expands, 
their use could become more extensive with concomitant 
environmental risks. 
 
¶12. Government Policy Response: High level support for 
coordinated, effective agricultural policies is needed.  Ad 
hoc policies are aimed more at reviving agriculture generally 
than at alleviating the impact of high prices.  Programs to 
provide USD 17 million in low-cost credit and to develop 100 
new agricultural enterprises is under way.  The government 
negotiates directly with Ukrainian and Kazakh state-owned 
wheat exporters to try to obtain the best price on wheat for 
the Georgian market and set rules and conditions for imports. 
 Agriculture is a sector of the economy to which the 
government would like to attract foreign investment in 
larger, more efficient farms created from state-owned land. 
The government offers no major subsidies to farmers, although 
it has created machinery rental centers in rural areas by 
supplying farm equipment at cost to towns in the regions.  It 
also is currently distributing a limited amount of vouchers 
for diesel fuel to offset higher fuel prices.  After reducing 
most tariffs to zero, only agricultural products still 
benefit from tariff protection at rates of 12 and 5 percent. 
The government has shelved plans to reduce all remaining 
tariffs to zero in order to preserve an incentive for 
domestic production and foreign investment in the 
agricultural sector.  A free trade agreement was concluded 
with Turkey in 2007.  Turkish tariffs have been reduced to 
zero on wine, citrus and anchovies from Georgia.  Other 
tariffs on agricultural imports are high but will gradually 
be reduced for Georgia under the terms of the FTA.  Georgia 
 
TBILISI 00000741  003 OF 003 
 
 
is also pursuing an FTA with the European Union that could 
help spur agricultural exports.  The government has been 
fairly passive in the face of the Russian boycott of fruits 
and vegetables from Georgia and has not actively sought to 
have it reversed.  According to the Ministry of Agriculture, 
Russia imposes a special 102 euro per ton export tax on wheat 
exported to Georgia. 
 
¶13.  Impact on Post Programs: The USG provides significant 
assistance to Georgian agriculture, totaling USD 3.47 million 
in FY 2008.  USDA is supporting programs for improving 
agricultural education, agricultural statistics, veterinary 
health and for Cochran Fellowships to provide Georgian 
agribusiness owners and government officials with experience 
in the United States.  USAID programs focus on providing 
rural enterprises with expertise.  The Millennium Challenge 
Corporation's investment program is investing in agricultural 
enterprises and building infrastructure that benefits rural 
areas.  USG programs are not likely to be significantly 
impacted by higher food costs, but their ongoing aim is to 
increase the productivity and export-preparedness of the 
Georgian agricultural sector, thereby increasing supply and 
hopefully helping to blunt food price inflation. 
 
TEFFT