94281 Uzbekistan Strengthening the Horticulture Value Chain Donald F. Larson, Dilshod Khidirov, and Irina Ramniceanu Uzbekistan Strengthening the Horticulture Value Chain Donald F. Larson, Dilshod Khidirov, and Irina Ramniceanu Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Copyright Statement: The material in this publication is copyrighted. 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Appreciation: The authors would like to thank Takuya Kamata, Dina Umali-Deininger, John Nash and Bill Sutton for their comments on earlier drafts, Polly Means for improving the presented figures, and Funda Canli for her thoughtful edits. All remaining mistakes are attributable to the authors alone. Acknowledgments: This paper relies heavily on the following four background documents prepared as part of the World Bank Report ACS4704: Bapaev, Kuvat. 2012. Agriculture competitiveness strategy: lessons from horticulture: results of gross margin analysis and investment models for selected vegetable and fruit crops in Uzbekistan (unpublished); Kholmirzayev, I. 2012. Agriculture competitiveness strategy: lessons from horticulture Uzbekistan horticulture sector analysis (unpublished); Yarmak, Andriy. 2012. A value chain study: Horticultural sector of Uzbekistan (unpublished). Yarmak, Andriy. 2012. Chile vs. Uzbekistan: Chilean experience in the fresh produce sector—relevant lessons for Uzbekistan (unpublished). Exchange Rates 1 USD = 1,976 UZS (as of December 12, 2012) Acronyms and definitions ADB Asian Development Bank AEZ Agro-ecological zones CIS Commonwealth of Independent States CAC CODEX Alimentarius Commission DF Household (dehkan) farms operating on small plots with hereditary use rights EU European Union FAO Food and Agriculture Organization of the United Nations FDI Foreign direct investment FSU Former Soviet Union GAP Good Agricultural Practices GDP Gross Domestic Product GOST Gosstandart, a set of standards including SPS standards used in the CIS HACCP Hazard Analysis and Critical Control Point MRL Maximum residue limit NGO Non-governmental organization OIE Office International des Epizooties (World Organization for Animal Health) PF Private farms operating on leased public land R&D Research and Development RIVMP The Uzbek Research Institute for Vegetables, Melons and Potatoes SPS Sanitary and phytosanitary standards UK United Kingdom UNEP United Nations Environmental Program USAID United States Agency for International Development USD United States Dollar USDA United States Department of Agriculture UZS Uzbek Soum VAT Value-added tax WHO World Health Organization WTO World Trade Organization Table of Contents Executive Summary ...................................................................................................................................... 1 Introduction ................................................................................................................................................... 8 Main Report ................................................................................................................................................ 10 1. An Overview of the Role of Agriculture and Horticulture in the Economy of Uzbekistan ................ 10 2. The Changing Farm Structure in Uzbekistan and Its Implications for Horticulture ........................... 22 3. Farm Incentives and Outcomes ........................................................................................................... 32 4. Value Chains from Farmgate to Destination Markets......................................................................... 43 5. Recommendations ............................................................................................................................... 66 5.1 Recommendations to improve farm productivity .......................................................................... 66 5.2 Recommendations to support high-value export markets .............................................................. 68 5.3 Recommendations aimed at eliminating unintended incentives that encourage the use of informal, low-valued market chains. ...................................................................................................................... 69 Annex I: Estimated Costs and Margins for Selected Crops, Per Hectare ................................................... 70 Annex II: Chilean Experience in the Fresh Produce Sector – Relevant Lessons for Uzbekistan ............... 83 A2.1 Introduction ................................................................................................................................... 83 A2.2 Chilean institutions that support horticultural exports................................................................... 85 A2.3 Promotional Programs ................................................................................................................... 91 A2.4 Crops where Chilean experience could be relevant for Uzbekistan .............................................. 92 i List of Tables Table 1.1: Irrigated area with saline soils by region, 2010. ........................................................................ 20 Table 1.2: Water footprint and value generated for sample crops .............................................................. 21 Table 2.1: Changes in the number and size of private farms, 2000-2010 ................................................... 23 Table 2. 2: Private farm structure, 2010...................................................................................................... 24 Table 2.3: The shifting composition of agricultural production in Uzbekistan, 1990 to 2010. .................. 29 Table 2.4: Sources of production gains in horticulture, 2000-2010 ............................................................ 30 Table 3.1: Tax obligations of private farms, 2012 ...................................................................................... 33 Table 3.2: How changes in land use and increase in land-tax revenue can offset turn-over tax revenue. .. 34 Table 3.3: Area planted to grains, cotton and horticultural crops (thousand hectares), 2010 ..................... 36 Table 3.4: Area and yields for selected vegetable crops in study regions and Uzbekistan, 2010 ............... 37 Table 3.5: Estimated revenue, operational costs and profit margins for selected field crops. .................... 38 Table 3.6: Maturity profiles for apples, grapes and cherries....................................................................... 39 Table 3.7: The effects of declining prices on gross margins....................................................................... 41 Table 4.1: Per capita production of selected horticultural goods, 2005-2010............................................. 45 Table 4. 2: Processed horticultural goods, 2000-2010 ................................................................................ 45 Table 4.3: Production and crop utilization, 2008 to 2010 ........................................................................... 46 Table 4.4: Value of horticultural exports, by region (thousand USD), 2006-2010..................................... 47 Table 4. 5: Value chain costs for selected crops. ........................................................................................ 55 Table 4. 6: Sensitivity analysis of incentives for informal export under alternative informal exchange rates .................................................................................................................................................................... 56 Table 4.7: Product standards for vegetables in the United Kingdom.......................................................... 57 Table 4.8: Minimum export prices set by the Cabinet for 2011 ($/ton)...................................................... 62 ii List of Figures Figure 1.1: Cotton and wheat production in Uzbekistan and comparators in 2012. 11 Figure 1.2: Horticultural production in Uzbekistan and comparators, 2010. 11 Figure 1.3: The agricultural sector in the Uzbek economy (million USD and USD/capita) 12 Figure 1.4: Economic growth and agricultural productivity in Brazil and Chile 12 Figure 1.5: Economic growth and agricultural productivity in Uzbekistan 13 Figure 1.6: Projected rural and urban populations in Uzbekistan 13 Figure 1.7: Land distribution among key agricultural crops, 2000-2009 14 Figure 1.8: Output of key agricultural products, 1990-2010. 15 Figure 1.9: Percentage changes in per capita consumption, 1996 and 2006 16 Figure 1.10: The main destinations of Uzbekistan’s primary horticultural exports, 2011 16 Figure 1.11: Agro-ecological zones of Uzbekistan. 18 Figure 1.12: Total area and share of irrigated lands 19 Figure 2.1: Average annual real price indices, based on Tashkent prices. 26 Figure 2.2: Yield gains for major crops in Uzbekistan, 2000-2010. 26 Figure 2.3: Increasingly, horticultural output originates on private farms. 30 Figure 3.1: Allocation of land to various crops by percentage share, 2010. 34 Figure 3.2: Ratio of gross margins over operating costs for selected field crops. 38 Figure 3.3: Internal rates of return for new apple, grape and cherry orchards 39 Figure 3.4: On-farm labor in man-months per hectare for selected field crops and established orchards 39 Figure 4.1: Formal and informal marketing channels for horticulture in Uzbekistan 43 Figure 4.2: Historical and projected market shares for horticultural products in Russia. 48 Figure 4.3: Costs along the marketing chain and implied price for suppliers. 52 Figure 4.4: Farmer incentive to sell locally or for export. 53 Figure 4.5: Seasonal price variation in local prices for selected horticultural items, 2010. 58 Figure 4.6: Seasonal price variation in Moscow prices for selected horticultural items, 2010. 59 iii List of Annex Tables and Figures Annex I Table. 1: Cabbage in Fergana, private farms ................................................................................ 70 Annex I Table. 2: Tomatoes in Fergana, private farms............................................................................... 71 Annex I Table. 3: Onions in Fergana, private farms ................................................................................... 71 Annex I Table. 4: Cotton in Fergana, private farms ................................................................................... 72 Annex I Table. 5: Melon in Fergana, private and dehkan farms................................................................. 72 Annex I Table. 6: Grapes in Fergana .......................................................................................................... 73 Annex I Table. 7: Cherries in Fergana ........................................................................................................ 74 Annex I Table. 8: Tomatoes in Samarkand, private and dehkan farms ...................................................... 75 Annex I Table. 9: Onions in Samarkand, private and dehkan farms .......................................................... 76 Annex I Table. 10: Cabbage in Samarkand, private and dehkan farms ...................................................... 77 Annex I Table. 11: Wheat in Samarkand, private and dehkan farms ......................................................... 78 Annex I Table. 12: Apples in Samarkand, private farms ............................................................................ 79 Annex I Table. 13: Cabbage in Tashkent, private and public farms ........................................................... 80 Annex I Table. 14: Wheat in Tashkent, private and public farms .............................................................. 81 Annex I Table. 15: Apples in Tashkent, private farms ............................................................................... 82 Annex II Table 1: Fresh fruit exports from South America 81 Annex II Figure 1: Main Fresh Fruit Exports from Chile (thousand tons) 82 Annex II Figure 2: Evolution of Chilean fresh fruit exports (tons) 83 Annex II Figure 3: Share of fresh produce exports from Chile in 2010-11, by destination. 84 Annex II Figure 4: ASOEX “Reasons for Success” 85 Annex II Figure 5: Chilean public institutions involved in market development 86 Annex II Figure 6: Chilean private institutions involved in market development 87 Annex II Figure 7: International organization devoted to fresh produce market development 88 Annex II Figure 8: Structure of the ChileGap program 89 Annex II Figure 9: Unified branding in Chile 89 iv Executive Summary Uzbekistan’s horticulture subsector is an important source of income for the 4.7 million households that operate dehkan farms in rural and disproportionately poor communities. Horticultural products are grown on an additional 21 thousand larger private farms as well. Growing fruit and vegetables is among the most profitable activities on both dehkan and private farms and, over the last ten years, the incomes generated by the subsector comprise a growing share of national GDP. Horticultural export earnings have also surged in recent years, growing from USD 373 million in 2006 to USD 1.16 billion in 2010. On the whole, good general agricultural policies benefit the horticultural subsector. However, horticultural markets have particular traits that require an additional set of targeted policies and institutions. In particular, the market value of horticultural goods depends heavily on the rapid and carefully managed delivery of fresh fruit and vegetables to destination markets, together with an attentive management of food safety risks and phytosanitary risks. Failures that result in temporary supply disruptions or short-lived outbreaks of food-related illnesses carry lasting reputational risks for the subsectors. Additionally, the capacity to meet quality and safety standards set by governments and international trade agreements is no longer sufficient to enter a growing portion of the export markets, as supermarket chains and fast-food restaurant chains increasingly purchase their produce from field-to-store channels where food safety hazards are carefully monitored and controlled. Assessing current policies in light of these developing market requirements and pointing out positive examples from peer countries are additional objectives of this Policy Note. Horticulture in Uzbekistan has also been a crucible for policy experiments in Uzbekistan and this is another important motivation for this Policy Note. Most arable land in Uzbekistan is planted to grains and cotton, and these subsectors operate under a different set of policies. With the exception of what is produced on small dehkan plots, most field crops and orchards are situated on public lands operated by private farms under long-term leases. In the case of grains and cotton, private farmers are given a production quota under the terms of the lease and, in exchange, are guaranteed a market and price for their production and receive support in the form of delivered inputs. In contrast, dehkan farmers growing any crop and private farms specializing in horticulture are given greater choice about what they produce and how they produce it. The Government has supported the subsector in many important ways, but has adopted a special set of policies for the horticulture subsector that rely on private investment, and private input and output markets. Describing how these alternative set of policies have helped boost productivity and spur income growth in agriculture is another objective of this Policy Note. In Vision 2030, the Government of Uzbekistan announced an aggressive development strategy with the objective of becoming a middle-income country by mid-century, which implies a ten-fold increase in per capita income. A key finding from this Policy Note is that the Government’s shift from direct interventions to market-reliant support has generated significant positive benefits, whether measured in output, export earnings, farm incomes or resource productivity. Important steps have been taken to support the subsector’s market channels as well, although there is still work that needs to be done to build the special institutions needed to enter high-value markets consistent with the high-quality horticultural 1 goods Uzbek farmers produce. Though this will be challenging in practice, Uzbekistan can draw on lessons from other robust horticultural sectors to forge its own unique institutions. A more ambitious task is to find a way to adapt the policy lessons from horticulture to improve agricultural productivity as a whole. Uzbekistan is a major agricultural producer, regionally and globally. Agriculture remains an important component of national income, and has grown at a robust pace in recent years. Agriculture generates about 17.5 percent of GDP and contributes to the well-being of the nearly 14.5 million people who live in rural areas. The horticulture subsector has been a source of growth within agriculture and offers an opportunity to sustain the recent gains in agricultural productivity. Traditionally, cotton and wheat are the dominant crops in Uzbekistan and they currently take up the dominant share of land resources. Still, the area devoted to horticulture has been increasing steadily. In 2010, an additional 240 thousand hectares of land was reassigned to horticultural production under new government policies. Despite its small footprint, the economic impact of the fruit and vegetables subsector is large, accounting for 50 percent of the value of crop output and over 35 percent of export earnings. Steady economic growth over the last 10 years (including an 8.1 percent GDP growth rate reported in the third quarter of 2012), supplemented by strong population increase (at an annual rate of 2.7 percent) has resulted in an expanding domestic market for horticultural goods. Moreover, during the next decades, continued growth in income, population and urbanization are expected, sustaining a growing domestic demand for horticultural goods. As in other countries, an increase in domestic incomes in Uzbekistan has been accompanied by a shift in the Uzbek dietary preferences that favors horticulture. Uzbekistan is also well positioned to take advantage of the large and growing markets for horticultural products in Russia and other countries. The agro-climatic conditions that support horticulture in Uzbekistan are found in very few places. Agro- climatic conditions in Chile, Turkey, and California in the United States support many of the same crops grown in Uzbekistan. These countries have been able to leverage their agro-climatic advantages to become important players in global horticulture markets, and they are relevant peers when looking for policy lessons. Uzbekistan is also rich in natural genetic resources and many plants related to domesticated varieties can be found growing wild. If the habitats supporting these resources are well protected, this rich natural resource can continue to support domestic and international research efforts to develop improved varieties. Still, the area best suited for agriculture in general and horticulture in particular is limited. In addition, some land has been degraded by poor agricultural practices in the past. Most land under crops is irrigated, and there is little potential to expand crop area. Consequently, it is important that available resources are managed in a sustainable way and put to their best use. Horticulture has a role to play here as the fruit and vegetable crops commonly grown in Uzbekistan use less water compared to any other crops, including cotton and wheat, while generating greater revenue per hectare and per cubic meter of water used. Moreover, when drip irrigation is employed, as is often the case with new orchards, there are additional water efficiency gains. 2 The farm structure in Uzbekistan has gone through a series of changes following independence. The reforms began with the restructuring of state and collective farms established during the Soviet era. Between 1990 and 1998, the state farms were converted into various economic entities, mainly lease- based collective farms. In 1998, the former state and collective farms were converted into cooperative farms (shirkats), where the production assets were managed by families. In 2002 the Government began a conversion of shirkats into private farms. Agricultural land is also held in the form of dehkan farms, small-scale operations largely based on household labor. Citizens living in rural areas are entitled to small inheritable household plots, on the condition that they build a house within three years. They occupied about 13 percent of irrigated arable land and produced 63 percent of gross agricultural output (State Statistics Committee of the Republic of Uzbekistan, 2010). Beginning in 2004, a lease-based land use system was introduced for all forms of farming entities, except for dehkan farms. Land plots are allocated to farmers on long-term lease for 49 years, with the minimum area for cotton and grain farms set at 30 hectares, and horticulture farms set at 5 hectares. Land use rights are not fully guaranteed, since provisions of the lease require the fulfillment of a state procurement order for cotton and wheat. Starting in 2006, ‘agri-firms’ were established within the horticultural subsector. Agri-firms are non-government associations and private firms that participate in the distribution and processing of fruit and vegetables; occasionally they have evolved into vertically integrated trading or processing firms that also operate private farms. As of 2012, there were 267 agri-firms in Uzbekistan. In 2008, 2009 and 2010, selective land leases for unprofitable farms and farms where state resources were misused were revoked and farm land optimization was implemented by administrative measures. The number of private farms declined by 70 percent, and the average size of land plots increased from 27 hectares to 80 hectares. More recently, the Government has converted cotton and wheat farms into horticultural farms. For example, in late 2011, more than 500 private wheat and cotton farms were converted into farms specializing in horticulture, concentrated in 25 districts that are especially well suited for horticulture. The governance structures of dehkan farms and private horticultural farms are different from those under which private wheat and cotton farms operate. Dehkan farms operate on lands for which they hold inheritable use rights and make independent decisions about what they produce and sell and receive no direct material support from the government. As discussed, private farms growing cotton and wheat are obliged to meet production quotas, while private farms specializing in horticulture are given wider latitude to decide on what they produce. Wheat and cotton farms are supplied with fertilizer and pesticides by government firms, while dehkan and private horticultural farmers make their own arrangements. Chemical fertilizers, pesticides and herbicides are widely available. There are numerous outlets for seeds, seedlings and sapling as well as the materials needed for drip irrigation and plastic tunnels. In recent years, the Government has facilitated the importations of seeds, planting material and reduced taxes on almost all horticultural inputs. 3 Strong research institutions have helped sustain productivity growth in the horticulture subsector. Research related to fruit trees, grapes and wine making is managed by the Schroeder Institute, which has operated for 70 years. The Institute has branches in each region of the country, and has a well-established production and research capacity. Research on horticultural field crops, including melons and potatoes is managed by the Uzbek Research Institute for Vegetables, Melons and Potatoes (RIVMP). The RIVMP is also a long-standing research center, having been established in 1933. Taken together, changes in land policy, productivity and incentives have led to a greater role for horticulture; production has grown due to improved productivity and also through an expansion of area planted. Though output from dehkan farms remains important, horticultural production is shifting toward private farms. This Policy Note contains an indicative analysis of the cost and profitability of key horticultural products on private and dehkan farms in selected districts in Tashkent, Samarkand and Fergana provinces and compares them to similar calculations for wheat and cotton. Gross margins were calculated for field crops, while rates of return from a 15-year production cycle were used to take into account up-front investment costs in the case of orchards. Although the sample is not nationally representative, the allocation of land by crop in the study areas is similar to the national allocation. Dehkan and private farms differ in scale, and private farms face tax and social obligations that dehkan farms do not, including the maintenance of local roads and irrigation canals and providing support to the poor. These factors affect the profitability calculations. Private farms are taxed on the value of the land they farm and also on the value of the output they produce. The second tax encourages the use of informal market channels and the under-reporting of farm output. Eliminating the revenue tax and replacing it with a higher land-tax would remove this unintended consequence. Moreover, under a more flexible land policy and with the development of land rental markets, land values should increase as land moves from other crops to more profitable horticultural crops. Land markets would help steer land to its most profitable use and, in cases where land is shifted from cotton to vegetables, generate additional tax revenue even if prevailing rates were not changed. Dehkan farms and private farms use differing production methods, with dehkan farms relying more on household labor. Private farms are more likely to use new fast-maturing varieties in their orchards and use more machines to prepare and maintain their lands. Still it would be inaccurate to say that dehkan farms do not use modern technologies, since dehkan farmers often use drip irrigation, plastic tunnels and green houses. They also employ traditional techniques for storage and managing vineyards that are quite affective. By regional standards, both private and dehkan farms are highly efficient. In comparison to wheat and cotton, horticultural crops generate higher revenue, higher costs and higher profits. Horticultural activities are especially profitable on dehkan farms, in part because of lower taxes. Still, this is a significant and positive outcome, since dehkan farm families tend to be poorer and use income from their plot to supplement income from wages and other sources. 4 The economic incentive for private and dehkan farmers to move from wheat and cotton to horticulture is high. For example, the ratio of gross margins to operational costs for wheat is 0.14 in Samarkand and 0.13 in the Zangiata district of Tashkent; the ratio for cotton in Fergana is 0.02. In contrast, the ratio for alternative horticultural crops is consistently higher, with gross margins exceeding operating costs by more than 100 percent for crops like tomatoes and melons on dehkan farms. Private farmers growing horticultural goods also do better than their counterparts who grow wheat or cotton. In Fergana, revenues exceeded costs by more than 50 percent for onions, tomatoes, melons and cabbage. The returns to establishing new orchards are also high, even though revenues are delayed. For new breeds of apples, trees begin bearing fruit after two years; however, in the case of cherries, farmers must carry investment costs for up to eight years before earning significant revenue. Even so, calculated internal rates of return for apples, cherries and grapes are uniformly high in the study regions, at 19 to 20 percent for cherries and grapes in Fergana, and 34 to 35 percent for apples in Samarkand and Zangiata. This is significant, since the implemented technologies behind the high rates of return are modern and capital intensive. For example, the investment costs of establishing a cherry orchard in Fergana were estimated at nearly 10 million UZS (USD 5,300) per hectare. This included purchasing and planting saplings, preparing the land, purchasing and installing drip irrigation networks. Workers in rural communities are likely to benefit when farmers switch from cotton and wheat to fruit and vegetables, since horticultural field crops require more hired labor than cotton and wheat do. The same is true for orchards, even after they are well established. Processing activities have grown rapidly. In Uzbekistan, horticultural products are processed by 149 large firms, and numerous small processing enterprises. A little over 15 percent of total horticultural crops produced are processed (including drying). Between 2000 and 2010, the volume of vegetable processing rose six-fold and fruit processing rose threefold. Boosted by higher prices and growing volumes, export revenue from horticulture has grown. Although the share of horticultural goods destined for export markets is changing slowly, increases in volumes and prices have meant that export values have grown rapidly. The value of horticultural exports in 2010 was triple of what it was in 2006. In addition, trends show this especially concentrated in places like Tashkent and Samarkand with good access to large domestic markets and a growing agricultural processing industry. Russia accounts for 80 percent of all horticultural exports from Uzbekistan, but Uzbekistan imports only account for 3 to 4 percent of all fruit and vegetable imports to Russia. A growing share of horticultural goods in Russia reaches consumers via supermarkets. This poses a risk to Uzbek exporters, since supermarkets have higher food safety and packaging requirements than the traditional wholesale markets that currently handle most of Uzbekistan’s exports to Russia. Under current rules, horticultural goods shipped to Russia from Uzbekistan face reduced tariffs, but this advantage will likely be lost as Russia extends most-favored nation tariff rates to fellow WTO members. Russian product standards are likely to change as well, since the standards used to settle food safety and other product quality disputes under the WTO are different from the set of standards that currently govern horticultural trade in the region. 5 Once produced, horticultural goods travel along different market channels with their own logistical and institutional features that impart characteristics relevant for consumers and intermediaries. The channels affect prices, and in some cases, determine whether the products can enter certain markets. Flavor, appearance, freshness, shelf-life, packaging, product safety and reputation are examples of key product characteristics. Because of this, it is useful to think of the entire value-chain, from field to consumer, as producing the final good. Failing to meet SPS requirements can shut countries out of markets and slow certification will do the same. Increasingly, supermarkets and restaurants require food hazard management systems and standards that exceed national standards. This Policy Note contains lessons from other countries about the reputational risk to horticultural exports from food safety events. An annex to the Policy Note uses the example of Chile to show how good agro- climatic conditions combined with strong food safety standards can be used to access global markets. A review of institutions there illustrates a useful delineation between public and private market responsibilities. Other countries also face challenges resulting from increased concerns about food safety hazards; in some countries, the World Bank has facilitated national SPS Management Strategies to help put in place appropriate standards and support for private market HACCP systems. This Policy Note contains an analysis of costs along the marketing chain for selected crops. The findings show that transportation and handling costs can exceed the price received by farmers, affecting decisions whether to sell locally or for export. At the time of the analysis, official exchange rates were below informal parallel rates. In general, the difference was not great enough to affect the decision to sell locally or for export. However, currency policies provide an added incentive for agents to use informal rather than formal market channels. For fresh horticultural goods, prices exhibit seasonal swings. Uzbek farmers can potentially capture seasonal premiums, since their produce can be harvested while prices are still relatively high in export markets. However, under current policy, exports are subject to the permission of the Cabinet of Ministers Working Group. The Working Group is mandated to take domestic supply conditions into account, and on occasion in low production years, horticultural exports have been temporarily banned. Moreover, for fresh horticultural products, formal export channels are restricted to approved companies. This combination of restricting competition among exporters and occasionally disrupting exports altogether is likely to harm the reputation of Uzbekistan as a reliable supplier and encourages traders to use informal lower-valued channels. A series of regulations concerning the conversion of foreign exchange also create hurdles for formal exporters, thereby adding to transaction costs and encouraging the use of lower-valued channels. The Government of Uzbekistan has taken a series of positive steps to ensure food safety and speed up the issuance of sanitary and phytosanitary certificates via a one-stop export mechanism. The Government also provides free advisory services to help promote horticultural exports. These efforts can be the foundation of a forward-looking approach that matches international public standards better, such as those used by the WTO to settle disputes, and also encourages the types of private-public partnerships needed to access high-value markets that require high-cost supply chain management systems. 6 The report ends with a series of recommendations. A set of supporting activities to further discuss the recommendations with stakeholders and to study the potential impact from implementing the recommendations are envisioned in a World Bank loan now under review. The first set of recommendations is aimed at improving farm productivity. Although the recommendations are based on a review of the horticultural sector, many relate to the agricultural sector in general. They include recommendations for: i) protecting genetic resources and continuing the country’s strong commitment to catalog genetic material; ii) restoring land and improving water resource management; iii) sustaining domestic improvements in production technologies; iv) finding innovative ways to deliver extension services; v) sustaining support for new private investments; vi) expanding the successful program of granting farmers greater autonomy; and, vii) facilitating land markets. A second set of recommendations aim to support high-value export markets. These include: i) strengthening support for quality and food safety standards; ii) building a brand for Uzbek horticulture; iii) continuing to support private access to quality and productivity enhancing equipment; and, iv) continuing on-going efforts to remove obstacles to foreign direct investment in the sector. A final set of recommendations are aimed at eliminating unintended incentives that encourage the use of informal, low-valued market chains. These include: i) eliminating export restrictions on horticultural produce; ii) easing restriction on the use of foreign currencies in trade; iii) dropping the revenue tax on farm products; and, iv) promoting competition by bring more firms into the formal export chain. 7 Introduction Why produce a Policy Note on horticulture in Uzbekistan? There are several answers to this existential question, although they are not necessarily obvious ones. Agriculture, taken as a whole, constitutes a small and declining share of Uzbekistan’s national income, and horticulture is a small share of agricultural income. Even so, it is an important source of income for the 4.7 million households that operate dehkan farms in rural and disproportionally poor communities. Horticultural products are grown on an additional 21 thousand larger private farms as well. Evidence in this note suggests that growing fruit and vegetables is among the most profitable activities on both dehkan and private farms and, over the last ten years, the incomes those activities generate comprised a growing share of national GDP. Horticultural export earnings have also surged in recent years, growing from USD 373 million in 2006 to USD 1.16 billion in 2010. Uzbekistan has special agro-ecological conditions that set it apart from most countries and provides the basis for its horticulture subsector. Like agriculture as a whole, the subsector benefits greatly from policies that support basic research in agronomy and post-harvest technologies, from policies that support private investment and efficient markets, and from policies that promote the good stewardship of natural resources. However, there are particular traits of horticultural markets that require special consideration and suggest an additional targeted set of policies and institutions. In particular, the market value of fresh horticultural goods depends heavily on their rapid and carefully managed delivery to destination markets, together with the attentive management of risks to food safety and phytosanitary risks. Failures that result in temporary supply disruptions or short-lived outbreaks of food-related illnesses can have lasting reputational risks for the subsectors. Additionally, the capacity to meet standards set by governments and international trade agreements is no longer sufficient to enter a growing portion of the export markets as supermarket chains and fast-food restaurant chains increasingly purchase their produce from field-to-store channels where food safety hazards are carefully monitored and controlled. Assessing current policies in light of these developing market requirements and pointing out positive examples from peer countries is a key objective of this note. Horticulture in Uzbekistan has also been a crucible for policy experiments in Uzbekistan and this is another important motivation for this Policy Note. Most arable land in Uzbekistan is planted to grains (47 percent) and cotton (37 percent) and these subsectors operate under a different set of policies. With the exception of small dehkan plots, farms operate on public lands under long-term leases. In the case of grains and cotton, farmers are given a production quota under the terms of the lease and, in return, are guaranteed a market and price for their production and receive support in the form of delivered inputs. In contrast, dehkan farmers and private farms specializing in horticulture are given greater choice about what they produce and how they produce it. They do not receive direct support for inputs or guarantees about the price of their output. They rely on markets for both inputs and outputs. At the same time, the Government has provided considerable indirect support to the sector by building high quality research institutes to support research in new varieties, as well as research in field and post-harvest technologies. The Government has also helped ease shortages for new planting materials and eased import duties and 8 taxes on machinery and advanced irrigation inputs. Describing how these alternative set of policies have helped boost productivity and spur income growth is another objective of this Policy Note. In Vision 2030, the Government of Uzbekistan announced an aggressive development strategy with the objective of becoming a middle-income country by mid-century, which implies a ten-fold increase in per capita income. Lessons from other countries suggest that such periods of sustained national income growth are associated with rapid increases in agricultural productivity growth, even as the share of labor in agriculture and the share of agriculture in national income decline. In turn, agricultural growth is driven by accumulations of physical and human capital, the innovation and adoption of better technologies and, importantly, a shifting of limited natural resources to their most productive resources. In the specific case of Uzbekistan, where land and water resources are limited and are already largely exploited, improvements in allocative efficiency are especially relevant. A key finding from this Policy Note is that the Government’s shift from direct interventions to market-reliant support has generated significant positive benefits, whether measured in output, export earnings, farm incomes or resource productivity. Important steps have been taken to support input and output markets as well, although work needs to be done to build the special institutions needed to enter high end markets consistent with the high-quality horticultural goods Uzbek farmers produce. Though this will be challenging in practice, Uzbekistan can draw on lessons from other robust horticultural sectors to forge its own unique institutions. The Policy Note is centered on the horticultural subsector. However, because an effort is made to draw comparisons between the policy environment that prevails for dehkan farmers and private farmers growing horticultural crops and that which is relevant for private farmers growing wheat and cotton, the Note touches on many sector-wide issues. Still, it is important to emphasize that this Policy Note should not be viewed as a general review of agricultural policies. Finding ways to adapt policy lessons from horticulture to improve agricultural productivity as a whole is a more ambitious task and one that requires broader analysis and discussion. 9 Main Report 1. An Overview of the Role of Agriculture and Horticulture in the Economy of Uzbekistan Key messages from this section. Uzbekistan is a major agricultural producer, regionally and globally. Agriculture remains an important component of national income, generating about 17.5 percent of GDP and affecting the well-being of the nearly 14.5 million people who live in rural areas. The horticulture subsector has been a source of growth within agriculture and offers an opportunity to sustain recent gains in agricultural productivity. Traditionally, cotton and wheat are the dominant crops in Uzbekistan and they currently take up the dominant share of land resources. Still, the area devoted to horticulture has been increasing steadily. In 2010, an additional 240 thousand hectares of land was reassigned to horticultural production under new government policies. Despite its small footprint, the economic impact of the fruit and vegetables subsector is large, accounting for 50 percent of the value of crop output and over 35 percent of export value. Steady growth in income and a related shift in preferences have fueled an increased demand for horticultural goods domestically. In addition, a corresponding growth in Russia and Kazakhstan has spurred a rapid increase in Uzbek exports. In the near term, both trends are expected to continue. The agro-climatic conditions that support horticulture in Uzbekistan are found in very few places and are the foundation of the subsector. Countries with advanced horticultural subsectors like Chile, Turkey, and California in the United States support many of the same crops grown in Uzbekistan. These countries are important players in global horticulture markets and are relevant peers when looking for policy lessons. Uzbekistan is also rich in natural genetic resources and many plants related to domesticated varieties can be found growing wild. If the habitats supporting these resources are well protected, this rich natural resource could support domestic and international research efforts for improved varieties. Still, the area best suited for agriculture is limited, and some land has been degraded. Most land under crops is irrigated, so there is little potential to expand crop area. Horticultural products use less water than cotton and often less than wheat but generate more revenue. Uzbekistan is a major agricultural producer, regionally and globally. The country is one of the world leaders in cotton production, ranking 6th in the world output in 2012, and 5th in the global exports (Figure 1.1). Annual revenues from cotton exports amount to over USD 1.6 billion. Uzbekistan is also among top producers of wheat, barley and corn in the Community of Independent States (CIS), ranking 4th after Russia, Kazakhstan and Ukraine, and is among the top 20 wheat producers in the world. Uzbekistan is also a major regional producer of fruit and vegetables (Figure 1.2). According to official estimates, the country will produce over 7.8 million tons of vegetables, 1.4 million tons of melons, 2 million tons of potatoes, 2.25 million tons of fruit and 1.2 million tons of table grapes in 2012. 1 1 Report on the Results of the First quarter of 2012 for production of vegetables, melons, potatoes and grapes, April 25, 2012, Ministry of Agriculture and Water Resources. 10 Agriculture equally represents an important component of the Uzbek economy. Although the share of agriculture has declined in recent years compared to the other sectors of the economy, the sector continues to hold a significant share of nation's gross domestic product (GDP) at 15.8 percent, which amounts to UZS 14,168 billion in 2010 (Figure 1.3).2 In 2012, more than 14.5 million people lived in the rural areas, which accounted for about 49 percent of the total population. 3 Agriculture has a large impact on rural livelihoods, providing about 32 percent of employment. 4 2 Report of the Minister of Agriculture on the State of Agriculture on July 15, 2011, Ministry of Agriculture 3 Statistic Overview of Uzbekistan, Third quarter of 2012 (figures released on July 1, 2012), Central Statistical Agency 4 Uzbekistan Welfare Strategy 11 In recent years, the agricultural sector has grown steadily. Despite a decline in agricultural share in relative terms, farm output doubled in real terms and continues to grow at a 7.1 percent rate per annum. This trend is driven by a favorable situation both in domestic and foreign markets, ensuring high levels of demand for Uzbek produce. However, much of the supply response also reflects a successful policy that gives farmers greater choice in what they grow. Growth in agricultural labor productivity, even as the share of agriculture in the GDP declines, is a hallmark of robust economies with strong agricultural sectors. Figure 1.4 presents data from Brazil and Chile that illustrates how growth in agriculture, robust overall economic growth and a structural adjustment of the economy from agriculture to other sectors go together. In both Brazil and Chile, agricultural value added per worker has grown as fast as or faster than GDP per capital in recent decades, even as the share of agriculture has declined. 12 In the case of Uzbekistan, agricultural labor productivity has also grown in recent years as its share of the overall economy declined. However, as shown in Figure 1.5, agriculture’s relative share of the economy in Uzbekistan remains much larger than that in Brazil or Chile. Still, as in Brazil, agricultural productivity has grown faster in Uzbekistan than the overall economy. Moreover, unlike either country, the value added per agricultural worker is significantly higher than average per capita GDP. Most Uzbeks live in rural areas and this is expected to remain true over several decades. According to FAO, the urban share of the population stood at about 36 percent in 2010 and is expected to remain below 43 percent through 2030 (Figure 1.6). Comparable contemporary data is lacking, but in 1999 agriculture accounted for about 38.5 percent of overall employment, while, by way of comparison, agriculture accounted for roughly 23 percent of employment in Brazil. 5 5 World Bank development data (2012). 13 It is difficult to know how many rural families are poor or how important income from horticulture is for their wellbeing. The main data on poverty in Uzbekistan comes from outdated Household Budget Surveys. Using on a caloric measure of poverty, the data suggests that 27.5 percent of Uzbekistan’s population (6.8 million people) could be classified as poor in 2001. The share declined slightly to 26.2 percent in 2003. In total, 63 percent of the poor lived in rural areas. 6 It is likely that income from the expanding horticultural sector has helped to improve rural incomes and helped to reduce poverty, by providing food and income directly to producer households and through increased employment. As will be seen later, most horticulture originates in household gardens and from smaller-scaled farms. Moreover, horticulture is more labor intensive than cotton and wheat, so recent shifts in production likely benefited low-wage rural workers. Cotton and wheat are the dominant crops in Uzbekistan and they occupy the highest share of land resources. Uzbekistan produces about 3.5 million tons of seed cotton, which equals to 1.2 million tons of cotton lint annually. Grains, especially wheat, are also significant in the country’s agricultural production. In face of unfolding climate change and high volatility of the global commodity markets, the Government of Uzbekistan took steps to increase the domestic production of key grain crops during the past few years in an attempt to meet domestic and foreign consumption needs more consistently. To date, Uzbekistan produces over 6.7 million tons of wheat, which allows the country to fully satisfy its internal demand for this commodity. The country also produces 240,000 MT of barley and 120,000 MT of corn which are mostly used for domestic consumption. Jointly, wheat and cotton occupy about 80 percent of the cultivated agricultural area (Figure 1.7). 6 http://www.undp.uz/en/development/, downloaded November 2012. 14 Horticulture is an important component of the agricultural sector in Uzbekistan, although its significance is easy to miss. Compared to traditional crops such as wheat and cotton, the footprint of horticulture is small. As shown in Figure 1.7, horticulture accounted for about 16 percent of the aggregate arable lands in contrast to grain fields (47 percent) and cotton (37 percent) in 2009. However, a changing market and policy environment has led to more than 241.1 thousand hectares of land being assigned for horticulture use in 2012 alone, including 84.1 thousand hectares for potatoes and 57.8 thousand hectares for melons. The area devoted to horticulture has been increasing steadily, primarily by displacing land used once used cotton production. Consequently, horticultural production has been increasing faster than traditional crops in recent years (Figure 1.8). The economic impact of the fruit and vegetables subsector is large, accounting for 50 percent of the value of crop output and over 35 percent of export value. 15 Growing domestic incomes and external demand generate new opportunities for the Uzbek horticulture. Steady economic growth over the last 10 years (including an 8.1 percent GDP growth rate reported in the third quarter of 2012), supplemented by strong population increase (at an annual rate of 2.7 percent) has resulted in an expanding domestic market. Moreover, in the next decades, continued growth in income, population and urbanization are expected to continue, feeding an increased domestic demand for horticultural goods. As in other countries, an increase in domestic incomes in Uzbekistan has been accompanied by a shift in the Uzbek dietary preferences. While traditionally fresh fruit and vegetables have not comprised a large share in the average diet in Uzbekistan in caloric terms, this is changing. Figure 1.9 reports on the change in per capital calories by source between 1996 and 2006, for a selected group of commodities. Taken together, wheat and meat still account for about 60 percent of calories in a typical Uzbek diets; however their share has declined in recent years. In contrast, spurred by income growth, the consumption of horticultural products is rapidly growing. While the prospects are good for continued growth in domestic demand for horticultural products, Uzbekistan is also well positioned to take advantage of the large and growing market for horticultural products in Russia and Kazakhstan. Russia’s population is more than five times larger than that of Uzbekistan, and incomes there are rising fast: Russia’s GDP per capita has quadrupled since 1999, to reach USD 17,000 in 2011. Kazakhstan has witnessed a similarly fast economic growth, with incomes reaching more than USD 13,000 per capita in 2011. These two countries are the main destinations for the Uzbek fruit and vegetables and, in 2011, accounted for 93 percent of the subsector’s export revenue, totaling USD 0.7 billion (Figure 1.10). 16 Natural endowments, notably excellent climatic conditions, are the foundation of the country’s vibrant horticulture subsector. Warm days and cool nights create an ideal environment for horticulture. The country produces a large variety of fruit and vegetables year-round, including some tropical cultures, such as persimmons, pomegranates and others. Favorable conditions also reduce problems related to pests and disease. Uzbekistan’s climate supports two vegetable crop harvests in most places, and three harvests in some provinces, for instance, Surkhandarya and Kashkadarya. The climate also allows farmers to grow crops with different ripening periods (early, medium, and late) throughout the year. Many farmers use organic fertilizers and the weather also allows high productivity without the heavy use of pesticides. This gives Uzbek farmers a comparative advantage to deliver organic high-quality fruit, nuts and vegetables to domestic and high-end export markets. The agro-climatic conditions that support horticulture in Uzbekistan are found in very few places. Agro-climatic conditions in Chile, Turkey, and California in the United States support many of the same crops grown in Uzbekistan and these countries are relevant peers when looking at the potential for Uzbek horticulture. For example, the United States, Chile and Turkey are the world’s leading exporters of cherries; and Chile and the United States are also the top exporters of fresh grapes. As will be described later, Uzbekistan has been exporting growing volumes of both crops, and there are good prospects for production to expand. Lessons drawn from how value-chains operate in these countries are therefore useful as the Government of Uzbekistan considers future policies. Uzbekistan is rich in genetic resources. Uzbekistan is home to many food plants (350 species); forage plants (1,700 species); herbal plants (600 species); essential oil plants (650 species); dye plants (150 species); oriental plants (270 species); spice plants (200 species); saponin plants (100 species). 7 Additionally, many vegetables, fruit trees and nut trees are thought to have originated in Uzbekistan including onions (allium cepat), carrots (Daucus carota), radishes (Raphanus sativus), spinach (Shpinacia 7 Horticultural Crops and Wild Fruit Species (UNEP 2012). 17 oleraceae), garden cress (Lepidium sativum), coriander (Coreandrum sativum), basil (Ocimum basilicum), turnip (Brassica campestris), apple (malus sp.), pear (pyrus sp.), apricot (Armeniaca vulgaris), almond - Amigdalus sp.), walnut (juglans regia L.), grape (vitus sp.), pomegranate (punica granatum L.) and pistachio (Pistacia vera L.). Wild versions of many domestic plants still grow in Uzbekistan’s forests and meadows. As will be discussed later, this genetic base is not fully documented and it is not fully protected; however, it presents an important base for research-based biological productivity gains. National and global assets. There are potentially significant benefits to preserving and fully documenting this rich natural resource. Doing so will likely benefit applied agricultural research in Uzbekistan in the near term, and entering into collaborative arrangements with scientists from other countries can complement and help sustain Uzbekistan’s excellent agricultural research centers. Importantly, the likely need for global agriculture to adapt to uncertain changes in the climate also points to the importance of fully protecting and utilizing Uzbek wild flora, as well as the heritage varieties of fruit and vegetables now grown in small gardens that are not common on commercial farms. The total area best suited for agriculture is limited. Uzbekistan is divided into three agro-ecological zones (AEZs), as shown in Figure 1.11. A large part of the country’s terrain is primarily desert plains, with about 20 percent of the territory comprised of mountains and foothills (Centre of Hydro- Meteorological Services, 2008). In the figure, the plains are lightly shaded and comprise the Desert and Steppe AEZ at 60 to 150 meters above sea level. The country’s most fertile areas are shown in a medium shade and make up the Piedmont AEZ at 400 to 1,000 meters above sea level. The remaining areas, shaded in dark brown comprise the Highland AEZ, hilly-to-mountainous areas with interspersed high plains at over 1,000 meters above sea level. The desert and steppe zones are hostile areas for most agriculture. The Highlands receive the most rain (over 1000 millimeters annually), but the area is better suited for livestock grazing than for crops. Consequently, most of Uzbekistan’s annual and permanent crop production resides in the limited areas of the Piedmont AEZ. 18 Most of the land used for annual and permanent crops is irrigated. Moreover, the total area under irrigation has remained constant in recent years while planted rain-fed area has declined (Figure 1.12). The irrigation network in Uzbekistan is extensive, but in recent years, investments in maintaining this infrastructure appear to have decreased. Overall system-wide and on-farm water use efficiency is difficult to estimate, but by most accounts, it is much lower than optimal; for instance, it is estimated that only one-quarter of the distribution channels are equipped with anti-seepage lining. Pumping infrastructure is relatively old and, as a result, less energy efficient than newer systems. There are few incentives for application of water saving-technologies because farmers do not see direct costs of water provision; instead, water costs are covered by an overall land tax and are not tied to use of inputs; moreover, water user associations are not well-established. 8 Because of all of these factors, and because of the agro- ecological constraints discussed earlier, it will be difficult to expand the area under horticultural crops without switching land out of other crops. 8 Reducing the Vulnerability of Uzbekistan’s Agricultural Systems to Climate Change: Analysis of Adaptation Options. World Bank Report, May 2011. 19 Moreover, Uzbekistan’s rich natural environment is constrained by increasing salinity in soils and growing water scarcity. Keeping in mind that more than 90 percent of cropland in Uzbekistan is irrigated, Table 1.1 shows that a significant share of the country’s cropland is affected by salinity, although the extent of the problem varies significantly by region. For example, salinity is less of a problem in Samarkand and around Tashkent, where horticulture has prospered in recent years, than it is on average. In contrast, about 46 percent of the irrigated land in the important region of Fergana suffers from salinity. Table 1.1: Irrigated area with saline soils by region, 2010. Saline Low Medium High Location Total area Share (%) Share (%) Share (%) Share (%) area salinity salinity salinity The Republic of 515.0 401.6 78.0 164.2 31.9 185.0 35.9 52.4 10.2 Karakalpakstan Andijan 265.9 11.1 4.2 6.3 2.4 4.8 1.8 Bukhara 274.9 239.0 86.9 159.6 58.1 69.2 25.2 10.2 3.7 Jizzakh 300.0 247.1 82.4 161.3 53.8 79.6 26.5 6.2 2.1 Kashkadarya 514.9 242.8 47.2 182.7 35.5 47.3 9.2 12.8 2.5 Navoiy 131.8 115.0 87.3 89.5 67.9 19.8 15.0 5.7 4.3 Namangan 282.5 26.0 9.2 17.8 6.3 7.2 2.5 1.0 0.3 Samarkand 379.2 6.4 1.7 6.0 1.6 0.4 0.1 Surkhandarya 321.2 103.4 32.2 70.8 22.0 31.7 9.9 0.9 0.3 Syrdarya 292.8 290.1 99.1 225.2 76.9 60.8 20.8 4.1 1.4 Tashkent 393.3 10.1 2.6 7.8 2.0 2.3 0.6 0.03 0.01 Fergana 365.9 168.4 46.0 124.0 33.9 39.7 10.8 4.7 1.3 Khorezm 265.2 265.2 100.0 141.7 53.4 88 33.2 35.5 13.4 Total 4,302.6 2,126.2 49.4 1,356.9 31.5 635.8 14.8 133.5 3.1 Source: State Committee for Land Resources, Geodesy, Cartography and State Cadastre, Republic of Uzbekistan Land restoration efforts are underway and there may be scope for coordination of those efforts with policies regarding how land is used. For example, in 2010 alone, UZS 154.0 billion was allocated for land reclamation projects under the Program on Land Development and Soil Fertility Improvement. 20 This single program covered 381 land reclamation sites. In addition, over USD 62 million of loans from international financial institutions were disbursed to rehabilitate land in Kashkadarya, Bukhara, Navoiy, Surkhandarya, Syrdarya, Jizzakh and Fergana Provinces and the Republic of Karakalpakstan. Other programs are planned, as well. Past choices regarding production and irrigation approaches were the causes of the land degradation that these projects hope to reverse, so it is important to see that the incentives and rules governing how water and land are used are consistent with good stewardship practices. As will be discussed later, rates of return on private investments in drip irrigation are currently high in horticulture, a production technique that results in better land management. Horticultural crops use less water than cotton. A recent study by Aldaya, Munoz and Hoekstra (2010) estimate that about 4,426 m3 of water is required to grow a ton of cotton in Uzbekistan; about 2,068 m3 of water is required for wheat. 9 Although comparable numbers are not available for Uzbekistan, a study of global water footprints using a similar methodology (Mekonnen and Hoekstra, 2010) suggests that horticultural products require substantially less than cotton and in some cases less than wheat. 10 For example, grapes require, on average, 2,400 cubic meters of water per ton, while apples require about 820 cubic meters. As will be discussed later, new orchards in Uzbekistan generally employ new and efficient drip irrigation technologies and therefore most require likely less water than international average values would suggest. In economic terms, based on these conservative estimates, a cubic meter of water used to irrigate grapes in Fergana generates 625 UZS, compared to 169 UZS for cotton. A cubic meter of water in Samarkand used to grow apples generates UZS 1,829, compared to UZS 169 for wheat (Table 1.2). Table 1.2: Water footprint and value generated for sample crops Price (‘000 UZS) Water (m3) footprint UZS per m3 per ton per ton of water Fergana grapes 1,500 2,400 625 Fergana cotton 750 4,426 169 Samarkand apples 1,500 820 1,829 Samarkand wheat 350 2,068 169 Source: Authors’ calculations. 9 Aldaya, M.M, G Munoz, and A.Y. Hoekstra. 2010. Water footprint of cotton, wheat and rice production in Central Asia. Value of Water Research Report Series Number 41. Delft, Netherlands: UNESCO-IHE. 10 Mekonnen, M.M.,and A.Y. Hoekstra. 2010. The green, blue and grey water footprint of crops and derived crop products. volume 1: main report. Value of Water Research Report Series Number 47. Delft, Netherlands: UNESCO-IHE. 21 2. The Changing Farm Structure in Uzbekistan and Its Implications for Horticulture Key messages. The historical allocation of agricultural land and water resources are strongly linked to past land-use policies. These policies worked to keep the allocation of production area among crops relatively fixed so that the changes in total and relative output reflected absolute and relative improvement in yields. In recent years, incremental but successful changes in policy have introduced greater flexibility in crop choices in selected areas. Consequently, horticultural output has grown through healthy productivity gains and policy related changes in land allocation away from cotton. Importantly, the role of the state is now different for horticulture and for dehkan farmers than it is for other crops grown on private farms. Producers of horticulture are given greater scope for deciding on what they will produce and how they will produce it. The farm structure in Uzbekistan has gone through a series of changes following independence. Reforms began with the restructuring of state and collective farms established during the Soviet era. Between 1990 and 1998, the state farms were converted into various economic entities, mainly lease- based collective farms. Starting in 1998, the former state and collective farms were converted into cooperative farms (shirkats), where the production assets were managed by families, who held ownership shares, under overall leadership of the head of the shirkat. Some shirkats operated successfully, but often shirkats were managed as they were when they operated as collective farms. Many suffered significant financial losses, which were periodically written off. Between 2002 and 2007, the Government undertook a massive conversion of shirkats into private farms under a series of related resolutions. New farms were created through a bidding process held by a special commission established within District Hokimiyats (Governor’s Offices). Agricultural land is also held in the form of dehkan farms. Carved out from lands previously operated as state and collective farms, dehkan farms are small-scale operations largely based on household labor. Citizens living in rural areas for at least three years are entitled to inheritable household plots; areas not larger than 0.35 hectares on irrigated lands, and not larger than 0.5 hectares on rain-fed lands, and not larger than 1 hectare on steppe and desert zones with rain-fed pastures. In addition, some households in urban or peri-urban settings cultivate backyard plots. Dehkan farmers are free to produce what they choose; they do not receive inputs for financial assistance from the state. In contrast to private farms and shirkats, where modern varieties are used, many of the varieties of fruit and vegetables grown on dehkan farms are heritage varieties that appeal to local preferences. In 2010, there were more than 4.7 million dehkan farms. They occupied about 13 percent of irrigated arable land and produced 63 percent of gross agricultural output (State Statistics Committee of the Republic of Uzbekistan, 2010). Beginning from 2004, a lease-based land use system was introduced for all forms of farming entities, except for dehkan farms. Land plots are allocated to farmers on long-term lease from 30 to 50 years, with the minimum area for cotton and grain farms set at 30 hectares, and vegeculture and horticulture farms set at 5 hectares. Although farmers lease the land for 50 years, their land use rights are not guaranteed. The right to lease is associated with the fulfillment of a state procurement order on cotton and 22 wheat, which gives local authorities a strong lever to regulate the terms of lease if a farm does not fulfill the state procurement order. Starting in 2006, ‘agri-firms’ were established within the horticultural subsector. Agri-firms are non-governmental associations and private firms that participate in the distribution and processing of fruit and vegetables. They are designed to be non-producing firms, but have also, on occasions, vertically integrated trading or processing with primary production; for example, some tomato processors grow a portion of their own raw material supply, while also purchasing a share from neighboring farms. 11 As of 2012, there are 267 agri-firms in Uzbekistan. In 2008, 2009 and 2010, special resolutions were adopted to optimize farm areas. Selective leases were revoked and farm land optimization was implemented by administrative measures. As a result, the number of farms declined from 219,900 to 66,100, or by 70 percent, while the average size of land plots increased from 27 hectares to 80.1 hectares, or became three times as large. In 2010, private farms accounted for 35 percent of agricultural output overall, 100 percent of cotton production, and 84.0 percent of cereal production. In terms of horticulture, private firms produced 34.9 percent of vegetables: 50.4 percent of melons, 47.7 percent of fruit production, and 56.4 percent grapes production. The consequences of the various waves of reform on private farms are summarized in Table 2.1. Table 2.1: Changes in the number and size of private farms, 2000-2010 2000 2005 2006 2007 2008 2009 2010 Total number of private 43,479 125,668 189,235 217,095 105,033 80,628 66,134 farms Land area, 1000 ha. 889.3 3,775.30 4,953.20 5,787.80 5,896.80 5,828.50 5,826.80 Area under crops, 1000 ha. 632.2 2,140.70 2,710.60 3,001.60 3,045.20 3,052.90 3,140.20 Share of national total area 16.7 58.7 74.7 84.3 84.4 84.6 84.8 under crops, % Average farm area, ha. 20.3 30 26.2 27 56 65.7 80.1 Average farm area under 20.3 30 26.2 13.8 29 37.9 47.5 crops, ha Source: State Statistics Committee, Republic of Uzbekistan. In recent years, the Government has converted cotton and wheat farms into horticultural farms. In particular, in late 2011 (November-December), 112 cotton-and-wheat farms operating on 9.6 hectares of land in Asaka District of Andijan Province, 288 farms operating on 27.5 hectares of land in Jambay District of Samarkand Province, 113 farms operating on 14.7 hectares of land in Yangiyul District of Tashkent Province were converted into farms specializing in the production of vegetables, melons, horticultural products, grapes and other crops. The net effect of the restructuring of farm size and the reallocation of farms among crops has resulted in the following farm structure in Uzbekistan (Table 2.2). 11 UNDP (2009). Investment guide to the food processing sector in Uzbekistan. Tashkent. 23 Table 2. 2: Private farm structure, 2010. All private farms Cotton and wheat Vegetables and melons Fruit, incl. grapes Livestock Other Regions Number Avg. size Number Avg. size Number Avg. size Number Avg. size Number Avg. size Number Avg. size Rep. of Karakalpakstan 3,354 126.9 2,653 142.9 168 29 141 8.8 316 120.6 76 28.8 Andijan 6,175 36.3 2,551 75 364 8.6 1,554 10.1 436 20.7 1,270 4 Bukhara 3,953 184.6 2,679 122.5 67 10.3 642 8.2 508 778.4 57 2.8 Jizzakh 4,735 102.8 3,716 118.1 147 17.9 492 20 332 101.9 48 31.2 Kashkadarya 7,139 101.7 5,266 112.8 307 29.5 1,079 18.8 429 237.8 58 6.7 Navoiy 1,801 119.8 1,158 104.8 17 8.7 264 27.7 324 261.9 38 53 Namangan 4,515 50.9 2,377 83.3 119 12.3 1445 12.2 240 41.6 334 9.1 Samarkand 7,723 64.4 3,013 122.3 1,519 29.5 1,968 15.9 425 58.2 798 35 Surkhandarya 4,951 122.4 2,490 110.4 0 0 1,576 17.5 701 422.3 184 41.7 Syrdarya 3,319 71.8 2,459 88 15 12 377 9.2 232 38.7 236 39.6 Tashkent 6,051 69.8 2,833 103.6 650 25.4 1,809 19 539 118.7 220 63.2 Fergana 7,737 37 2,709 85.6 259 7.7 4,280 9.1 318 37.1 171 8.2 Khorezm 4,681 44.1 1,992 90.4 15 6.1 1,337 6.3 529 25.5 808 5 Uzbekistan 66,134 80.1 35,896 106.3 3,647 23.5 16,964 13.1 5,329 205 4,298 18.3 Note: Average farm size given in hectares. Source: Ministry of Agriculture and Water Resources, Republic of Uzbekistan 24 Policy interactions. Although this Policy Note deals primarily with how policy affects the horticulture sub-sector, it is worth pointing out that the parallel policy regimes that treat horticultural products differently than wheat or cotton have spillover effects. An important channel for this has to do with differences in growing seasons. In general, wheat in Uzbekistan is harvested in June, leaving land (and water) available from July to November, during when farmers frequently grow other crops, mostly vegetables. In contrast, cotton occupies the land for the entire year. Consequently, wheat farmers benefit partially from the currently favorable environment for horticulture discussed in this report while cotton farmers do not. Another important connection comes through the input subsidies received for wheat and cotton production. Anecdotal evidence suggests that financing and input supplies intended for wheat and cotton are sometimes used for other crops, including horticultural crops. 12 The governance structures of dehkan farms and private horticultural farms are different from those under which private wheat and cotton farms operate. As discussed, dehkan farms operate on lands for which they hold inheritable use rights, while other farms operate under long-term leases from the government. Dehkan farmers make independent decisions about what they produce and sell and receive no direct material support from the government. Larger private farms growing cotton and wheat are obliged to meet production quotas, with the real potential that their leases will be canceled or modified if they under-perform. In contrast, private farms specializing in horticulture are not subject to production quotas and they are given wider latitude to decide on what they produce. Government support differs as well. Wheat and cotton farms are supplied with fertilizer by district branches of the Territorial Joint Stock Company, UzKishlok-Khujalik-Kimyo, in accordance with an official distribution plan. Pest control services are provided, too. Dehkan and private horticultural farmers make their own arrangements. In general, this does not appear to be a binding constraint, as input markets are fairly well established. Fertilizer, pesticide and herbicide markets. For fertilizers, anecdotal evidence suggest that dehkan farmers often rely on organic fertilizers locally obtained; however, private farms and dehkan farms in need of chemical fertilizers can buy it from any of the 860 fertilizer sale centers, 489 permanent shops, and 150 mobile shops operating throughout the country. In 2011, over 20,000 tons of mineral fertilizers were sold to dehkan and private farms producing horticultural products. 13 Pest and disease control services are provided by district centers of Agro-Kimyo-Markaz, but there supplies of foreign produced herbicides and pesticides as well. Seeds, seedlings, and saplings. There are also multiple providers of seeds, seedlings and saplings in Uzbekistan. At the center are two state-supported research institutions, The Uzbek Research Institute for Vegetables, Melons and Potatoes, and for fruit, regional branches of the Schroeder Research Institute of Horticulture, Viticulture and Wine-Making (Schroeder Institute). In 2011, each province established 5 12 See the discussion in Guadagni, Maurizio, Martin Raiser, Anna Crole-Rees, and Dilshod Khidirov. 2005. Cotton Taxation in Uzbekistan: Opportunities for Reform. ECSSD Working Paper 41. Washington, World Bank. 13 Data reported by UzKhimprom, a state-owned producer of chemicals and fertilizers. 25 vegetable-culture farms to provide planting material. 14 In addition, a variety of companies sell imported seeds, including the private firm Agro-Continent, which claims a 30-35 percent share of Uzbekistan’s seed market. The firm operates 47 demonstration plots and, supplies seeds imported from Ukraine, Netherlands, Germany and other countries. In 2011, the Schroeder Institute produced and sold more than 4 million pieces of nursery stock. Planting material from the institute is highly demanded because of its quality and the institute’s reputation, but also because the institute’s material is generally less expensive. For example, in the summer of 2012, the price of one sapling (apples, cherries, grapes, etc.) was UZS 5,000-6,000 (USD 2.5-3.0), while the price of identical imported material was USD 5-6. In addition to these formal outlets, many dehkan farms produce and trade their own seeds and saplings. Water. As noted in the first section, water is a limited resource, cotton is a thirsty crop, and poor water management practices have contributed to land degradation. In many ways, current policies reinforce this outcome. Farmers are not charged for the water they use and the state covers the cost of operating and maintaining the irrigation systems used for cotton and wheat, as well as the cost of electricity used to power irrigation pumps. This practice creates powerful incentives to overuse water. For example, a 2005 study estimated that irrigation subsidies for cotton amounted to more than USD 156 per hectare. 15 In recent years, the Government has provided significant support to horticulture, focusing on the creation of high-density orchards with dwarf and semi-dwarf fruit trees. Pursuant to orders from the Cabinet of Ministers, seedlings of dwarf and semi-dwarf fruit trees and drip irrigation equipment were imported from Poland, Serbia, Turkey, Ukraine, and other countries, feeding an expansion of about 2,500 hectares of high-density orchards in 2011, and other 4,000 hectares in 2012. For 2011-2012, the value of various plants, rootstocks and equipment imported for orchards were valued at USD 28,255,000, including the importation of 2,688.8 seedlings of dwarf and semi-dwarf trees worth USD 7,933,700. Concurrently, measures were taken to supply seedlings of dwarf and semi-dwarf trees through local nurseries by importing rootstocks. In 2011, Uzbekistan imported 1.7 million dwarf and semi-dwarf rootstocks of fruit trees, valued at USD 777,000, and in 2012, 2.2 million rootstocks, valued at USD 1,136,200. Planting materials and orchard equipment were also given preferential tax treatment, and between 2011 and 2012, the amount of customs and tax exemptions for the subsector totaled USD 10,824,500, of which import duties made up USD 6,488,700 and VAT USD 4,325,800. Improving prices have spurred production as well. After accounting for inflation, prices have held steady or improved modestly for most crops between 2005 and 2009, including government contract prices for wheat and cotton (Figure 2.1). It is worth noting that prices for wheat and cotton grew at about the same rate as tomatoes and apples, and more quickly than for melons and grapes, which remained below 2005 highs. Nevertheless, as will be seen later, profits from growing horticultural crops greatly exceeded the slim profits from growing wheat and cotton. 14 As a result of the Protocol Instructions of the Cabinet of Ministers of the Republic of Uzbekistan, Number 03/10-1, dated January 5, 2011. 15 Guadagni, Maurizio, Martin Raiser, Anna Crole-Rees, and Dilshod Khidirov. 2005. Cotton Taxation in Uzbekistan: Opportunities for Reform. ECSSD Working Paper 41. Washington, World Bank. 26 Productivity growth has also influenced the structure of agriculture in Uzbekistan. Constrained by water and land resources, the growth in agriculture was driven in large part by yield gains. In fact, the capacity to sustain growth via productivity gains has been a traditional strength for Uzbek agriculture on the whole and reflects well on the country’s strong commitment to basic and applied agricultural science. As shown in Figure 2.1, land productivity gains were widespread and, with the exception of cotton, yields are up by more than 50 percent for all of the major crops since 2000. Strong research institutions have helped sustain productivity growth. Research related to fruit trees, grapes and wine making is managed by the Schroeder Institute, formally titled “The Uzbek Research Institute of Horticulture, Viticulture and Wine-Making Named after R.R. Schroeder”. 16 The Institute has 16 The duties of the Schroeder Institute are laid out in a Resolution of the Cabinet of Ministers dated August 14, 1995, Number 315, "On Deeper Integration of Science and Production in Horticulture and Viticulture of Uzbekistan”. 27 operated for 70 years, has branches in each region of the country, and has a well-established production and research capacity. The main tasks of the Science and Production Corporation section of the Institute include: i) increasing the level of research leading to new highly productive varieties of fruit and grapes, and to the development and implementation effective technologies in horticulture, viticulture and wine- making; ii) providing incentives for research fellows, specialists and other employees depending on their concrete contribution to science and practice; and, iv) cooperating with foreign countries in the area of research and implementing their developments. Since Uzbekistan’s independence, the Institute created 28 new varieties of fruit and grapes. Research on horticultural field crops, including melons and potatoes is managed by the Uzbek Research Institute for Vegetables, Melons and Potatoes (RIVMP). The RIVMP is also a long-standing research center, having been established in 1933. RIVMP’s main activities include: helping Uzbekistan’s farmers and dehkan operators produce high quality profitable crops of vegetables, melons and potatoes through systematic evidence-based improvements of crop cultivation and storage processes; creating new varieties and hybrids of vegetables, melons and potatoes, organizing their primary seed production, creating local varieties gene pool, developing high yielding cultivation technologies, designing activities on pests, diseases and weeds control, designing activities to achieve sustainable crops and developing technologies to obtain environmentally friendly products; designing agricultural activities in the context of Uzbekistan’s climatic conditions; promoting the wide application of scientific achievements and best practices; testing new machine complexes to be introduced in vegetable production; supplying specialized vegetable seed farms with high-quality seeds; providing for the professional development of specialists and members of specialized vegetable seed farms of the country; training highly qualified research personnel (doctors and candidates of sciences); organizing important workshops, conferences, meetings and symposia on vegeculture, melon and potato production; introducing new scientific developments to large farms and dehkan households producing vegetables, melons and potatoes; providing guidance and systematic consultation services to these farms; establishment and expansion of foreign economic, scientific and technological relationships and of joint ventures; and improving vegetable production using all kinds of mediation. In the last 15 years, the institute created 44 new varieties; including 11 varieties of tomatoes, 3 varieties of cabbage, 3 varieties of onions, 2 varieties of carrots, 2 varieties of cucumbers, 7 varieties of green vegetables, 8 varieties of melons, and 3 varieties of watermelons. Taken together, changes in land policy, productivity and incentives have led to a greater role for horticulture. Broadly, the composition of agricultural output in national income mirrors productivity gains and land reallocation outcomes, with only cotton declining in output since 1990 (Table 2.3). That having been said, it is worth noting that a policy environment supporting a reallocation of land and water resources out of grains and cotton is relatively new and has been limited to targeted districts to date. At the margin, results from the farm model exercise suggest that there is further opportunity for productive reallocation of resources. As a consequence, the observed changes in the commodity-composition of production do not capture what would occur, were the policy granting farmers greater autonomy expanded. 28 Table 2.3: The shifting composition of agricultural production in Uzbekistan, 1990 to 2010. 1990 2000 2010 Volume Share GDP Volume Share GDP Volume Share GDP Agriculture 33.4 30.1 17.5 Selected crops Raw cotton 5,057.70 0.03 3,002.40 3.60 3,442.80 1.90 Grains 2,038.20 1.40 4,101.40 3.40 7,504.30 2.00 Potatoes 336.40 0.30 731.10 0.80 1,694.80 1.40 Vegetables 2,842.50 1.30 2,644.70 2.40 6,346.50 2.30 Melons 1,000.00 0.50 451.40 0.30 1,182.40 0.30 Fruit 660.40 0.70 790.90 0.90 1,710.30 1.10 Grapes 744.70 0.80 624.20 0.80 987.30 0.90 Note: Output is given in thousand tons; shares are measured in percentages. Source: State Statistics Committee, Republic of Uzbekistan. In the case of horticulture, production grew due to increased area and improved productivity. Table 2.4 shows that horticulture production grew via a reallocation of land resources to horticulture and by improvements in land productivity (yields) in roughly equal measure. This illustrates neatly the two sources of total factor productivity available for Uzbekistan: continued improvement in factor productivity (land, water, capital, etc.); and productivity driven by improving allocative efficiency, that is, productivity that comes from shifting resources, especially land, from less profitable uses to more profitable ones. 29 Table 2.4: Sources of production gains in horticulture, 2000-2010 2010 relative to Product Parameters Units 2000 2005 2008 2009 2010 2000 Vegetables Area thousand ha 130 137.7 162 165.4 173 1.3 Yield centner/ha 203.4 215.8 322 345 367 1.8 Production thousand tons 2,644.70 3,517.50 5,217.40 5,710.30 6,346.50 2.4 Melons Area thousand ha 37 33.9 41.7 44 47.9 1.3 Yield centner/ha 139.9 181.5 235 243 247 1.8 Production thousand tons 517.5 615.3 981.2 1,071.30 1,182.40 2.3 Fruit Area thousand ha 139.2 152.3 170 176.9 184.9 1.3 Yield centner/ha 56.8 62 82 87 93 1.6 Production thousand tons 790.6 949.3 1,402.80 1,544.50 1,710.40 2.2 Grapes Area thousand ha 99 99.2 102.38 105.63 113.4 1.1 Yield centner/ha 63 64.7 77.4 85 87 1.4 Production thousand tons 623.8 641.6 791 900.5 987.4 1.6 Note: A center equals 100 kg. Area planted to grapes excludes non-bearing vines. Source: State Statistics Committee, Republic of Uzbekistan 30 Though output from dehkan farms is important, production is shifting toward private farms. Taken together, the restructuring of shirkat farms into private farms and the shifting of production on private farms in selected districts from grains and cotton to horticulture, all against the consistent flow of horticultural products from dehkan farms, have meant that private farms now play a much larger role in the horticulture subsector (Figure 2.3). As already noted, this means that the subsector is largely shaped by private decisions about production and investment. However, it also means that the scale of production has shifted to medium and small producers. This has implications for how products move along the value chain, which is a topic covered in the next section. 31 3. Farm Incentives and Outcomes Key messages. This section looks at the relative income outcomes among wheat, cotton and representative horticultural crops in Fergana, Samarkand and Tashkent. Private farms producing wheat and cotton receive direct support from the state, but are obligated to meet production quotas. Dehkan and private farms producing horticultural goods are given greater freedom in deciding what to grow or what investments to make, but are left to arrange their own credit, inputs and sales. At the same time, the horticultural subsector has received support via tax reductions and other market-delivered incentives. Because they operate informally, dehkan farms have an advantage in the form of reduced tax obligations. Analysis shows that revenue, operational costs and profit margins were higher for horticultural crops than for wheat and cotton. Even though new fruit orchards generate little to no revenue early on, new orchards are expected to produce high rates of return over a 15 year life cycle. On a per hectare basis, horticulture employs more workers than wheat or cotton The farm budget calculations presented here are indicative rather than representative, drawing on interviews with farmers in Tashkent, Samarkand and Fergana. 17 The calculations presented in this chapter were done to provide a snapshot of on-farm incentives. On balance, the results confirm the widely held belief among policy makers and market participants that producing horticultural products is more profitable than producing wheat or cotton. For the analysis, there is an intentional focus on areas where horticulture is expanding and where agro-ecological conditions are conducive to horticulture. This means that the findings do not necessarily apply to all land currently planted to wheat or cotton. Still, as discussed below, there is a mix of cotton, wheat and horticultural crops in most regions of the country, so there are also potential tradeoffs in the use of land resources outside of the study areas. The analysis includes private farms and dehkan farms, but excludes shirkats, since their role in horticulture has declined. Specifically, the study areas are the Zangiata district in Tashkent, the Samarkand district in Samarkand, and the Oltiorikskyi district in Fergana. For selected vegetables, gross margins were calculated based on annual inputs and outputs. A Gross Margin methodology was used to estimate profitability of the following crops: cabbage, tomato, onions, wheat, cotton and melons. The data for calculations was derived from interviews with farmers on private farms (PFs) and dehkan farms (DFs) and statistical data provided by the Ministry of Agriculture and Water Resources. For this analysis and for the tree crop investment analysis, the official exchange rate of 1,870 UZS per USD was used for calculations, a rate that may be below parallel rates. A return-to-investment model was employed for selected tree crops. For apples, grapes and cherries, models were prepared in order to calculate rates of return over the productive life of orchards, based on fixed investment costs and variable operational costs. The models constructed for the analysis benefited from earlier crop models prepared under the ADB funded project “Preparing the Development of Market Infrastructure for Private Farms and Agribusiness Project” (2006) as well as models prepared by the 17 The farm budgets were based on interviews with farmers in April 2012. Three districts in three Regions were visited: Zangiata district in Tashkent region, Samarkand district in Samarkand region, and Oltiorikskyi district in Fergana region. 32 Uzbek Scientific Research Institute for Market Reforms (2011), and we would like to thank those agencies for their help. Differences in the structure and obligations of private farms and dehkan farms. The average size of private farms (PF) can vary significantly, ranging from several hectares to over 100 hectares in some cases. Private farms have a well-defined legal status and are registered with local authorities: tax inspectors, statistical agencies, social funds etc. The farm, as an enterprise, incurs specific tax obligations as do farm employees (Table 3.1). The farm is obligated to pay a 3.5 percent tax on revenue and a 6 percent land-value tax. A total of 27.5 percent of salaries are retained as social fund obligations, made up of a 25 percent contribution by the farm and a 2.5 percent contribution by farm employees. In addition, farm employees pay an income tax of 9 percent. In general, private farms are better capitalized than dehkan farms, and incur costs associated with the maintenance of machinery and other physical assets, for instance, office buildings, barns and farm roads. Private farms often are the successors of the shirkat farms, and inherit their assets and debts. They are also often expected to meet certain social obligations such as providing support to the poor, and maintaining local infrastructure, including roads and irrigation canals. In addition, private farms may carry significant administrative costs: accountants, agronomists, drivers etc. In contrast, the average dehkan farm size is between 0.1 to 0.5 hectares. Sometimes a dehkan farm will be limited to the backyard plot and sometimes it may include several additional small plots located near the house or in a more distant location. Unlike private farms, few dehkan farms have legal status as an enterprise and, the majority of dehkan farms do not pay taxes, in practice. Likewise, they have no significant social obligations to the larger community. Table 3.1: Tax obligations of private farms, 2012 Payable by farm Revenue tax 3.5% of revenue Land tax 6% of cadastral value of land Social fund 25% of salaries Payable by employees Income tax 9% of salary Social fund 2.5% of salary Source: Field surveys Taxing private farm revenue encourages the use of informal market channels. Although the revenue tax rate is relatively low, there is anecdotal evidence suggesting that the tax encourages private farmers to sell into informal channels for cash in order to avoid tax payments. The problem has an easy policy solution, which is to eliminate the revenue tax and rely more heavily on the land tax. Doing so would remove the incentive to avoid formal markets and, if combined with the creation of land-rental markets, would provide added incentives to put land to its most profitable use. In fact, in the presence of land markets, the value of land that can be used to raise horticultural goods will reflect the increased revenue that comes from reallocating the land to more profitable crops. As a consequence, revenues generated from the land tax will increase even if the land-tax rate remains constant. Table 3.2 provides a numerical example, based on switching land out of cotton in Fergana. 33 Table 3.2: How changes in land use and increase in land-tax revenue can offset turn-over tax revenue. Lost revenue from Net Increase in Switching land from Increase in gross Increase in eliminated annual tax cotton to: margin land value turnover tax revenue Cabbage 2,296 25,849 91.875 1,459 Tomato 3,127 35,693 91.875 2,050 Onion 3,893 44,312 91.875 2,567 Mellon 2,567 29,387 91.875 1,671 Note: The example is based on working land markets, where future revenue streams, are generate a corresponding increase in land values, based on an 8 percent discount rate. Source: Authors’ calculations; revenue increases from cotton to other crops are based on field surveys in Fergana. Private farms and dehkan farms use different farming approaches. On the agronomy side, private farms cultivate large plots of land, which affects the mix of inputs used to produce their crops. For example, private farms use agricultural machinery to cultivate land, to apply fertilizer and chemicals and to harvest crops. In addition, private farms maintain permanent staff and hire seasonal labor. In short, private farms are factor intensive. In contrast, dehkan farmers cultivate very small plots, use little machinery and rely mostly on family labor. Still, it would be misleading to characterize dehkan farm production as low input; dehkan farmers often use advanced technologies, including drip irrigation, plastic tunnels and green houses, and often use seedlings rather than seeds. These techniques improve yields and allow farmers to harvest crops early in the season, thereby capturing seasonal premiums. On the whole, dehkan farms attain high yields across a range of crops, yields that are sometimes higher than those obtained on private farms. 18 Anecdotal evidence suggests that dehkan farms are quicker to respond to changing market demands and are able to diversify their cropping pattern to minimize production and market risks. However, it should be mentioned that the immediate priority for many dehkan farmers is to meet their own demand for basic foodstuff and only surpluses of produce go to the local market. Nevertheless, dehkan farms have traditionally produced most of Uzbekistan’s horticultural output and it is only recently that the output from private farms has become significant in the aggregate (recall Figure 2.2). In general, dehkan farms and private farms are both efficient. The farming systems employed by both classes of farms are efficient and highly productive in comparison to other Central Asian countries. High quality inputs are readily available (seed, fertilizer, chemicals) and enable farmers to attain yields that are well above regional averages. High quality imported and local varieties of seed and saplings are available. The price of seed of cabbage, tomatoes, onions, cucumbers and other vegetables varies significantly in the market depending on the quality and type (hybrid, local or imported etc). The cost can be from few USD per kilogram for local varieties up to several hundred USD per kilogram for high quality hybrids. The plastic sheet green houses and low tunnels often used to grow early vegetables are also readily available. Widely-used drip irrigation systems can be obtained domestically, with the average cost varying between USD 2,400 and 3,000 per hectare. Storage facilities, once limited, are becoming 18 As discussed, private farms may choose to under-report production as a way to avoid taxes and account for informal sales, which may bias reported yield statistics. 34 increasingly available and enable farmers to avoid selling during peak-production-low-price periods. In the areas visited, the average capacity of local storage structures varied from 30 tons to 5,000 tons, with average costs varying from USD 500 to 1,000 per ton. In addition to the modern facilities, many dehkan farmers use traditional technologies to preserve the quality and freshness of horticultural produce. For instance, many dehkan farmers growing grapes bury the vines with the grapes on them (un-harvested) and harvest them late in the season when prices are much higher. The same technology is used for the pomegranates. Melons are often stored in cool underground cellars. The allocation of land to crops in the study regions is similar to the allocation of land nationally. Figure 3.1 shows the areas planted to various crops for the country as a whole (top bar), the three study regions (bottom three bars), and for regions not covered in this section’s analysis. Recall that, for the country as a whole, most land is planted to wheat or cereals; about 47 percent of the land is planted to grains and another 37 percent is planted to cotton. Of the remainder, about 5 percent is planted to vegetables; 4 percent is planted to grapes, 1 percent to melons and another 6 percent is planted to “fruit and berries”, a category that includes apples and cherries. In the study areas, the share of area planted to grains is similar to the country as a whole – ranging from 44 to 51 percent. The area planted to cotton is about the same in Fergana (35.7 percent) and slightly lower in Samarkand and Tashkent (26.7 and 29.6 percent, respectively). Taken together, the study regions comprise more than 40 percent of the area planted to horticulture in Uzbekistan. Table 3.3 shows the planted areas in absolute terms. As the table shows, the three study areas include more cropland than most regions. In addition, because the area planted to cotton is proportionally less, the three study regions represent a significant share of the area planted to horticultural crops. 35 Table 3.3: Area planted to grains, cotton and horticultural crops (thousand hectares), 2010 Fruit and Grains Cotton Vegetables Melons Grapes Total berries Fergana 132 104 17 3 44 5 291 Samarkand 189 99 26 3 29 39 373 Tashkent 157 105 32 3 29 18 357 Rep. Karakalpakstan 103 101 7 6 5 1 266 Andijan 94 100 15 1 29 4 230 Bukhara 93 110 8 2 11 10 242 Jizzak 216 102 9 7 12 5 391 Kashkadarya 250 168 14 6 14 10 493 Khorezm 72 103 12 5 12 2 229 Namangan 96 88 13 2 25 12 224 Navoiy 53 36 3 1 6 7 106 Surkhandarya 119 119 13 3 14 14 272 Syrdarya 106 107 4 5 5 2 236 Uzbekistan 1,679 1,343 173 48 235 128 3,708 Source: Ministry of Agriculture and Water Resources, Republic of Uzbekistan. The study regions’ farm structure in 2010 reflects the national structural for horticulture. Table 3.4 shows the area and yields for selected vegetable crops. The regions contain sizable areas harvested by dehkan and private farms, while the area harvested by shirkat farms is relatively small. The last section of the table shows that dehkan and private farms obtain similar yields, which are higher than the average yields on shirkat farms. However, there are regional exceptions for specific crops. For example, yields on the remaining shirkat farms in Fergana are comparable to or better than those obtained on dehkan and private farms. Still, the shirkat areas associated with the higher yields are small. 36 Table 3.4: Area and yields for selected vegetable crops in study regions and Uzbekistan, 2010 Tomatoes Cucumbers Onions Cabbage Area Yields Area Yields Area Yields Area Yields Fergana Dehkan farms 3,946 26.2 3,336 26.3 1,798 27.0 697 27.9 Private farms 1,418 21.7 132 23.2 602 17.7 482 16.0 Shirkats 17 25.8 - - 19 18.6 2 27.5 Samarkand Dehkan farms 5,649 40.8 940 28.9 1,779 31.1 738 42.8 Private farms 10,287 35.9 388 26.7 775 26.9 253 76.8 Shirkats 422 17.9 - - 9 9.4 0.0 Tashkent Dehkan farms 7,263 32.1 1,894 19.6 2,164 35.3 2,184 55.2 Private farms 2,713 35.9 459 29.1 1,768 36.0 1,394 85.1 Shirkats 44 11.2 5 10.0 74 18.5 26 23.4 Uzbekistan Dehkan farms 38,762 33.3 11,075 25.6 19,903 28.8 8,245 45.1 Private farms 24,080 31.1 1,915 27.4 9,770 25.1 3,436 61.2 Shirkats 648 16.2 16 11.2 188 21.7 31 23.1 Note: Area is in thousand hectares; yields are in tons per hectare. Source: Ministry of Agriculture and Water Resources, Republic of Uzbekistan There are differences among the study areas in how horticultural produce is marketed. The main crops of the Zangiata district of Tashkent are wheat and cabbage. Tomatoes and onions are grown on a small scale, mostly for home consumption. Melons are also grown, both for consumption at home and for sale in local markets. Horticultural production is more market oriented in the Samarkand district of Samarkand, where the main crops are apples, grapes, cherries and tomatoes. Roughly half of production is sold to markets. There are several processors in the district, producing tomato paste and juices. Grapes are widely grown and are processed as raisins and are sold fresh. Onions and cabbage are also grown and sold in local bazaars. In the Oltiorikskyi district of Fergana, the main crops grown include wheat, cotton, apples, grapes and cherries. There are no processing facilities present in Fergana, but the region has a strategic geographical location facilitating exports to the neighboring countries. Consequently, fruit and vegetables produced in the district are consumed locally or exported, mostly to Russia, Kazakhstan, Kyrgyzstan and Tajikistan. Apples, cherries and grapes are often exported to Russia by refrigerated trucks. Tomatoes, cabbages and onions are grown for exports and for the local market. A complete analysis of on-farm production costs are given in Annex I. The annex includes a breakdown of input costs, land preparation costs, electricity, overhead expenses, etc. In addition, the annex reports on the costs of establishing orchards and provides a profile of expected yields as the trees mature. A summary of the evaluation of on-farm incentives for annual crops is given in Table 3.5. The table summarizes the findings for selected field crops from the study areas, for private farms (PF) and dehkan farms (DF). Compared to wheat and cotton, horticultural crops generate higher revenue, higher costs and higher profits. Horticultural activities are especially profitable on dehkan farms, which rely on family 37 labor. This is significant, since dehkan farm families tend to have lower levels of income and tend to use the income from their plot to supplement income from wages and other sources of income. 19 Table 3.5: Estimated revenue, operational costs and profit margins for selected field crops. Region and crop Revenue Operational costs Gross margins Fergana Cabbage (PF) 6,750 4,411 2,339 Tomato (PF) 7,700 4,529 3,171 Onion (PF) 8,800 4,864 3,936 Cotton (PF) 2,625 2,582 43 Mellon (PF) 7,200 4,590 2,610 Mellon (DF) 8,000 2,389 5,611 Zangiata Cabbage (PF) 6,300 5,098 1,202 Cabbage (DF) 6,300 3,185 3,115 Wheat (PF) 1,680 1,480 200 Wheat (DF) 1,800 1,093 707 Samarkand Onion (PF) 7,400 6,249 1,151 Onion (DF) 8,140 5,052 3,088 Tomatoes (PF) 6,771 5,510 1,261 Tomatoes (DF) 8,000 3,314 4,686 Cabbage(PF) 6,820 5,617 1,203 Cabbage(DF) 6,820 3,077 3,743 Wheat (PF) 1,690 1,479 211 Wheat (DF) 1,925 1,053 872 Note: Values are in thousand UZS per hectare. Source: Field surveys. See annex I for details. For horticultural crops, profits relative to input costs are high compared to wheat and cotton. Figure 3.2 illustrates the incentives private and dehkan farmers have for moving out of wheat and cotton and into horticulture when it is feasible to do so. The ratio of gross margins to operational costs for wheat is 0.14 in Samarkand and 0.13 in the Zangiata district of Tashkent; the ratio for cotton in Fergana is 0.02. In contrast, the ratio for alternative horticultural crops is consistently higher, with gross margins exceeding operating costs by more than 100 percent for crops like tomatoes and melons on dehkan farms. Private farmers growing horticultural goods also do better than their counterparts growing wheat or cotton. In Fergana, revenues exceed costs by more than 50 percent for onions, tomatoes, melons and cabbage. 19 Lerman, Zvi. 2008. Agricultural development in Central Asia: A survey of Uzbekistan, 2007–2008. Eurasian Geography and Economics 48(4), 481-505. 38 Rates of return are high for new orchards. The returns to establishing new orchards are high, although revenues are delayed. For new breeds of apples, trees begin bearing fruit after two years; however, in the case of cherries, farmers must be able to carry the orchard costs for up to eight years (Table 3.6). Even so, calculated internal rates of return for apples, cherries and grapes are uniformly high in the study regions; at 19 to 20 percent for cherries and grapes in Fergana, and 34 to 35 percent for apples in Samarkand and Zangiata (Figure 3.3). In the analysis, borrowing rates are set at 12 percent, so another way of looking at profitability is to calculate the ratio of the discounted value of net benefits to the discounted value of discounted costs. The cost-benefit ratios are as follows: Zangiata apples: 2.17; Samarkand apples: 2.14; Fergana cherries: 1.51; and Fergana grapes: 1.43. Table 3.6: Maturity profiles for apples, grapes and cherries First fruit Fully matured Apples 2 6 Grapes 4 8 Cherries 8 12 Source: Field surveys New orchards include significant investments in capital intensive technologies. The implemented technologies behind the high rates of return are modern and capital intensive. For example, the investment costs of establishing a cherry orchard in Fergana were estimated at nearly 10 million UZS (USD 5,300) 39 per hectare. This included purchasing and planting saplings, preparing the land, purchasing and installing drip irrigation networks (See the annex tables for details on this and other orchard crops). Horticultural crops generate greater levels of employment compared to cotton or wheat. Even after orchards are established and fields are prepared, on-farm labor inputs are higher for horticultural crops than they are for wheat or cotton (Figure 3.4). Because the work is seasonal, it can fit in well with dehkan livelihood strategies, where incomes are diversified. For private farms, the seasonality creates some scope for spreading out labor requirements, by sequencing early season crops, or crops grown in tunnels or greenhouses. Shifting from cotton to horticulture can mitigate contentious labor practices. Currently, students older than 15 years of age, teachers, health workers and other non-farmers are encouraged to pick cotton at harvest time. This is a source of conflict in some communities. This practice is absent on private farms growing wheat and horticultural crops. Consequently, policies that allow farmers to move from cotton to more profitable crops will mitigate the need to recruit community labor. 40 Sensitivity analysis. As discussed, prices for most horticultural products have risen in recent years and demand has grown, creating an environment favoring the subsector. Yet, what happens if prices fall? Table 3.7 repeats the farm budget analysis summarized for field crops in Table 3.5 and Figure 3.3. Under an across-the-board 10 percent decline in commodity prices, gross margins remain high for horticultural field crops, although margins dip to UZS 37,000 (USD 20) for wheat grown on private farms in Zangiata and turn negative for cotton in Fergana. Were prices to drop by one-third, wheat and cotton grown on private farms would be unprofitable as would cabbage grown on private farms in Zangiata and Samarkand; onions and tomatoes grown on private farms in Samarkand would be unprofitable as well. At the same time, the margins on many horticultural crops, especially those grown on dehkan farms would exceed the margins on wheat and cotton under a high-price scenario. Rates of return on investments in orchards fare better under low-price scenarios. In all cases, a ten percent decline in output prices simply reduces the already high internal rates of return. In addition, in most cases, orchard investments remain profitable even when facing a 33 percent decline in output prices. The exception is grapes grown on private farms in Fergana, where the internal rate of return at 11 percent fails to cover borrowing costs. Table 3.7: The effects of declining prices on gross margins. Gross margins when prices Gross margins when prices Region and crop Baseline gross margins fall by ten percent fall by one-third Fergana Cabbage (PF) 2,339 1,664 89 Tomato (PF) 3,171 2,401 604 Onion (PF) 3,936 3,056 1,002 Cotton (PF) 43 -219 -832 Mellon (PF) 2,610 1,890 210 Mellon (DF) 5,611 4,811 2,944 Zangiata Cabbage (PF) 1,202 572 -898 Cabbage (DF) 3,115 2,485 1,016 Wheat (PF) 200 37 -341 Wheat (DF) 707 527 107 Samarkand Onion (PF) 1,151 411 -1,316 Onion (DF) 3,088 2,274 375 Tomatoes (PF) 1,261 583 -996 Tomatoes (DF) 4,686 3,886 2,020 Cabbage(PF) 1,203 521 -1,070 Cabbage(DF) 3,743 3,061 1,469 Wheat (PF) 211 42 -188 Wheat (DF) 872 553 139 Baseline internal rate of IRR when prices decline IRR when prices fall by return by ten percent one-third Fergana Cherry (PF) 19% 17% 12% Grapes (PF) 20% 18% 11% Zangiata Apple 35% 31% 23% Samarkand Apple (PF) 34% 30% 22% Note: Margins are given in thousand UZS per hectare. Cost of borrowing set at 12 percent. Source: calculations based on field surveys. 41 The need for household and farm surveys. Much of the logic and evidence presented in this section suggests that steps taken to help dehkan farmers also help poor farmers and women, and that an increase in the demand for farm labor associated with switching to horticultural also helps the poor. However, it is difficult to be confident that this is the case without access to better information from rural households. Household surveys can also provide a baseline that can be used to evaluate the impact of ramping up some of the shifts in policy that have benefited the horticulture sub-sector. 42 4. Value Chains from Farmgate to Destination Markets Key messages. Currently, a number of market channels for horticultural products coexist. Most horticultural goods are destined for domestic markets, a large portion of which moves along informal channels based on cash transactions and personal relationships. These traditional markets serve small and dispersed dehkan farms well and this will likely continue into the future. Recently, private farms have become significant players in the subsector, and export and processing markets are growing rapidly. In general, larger scale operations with a geographically dispersed set of customers prefer to use more formal markets that are traceable and contract based, because they can address risks related to quality, safety and timely delivery in advance. The Government of Uzbekistan has taken positive steps to put in place the types institutions needed to support the subsector and to improve the speed of the provision of those services. As discussed, Uzbekistan’s favorable agro-climatic conditions set the stage for the country’s entry into high-end markets, including organic markets. Analysis of the value chain suggests that there are ample opportunities, but that there are bottlenecks as well. The analysis identifies opportunities reducing costs related to transportation and product loss. Doing so will require new investment, largely from the private sector, starting with farm-level modernizing investments to limit post-harvest losses. In addition, while current policies favor the subsector overall, some policies undercut efforts to build export markets based on a reputation for quality and reliability. Chief among these is the need to seek export permission; the infrequent but harmful practice of blocking exports and currency regulations undermine positive economic incentives and encourage the prevailing use of informal market channels. Formal and informal markets operate side by side. Historically, a large portion of horticulture production originated on dehkan farms and this gave rise to an extensive and informal marketing chain, well-suited to serving local markets from dispersed sources. Now, an increased portion of the production occurs on larger private farms that focus exclusively on commercial markets. As a consequence, new marketing channels are emerging that coexist with traditional markets, and together serve dehkan and private farms, local markets, processors, and export markets (Figure 4.1). In general, horticultural goods originating on dehkan farms are more likely to be consumed at home or sent to local markets, either directly or through local intermediaries. Private farms are more likely to sell to processors and higher-end destinations, including firms that produce juice, pasta sauce or the dried vegetables that are used for soup. There is also a nascent formal market for supermarkets, hotels and restaurants that receive goods from private farms or intermediaries. However, these are generalizations, and goods originating on either type of farm can flow through either channel. Moreover, intermediaries, formal and informal, are present who direct goods to whichever market offers better terms. Market incentives, the performance of institutions and policies all influence whether formal or informal markets are used. Formal markets rely more on contracts and quality standards; this reduces the reliance on personal relationships and spot markets, and permits the coordination of future sales and deliveries. This capacity is especially important for fresh products destined for export, since efficient logistical chains are needed to deliver high quality produce quickly. Moreover, well defined food safety 43 standards, embodied in contracts and certified through private and public institutions, address risks to public health and to the reputations of growers, exporters, groceries and restaurants. Branding, which is also contract-based and backed by public and private institutions, allows markets to expand by building on performance and quality. In other words, the characteristics of formal markets become essential for horticultural goods to enter into high-value and distant markets. In turn, the ability of government institutions supporting private agents is crucial as well. Even so, there are some advantages to using traditional and informal market channels. Some are intrinsic; for example, informal markets are well matched with the informal dispersed production from dehkan farms where household sales are often reactive and opportunistic, made in response to household needs or to short-term changes in market conditions. However, sometimes advantages stem from the unintended consequences of government policy, since informal agents are willing and able to skirt tax payments, export and import controls, quality and safety standards, and currency regulations. In later sections, we will return to steps the Government can take to enhance the supportive institutions that make formal markets effective and limit the incentives for market agents to use lower-valued alternatives. Figure 4.1: Formal and informal marketing channels for horticulture in Uzbekistan Horticultural production has grown vis-à-vis population growth rates rapidly. As discussed earlier, domestic markets have been growing due to rising incomes and populations growth and continued growth is expected. Still, in recent years, horticultural production gains on a per capital basis have been significant, providing expanded volumes that are eventually consumed in many destinations in several forms (Table 4.1). This in turn has generated an increase in product flows along all of marketing channels. 44 Table 4.1: Per capita production of selected horticultural goods, 2005-2010 Average annual 2000 2005 2006 2007 2008 2009 2010 % increase Vegetables 107.3 136 162.1 174.6 191 203.7 222.9 20.8 Melons and gourds 18.3 23.8 28.1 31.3 35.9 38.2 41.5 22.7 Fruit and berries 32.1 36.7 44.6 47.3 51.4 55.1 60.1 18.7 Grapes 25.3 24.8 30.3 32.7 29 32.1 34.7 13.7 Note: Production is given in kilograms per capita. Source: State Statistics Committee, Republic of Uzbekistan. Processing activities have grown rapidly. The use of horticultural goods for processing is one source of growing demand. In Uzbekistan, horticultural products are processed by 149 large firms, and numerous small processing enterprises. Processed horticultural products include canned and dried fruit and vegetables, tomato paste and juices, and grape wines and liquors. A little over 15 percent of total horticultural crops produced are processed (including drying). Horticultural product processing is growing rapidly, and this affects some horticultural products more than others. Between the years 2000 and 2010, the volume of vegetable processing rose six-fold, fruit processing rose threefold, grape processing rose about twofold. In 2010, the volume of processed grapes in total volume of grape production was 24.4 percent; vegetables11.3 percent, fruit 18.2 percent. Data for 2000, 2005 and 2010 are given in Table 4.2. Table 4. 2: Processed horticultural goods, 2000-2010 2000 2005 2010 Vegetables 148 602 718 Grapes 141 113 241 Other fruit 118 120 311 Total 407 835 1,271 Note: Production is given in thousand tons. Source: Ministry of Economy, Republic of Uzbekistan. To date, increases in processing capacity have outpaced actual processing, with significant differences among regions. While market incentives appear to be driving an expansion of the processing center, problems have emerged related to marketing channels. For example, the utilization of food processing capacity in the Republic of Karakalpakstan remained low up through 2009 (14 percent in 2006; 19 percent in 2007; and 16 percent in 2009). In Navoiy Province, the utilization ratio declined from 35 percent in 2006 to 27 percent in 2008. In Fergana, Khorezm and Surkhandarya Provinces, production capacity was utilized at 33 percent, 14 percent and 35 percent respectively in 2008. 20 Processing requires greater coordination between producers and processors in determining crop structure, assortments, and ripening periods, since processing investment costs can be lowered by spreading out deliveries. Incentives such as advanced payment and the subsequent need of producers to abide by contractual terms at harvest time depend on relatively new arrangements in places where spot markets have dominated. In some countries, land leases have helped firms and farms better integrate and coordinate product deliveries. 20 Data from the Ministry of Agriculture and Water Resources of the Republic of Uzbekistan. 45 During the past three years, growth in production has been matched with growth in each market destination. Table 4.3 shows that from 2008, the shares of horticultural products sent for exports, processing and domestic consumption have shifted for some crops, but the overall patterns remain in place. In other terms, an overwhelming portion of horticultural production is consumed domestically, and this is likely to remain the case in the near future. At the same time, production itself is growing and this means that the volumes available for all uses are expanding. Table 4.3: Production and crop utilization, 2008 to 2010 Percentage of production used for Years Production Seeds Processing Exports Domestic (thousand tons) consumption Vegetables 2008 5,217.4 1.8 10.8 2.4 85.0 2009 5,704.7 1.8 11.9 2.6 83.7 2010 6,346.4 1.7 11.3 4.6 82.3 Melons and 2008 981.2 3.3 0.0 7.5 89.2 gourds 2009 1,100.0 3.1 0.1 4.7 92.0 2010 1,182.4 3.0 0.1 5.6 91.4 Fruit 2008 1,402.8 0.0 20.0 6.7 73.3 2009 1,542.9 0.0 19.0 7.1 73.9 2010 1,710.4 0.0 18.2 10.1 71.7 Grapes 2008 791.0 0.0 23.7 10.5 65.7 2009 899.6 0.0 25.7 11.7 62.6 2010 987.4 0.0 24.4 9.7 65.9 Source: Ministry of Agriculture and Water Resources, Republic of Uzbekistan/ Boosted by higher prices and growing volumes, export revenue from horticulture is growing. Although the share of horticultural goods destined for export markets is changing slowly, increases in volumes and prices have meant that export earnings are growing rapidly. Table 4.4 shows that the value of horticultural exports tripled between 2006 and 2010. In addition, the trends show that have been especially concentrated in places like Tashkent and Samarkand with good access to large domestic markets and a growing agricultural processing industry. 46 Table 4.4: Value of horticultural exports, by region (thousand USD), 2006-2010 2006 2008 2010 The Republic of 2,919.7 165.0 1,901.1 Karakalpakstan Andijan 36,259.2 2,131.2 134.9 Bukhara 2,420.5 307.1 5,460.5 Jizzax 3,728.3 1,398.3 8,916.6 Kashkadarya 4,156.6 2,609.0 3,983.0 Navoiy 141.5 0.3 676.9 Namandgan 11,821.8 4,071.0 147.4 Samarkand 61,721.3 106,604.1 200,857.3 Surkhandarya 23,451.9 20,015.5 19,238.2 Syrdarya 10,360.5 22,722.8 12,888.0 Tashkent 93,897.2 105,566.0 541,419.3 Ferghana 61,025.3 29,050.2 18,102.2 Khorezm 1,427.2 4,565.6 8,084.2 Tashkent City 62,871.3 94,068.4 331,288.4 Total for the country 373,282.6 393,109.5 1,155,247.5 Source: Ministry of Agriculture and Water Resources and the State Customs Committee, Republic of Uzbekistan. Russia accounts for 80 percent of all exports from Uzbekistan, but Uzbek imports only account for 3 to 4 percent of all fruit and vegetable imports to Russia. The asymmetric trade relationship with Russia creates both opportunities and risks. Uzbek exports could expand significantly by capturing incremental shares of the Russian market. On the other hand, since Uzbekistan lacks a diverse set of trading partners, a loss of share due to competition on price, reliability or quality can greatly harm the industry. The same is true for disruptions related to unilateral changes in Russian import standards or policies. 21 Different market channels transform goods into different products. As already discussed, Uzbekistan’s favorable agro-climatic conditions support the production of high quality horticultural goods. Once produced, the goods travel along different market channels with their own logistical and institutional features that impart characteristics to the product as it appears in destination markets. These characteristics are in turn relevant for consumers and intermediaries. They affect prices, and in some cases, determine whether the products can enter certain markets. Flavor, appearance, freshness, shelf-life, packaging, product safety and reputation are examples of key product characteristics. As a result, it is useful to think of the entire value-chain, from field to consumer, as producing the final good and to recognize that different value-chains produce different products, even when the products are cultivated on the same farm. Often, good agricultural practices (GAP) in the field and post-harvesting handling practices affect both the appearance and flavor of the produce and mitigate food safety hazards, which are vitally important to consumers, but difficult to observe directly at the point of purchase. Economic incentives direct the choice of market chains. The technologies associated with producing the types of horticultural goods prized in high-end markets are costly to implement. Governments have an 21 In the past, Chile’s horticultural exports depended heavily on the US market, which prompted the industry to expand its marketing approaches in order to reduce risk through diversification. The approach taken by Chile is given in Annex II. 47 important role to play by facilitating the creation and enforcement of standards, especially those related to sanitary and phytosanitary risks. From a policy perspective, it is important to make sure that advanced channels are available to subsector participants and operate efficiently, but it is also important to recognize that, as a practical matter, produce is likely to flow to different final destinations along marketing channels that coexist. It is, therefore, important to make sure that government policies do not unintentionally divert horticultural goods to lower-value end markets. Dehkan markets and informal channels. As discussed, some of what is produced on dehkan farms is consumed directly by the producing households and a large share of the remaining production is sold via traditional channels, either in local market stalls or to intermediaries in small lots for cash. This system handles large volumes of fruit and seems to work well for this segment of the market. Yet, other destinations require features and services in addition to a good product. Local supermarkets. A significant share of the produce sold in Uzbek supermarkets is procured locally, usually from intermediaries, but sometime directly from larger farms. Usually supermarkets have their own distribution centers, where farmers and wholesalers bring produce in bulk. In these DCs products are retail packed or sorted, graded and distributed in mixed shipments to the stores. As a rule, supermarkets would like their produce to be pre-cooled and graded, although this is not usually the case. This is partly by convention; however, as will be discussed later, few farms are equipped to begin the cooling process in the field. Russian supermarkets. As discussed, Russia is a key export market for Uzbekistan, and it is the destination for more than half of the fresh cherries, grapes, melons and cabbage exported. Supermarkets have been expanding quickly in Russia and this trend is expected to accelerate with Russia’s WTO membership and the entry of foreign retailers. Russian supermarkets commanded 20 percent of the fresh fruit and vegetable market five years ago and that share now stands at 40 percent. Experts believe the share will reach 60 to 70 percent in five years (Figure 4.2) Supermarket chains in Russia are much more demanding than local Uzbek supermarkets. For most products, they require pre-cooled and properly packed produce. Since supermarkets in Russia do not want to deal with bulky packaging, they usually require high-quality cardboard packaging for most of the products supplied. These boxes need to sustain the trip to Russia and will be used to display produce in the store. This means that the boxes should be made mainly from pure cellulose. 48 Most products shipped from Uzbekistan to Russia fall short of handling these requirements. Managing the temperature of the produce is important for retaining quality and extending the shelf life of the produce, which ultimately drives the preferences of buyers. Produce should be picked at cooler times of the day, kept cool and moved quickly. Pre-cooling chambers and hydro-coolers are rarely used in Uzbekistan, as are optical scanners, which reduce sorting time. Moreover, most Uzbek produce is shipped in cardboard, which require additional handing for better presentation in stores. All of this explains why Uzbek produce often ends up in open markets or wholesale markets where requirements are not as high. Wholesalers in Russia and CIS are much less picky about the quality than supermarket chains. Usually they accept produce from Uzbekistan in whatever packaging it comes as long as the packaging adequately protects the produce during transport. After the product is received, they re-sell it on the local wholesale and retail markets. For some products like apples, onions and early cabbage, wholesalers might re-pack the produce for supermarkets. Hotels, restaurants and cafes are willing to pay a premium for high quality. Still, this market is the most difficult to serve since each of the companies need only a small amount of product but in a very wide assortment. Therefore, in most cases representatives either buy produce on their own on the wholesale markets or are supplied by specialized intermediary firms, which source their products directly from farmers or the wholesale markets and distribute it directly to the doors of their clients. Usually these firms have a preference for high taste characteristics instead of high visual characteristics as preferred by retail, so the demands for packing and pre-cooling can be of lesser importance. Processors in Uzbekistan usually source raw materials from dehkan and private farms producers directly or via intermediaries. In general, processors can work with lesser quality produce and therefore pay less than other buyers. In some limited cases, farmers grow fresh produce specifically for processing. This is the case with for tomatoes among our pre-selected products. Some table grapes are grown to produce raisins, but in this case, the drying-process usually occurs on the farm level. As discussed, the coordination of deliveries works best when processing firms can enter into contractual arrangements with suppliers. 49 Value chain analysis. With this as background, the next part of the report focuses on the costs of Uzbek horticultural goods along the value chain. As with the on-farm analysis, the numbers reported in this section are a one-time view of an indicative set of products. As such, the costs are reflective of current practices rather than potential processes that might be needed to tap high-end markets. For the export leg of the analysis, costs are based on delivering the products to Russia. The products included in the analysis are apples, sweet cherries, grapes, raisins, melons, tomatoes, cabbage and onions. Apples. Uzbekistan remains a net importer of apples and Uzbek farmers currently receive high prices as a result. The rate of return on new apple orchards is high, as shown earlier, so domestic production is expected to expand. Uzbekistan has an advantage in producing apples early in the season, but the prospects for the industry appear to be based on displacing imports where transport cost savings provide a competitive edge. Compared to regional neighbors, the Uzbek climate is warmer and less well suited for apple production, suggesting that Uzbek resources are better devoted to other crops. In addition, for higher-end domestic markets, better post-harvest management practices and improved storage facilities are required. Sweet cherries. Because of good climatic conditions, early crop maturing, a free trade agreement with Russia and inexpensive labor, Uzbekistan exports significant volumes of sweet cherries. Recently, exports to South Korea began using air transportation. The on-farm economics are supportive of further expansion and the potential for exports, as sweet cherries could be exported virtually to any country in the world, assuming proper production, pre-cooling and packaging technologies are employed. In fact, Unigreen, a local company already possesses modern pre-cooling and packaging technology, acquired from an international fruit company, Univeg. The firm owns hydro-cooling equipment and employs x- tend technology, which can preserve cherries for 45 days or longer. Nevertheless, work is still needed in this area, as well as an upgrading of cherry production technology to boost productivity. There are also opportunities for using technologies to extend the cherry season, as it is presently only about 20 days long. Production of cherries in high tunnels in the southern regions can help extend the season and increase the value of the product, as prices for early cherries are higher. Table grapes are the number one product from the fresh produce category exported from Uzbekistan. Annual exports of fresh table grapes averaged 100-120 thousand tons per year in the last 7 years and bring the country total annual revenue of more than USD 150 million. Thanks to its climatic conditions, Uzbekistan can export table grapes almost year around with early grapes being the most valuable crop. Table grape production technologies in Uzbekistan differ significantly from those in the US, EU and other countries, but local growers achieve very good yields using traditional techniques. Consequently, there is no pressing need to import nontraditional practices in the production technologies, except to conserve water through drip irrigation systems. During field visits, farmers reported difficulties storing grapes in modern cold storage facilities, while also reporting that traditional methods of storage worked very well. Since the scale traditional storage techniques is hard to extend to commercial operations, additional work will be needed in the area of developing storage approaches for local grapes, which will most likely also impact the crop protection practices. One negative point about the grape sector is that varieties grown today are a bit outdated. Modern varieties such as Red Globe, Thompson Seedless, Flame, etc., are being 50 promoted globally and consumers recognize them, but they are not grown in Uzbekistan. Therefore, it will be necessary to promote traditional varieties in destination markets, or explore whether better known varieties can be locally grown. Raisins are a traditional product for Uzbekistan. While raisin exports bring in only about one-fifth of the foreign exchange revenues generated by fresh grape exports, raisins are exported to more places. This product, considering its longer shelf life and storability, has a very significant potential and could be exported nearly anywhere in the world. However, food safety and quality are an issue in Uzbekistan. Interviews with local experts suggest that most of the raisins in Uzbekistan are sundried and quality control remains an issue. Still, it would not be too difficult to develop HACCP certified production of sundried raisins, which would permit better access to the markets in the EU, Middle East and other potential countries-importers. Melons. Uzbekistan was famous among the countries of the former Soviet Union for its melons and it still is. Melon exports bring USD 50-60 million to the country each year and make it the second most important export item after table grapes among fruit. Uzbekistan still grows traditional varieties and it is the only seed segment where there is virtually no imported product. Household farmers have developed traditional ways of storing melons, which effectively extends the melon season until the end of March. Farmers suggested during field visits that storing melons in the modern cold storage was difficult. Nonetheless, Uzbekistan can potentially supply melons almost year around. First early melons can be available at the end of May and the last melons in March, or even April with small improvements in storage techniques. There is significant scope for Uzbekistan to expand melon production and exports, targeting EU countries like the UK and Scandinavia, specifically with off-season products. Opportunities for this production exist also in Asia and Middle East countries. Significant exports to Korea are beginning to take place, too. Dried melons can also be an interesting category. To summarize, this is a very good product with a significant potential to focus on. Tomatoes. Markets for fresh vegetables in Uzbekistan are local for the most part and the potential for export is generally more limited than that for fresh fruit due to differences in taste preferences and higher requirements for freshness. Tomatoes, on the other hand, are the most tradable of vegetables. Field observations suggest that tomato production and processing in Uzbekistan have not reached its full potential yet; however, it still is the second most important export item after table grapes in the fresh produce sector, bringing the country up to USD 70 million in foreign exchange revenues. By implementing better production practices, especially in greenhouses, producers could boost productivity substantially. Significant improvements are also possible in the area of pre-cooling, packing, grading, etc. Moreover, if export restrictions were to be removed, Uzbekistan could sell greater volumes of early greenhouse produce in Russia. Open-field tomatoes are currently produced in large volumes for processing into tomato paste, which is another important export item. This production is competitive mainly thanks to Uzbekistan's low labor costs and the great “dry content” of tomatoes grown here. Further expansion of this would require significant investments into machinery, new varieties, drip irrigation, etc., which may also result in increasing costs of the final product. 51 Cabbage. In Uzbekistan, there are two primary types of cabbage: early white cabbage for local and export markets, and other white cabbage used exclusively for the local market. Uzbekistan’s advantages are seasonal, since the prices for early cabbage are usually 10-15 times higher than of late cabbage, once harvesting gets underway in cooler climates to the north. Technologies that would allow Uzbek farmers to grow and export cabbage even earlier than they do now are available, and there is scope for improved productivity. Markets are the largest among FSU countries although some shipments could also be potentially made to the EU countries by producing varieties that target EU preferences. Onions. Yellow onions have become an inexpensive commodity and the global market is very competitive. Domestic prices are high in Uzbekistan; in fact prices were 5-7 times higher than in the EU, Russia or the Ukraine in early 2012. With expanded trade, the incentives to grow onions domestically are likely to decline. As with other crops, Uzbekistan’s climate might provide a competitive edge for early onions, targeting the markets of Russia and Kazakhstan in May- June. Green onions, on the other hand, can be exported successfully along with herbs. Value-chain methodology. In order to better understand the prospects for the horticulture subsector in export markets and the related drivers of farm income, costs along the value chain were calculated using the following methodology. Final destination prices for export were taken from Fruit-Inform’s weekly price monitoring in Moscow. In some cases, Uzbek produce traded at a premium over the average price, in the case of melons for instance. In most cases however, Uzbek produce sold at about the average wholesale price indicated in the monitoring. The costs of transportation, import taxes (18 percent VAT in Russia only), unofficial payments at the customs and the costs of packaging were then calculated. Subtracting all of these costs from the average prices in Russia provides an opportunity price in Uzbekistan for pre-selected product, which we refer to as a “supplier’s price.”. Note that this is an implied price and not an observed price. The supplier price was subsequently compared with the actual local market price, as reported by farmers to gauge whether the implicit incentive to export was greater than the observed incentive to sell to the local markets. To summarize, a “supplier’s price” greater than the local market price means that the exporters should be able to pay a premium to the farmer over local prices and still make profit. Conversely, when local market prices exceed the “supplier’s price,” exporters are unable to profitably cover the cost of exporting the good to Moscow. Value chain costs. Estimates of costs along the value chain for select products are given in Table 4.5. These are also given graphically in Figure 4.3. What quickly becomes clear is that transportation costs are often larger than what remains available as a residual payment for the farmer. This is partly due to the cost of moving freight by truck or cooled mini-vans. However, it also reflects discounts at the destination end arising from spoilage, poor packaging and an inability to sell into high end markets. Less important, but still significant are import duties, both official and unofficial. It should also be noted that official exchange rates were used. 52 Formal and informal farm-gate incentives. Figure 4.4 and the last two columns of Table 4.5 show the implied incentives for farmers to participate in export market channels, both formal and informal. At the time of the field visits, there were significant incentives for farmers to export melons, grapes, tomatoes and early cabbage. The table shows that the difference between formal and informal exchange rates were significant, which creates opportunities for agents willing and able to use informal channels that circumvent currency restrictions. In most cases, the currency differential does not tip the decision of selling domestically rather than for export, but it does in the specific case of sweet cherries. In this instance, for the prices and exchange rates used, farmers are better off selling domestically rather than exporting using official exchange rates; however, they are better off still by selling to agents willing to pay prices based informal exchange rates. Sensitivity analysis. Table 4.6 repeats the formal-informal comparison for a variety of exchange rates, showing how relative changes in the informal rates affect incentives. The analysis shows the incentive structure holding under a range of exchange rates, although at high informal exchange rates the incentive to export apples by rail comes into play. 53 Which market, what price? When considering the value-chain analysis summarized in Table 4.5, it is important to keep in mind that the destination prices used in the analysis are representative of commonly used market channels, but they nonetheless mask large differences in outcomes due to the type of market channel employed and the characteristics of the final product sold. For example, Uzbek melons are in a sense “branded” because of their long-standing appeal to savvy buyers and for that reason command a premium. Uzbek produce that is better packed, or delivered reliably with field-to-table traceable delivery chains, or is fresher due to better post-harvesting handling can fetch higher prices as well. So it is good to keep in mind that the farmer incentives derived from the analysis are status quo measures and that one way to change the incentives is to add value and thereby increase final destination prices. 54 Table 4. 5: Value chain costs for selected crops. Wholesale Suppliers’ Suppliers’ Local Incentive Incentive to Transportation Import Unofficial Costs of Uzbek supplier's Value chain costs price in price, UZS price, UZS market to export export costs taxes paid payments packaging calculated price Russia (official) (unofficial) price, USZ (formal) (informal) Early cabbage $1.17 $0.67 $0.15 $0.03 $0.03 $0.30 531 827 300 231 527 Tomatoes (April) $2.50 $0.67 $0.32 $0.04 $0.10 $1.38 2,483 3,862 2,000 483 1,862 Tomatoes (May) $2.00 $0.67 $0.25 $0.04 $0.10 $0.94 1,696 2,639 1,250 446 1,389 Tomatoes (June) $1.67 $0.67 $0.21 $0.04 $0.10 $0.65 1,172 1,823 900 272 923 Sweet cherries air $5.67 $4.00 $0.71 $0.00 $0.15 $0.80 1,445 2,247 10,000 -8,555 -7,753 Sweet cherries truck $5.67 $0.75 $0.71 $0.04 $0.15 $4.01 7,225 11,239 10,000 -2,775 1,239 Table grapes (early) $3.33 $0.75 $0.42 $0.04 $0.12 $2.00 3,608 5,612 3,000 608 2,612 Table grapes (mass) $2.50 $0.10 $0.32 $0.04 $0.12 $1.93 3,467 5,393 1,500 1,967 3,893 Apples truck $0.75 $0.67 $0.09 $0.03 $0.08 -$0.12 -214 -333 1,500 -1,714 -1,833 Apples rail $0.75 $0.10 $0.09 $0.01 $0.08 $0.47 846 1,315 1,500 -654 -185 Melons rail $1.20 $0.07 $0.15 $0.01 $0.05 $0.92 1,662 2,585 1,200 462 1,385 Melons truck $1.20 $0.67 $0.15 $0.03 $0.06 $0.29 530 824 1,200 -670 -376 Note: The official exchange rate used to calculate the incentive to participate in formal export channels is 1800 Uzbek Soum per US dollar; the unofficial rate of 2800 per dollar is used to calculate informal market incentives. Source: Yarmak, Andriy. 2012. A value chain study: Horticultural sector of Uzbekistan. 55 Table 4. 6: Sensitivity analysis of incentives for informal export under alternative informal exchange rates 1,800 UZS 2,250 UZS 2,800 UZS 3,600 UZS Early cabbage 231.40 364 527 763 Tomatoes (April) 483 1,104 1,862 2,966 Tomatoes (May) 446 871 1,389 2,143 Tomatoes (June) 272 565 923 1,444 Sweet cherries air -8,555 -8,194 -7,753 -7,110 Sweet cherries truck -2,775 -969 1,239 4,450 Table grapes (early) 608 1,510 2,612 4,216 Table grapes (mass) 1,967 2,834 3,893 5,434 Apples truck -1,714 -1,768 -1,833 -1,928 Apples rail -654 -443 -185 191 Melons rail 462 877 1,385 2,123 Melons truck -670 -538 -376 -140 Source: Yarmak, Andriy. 2012. A value chain study: Horticultural sector of Uzbekistan (unpublished). Changing Russian trade tariffs and standards. As discussed, Uzbekistan exports rely heavily on Russian consumers. Under current rules, Uzbekistan exporters pay no import duty when selling fresh produce to Russia. This generates a 20 to 40 percent cost advantage over suppliers from outside the CIS. However, this advantage may be reduced or lost fully, when Russia, as a new member of the WTO, extends most-favored-nation tariff rates to other WTO members. Importantly, Russian membership in the WTO is likely to lead to changes in the sanitary and phytosanitary standards (SPS) governing Uzbek horticultural exports to Russia as well. SPS requirements are currently set out under Gosstandart (GOST), a set of standards first created in Soviet times. However, under the WTO, trade disputes related to food safety standards are settled based on another set of stands drawn up by the Codex Alimentarius Commission (CAC), a joint FAO/WHO program. The CODEX system comprises a collection of guidelines and codes of practices, including general guidelines for hazard analysis and critical control point (HACCP) systems. The CODEX system also provides supply chain management guidelines for fresh fruit and vegetables. If Russia were to adopt new standards that Uzbek producers were not positioned to meet, then Uzbekistan’s primary export market would be closed. Risks and opportunities. Failing to meet SPS requirements can shut countries out of markets, and slow certification systems can effectively do the same. For these reasons, SPS requirements are seen as a trade hurdle to be cleared and policies are designed with clearing this hurdle in mind. Policies based on this mindset tend to focus on minimal standards set out by governments and international organizations like FAO, OIE, WTO, and WHO. However, it is increasingly the case that supermarkets, fast-food restaurants and other private firms are moving to manage their own liability and reputational risk by instituting their own standards. A common approach for firms or associations of firms is to establish their own guidance on food safety and supply chain management, and subsequently purchase their produce only from sources who abide by those guiding rules. This means that produce compliant with government standards may nonetheless be excluded from important markets. For Uzbekistan, this trend constitutes a significant risk, since current prevailing practices may prove to be inadequate. At the same time, Uzbekistan’s favorable climate conveys already discussed advantages since fewer chemical fertilizers and pesticides are used, 56 making it easier for Uzbek produce to meet the very strict guidelines for trace elements associated with high-end produce markets. Positive lessons from successful peers like Chile, to be discussed later, shows how climatic advantages can be the starting point for building a strong reputation and global market presence. An example from supermarkets in the UK. A study by Jaffee (2003) examines the evolving standards for vegetables sold by supermarkets and by wholesalers in the United Kingdom. 22 As shown in Table 4.7, the commercial requirements related to food safety and packaging greatly exceed legal requirements. It also reinforces the notion that fresh produce is an embodiment of the full market channel used to deliver the final product. For example, supermarkets in the UK want continuous supply and traceability, characteristics that rely heavily on advanced planning and smooth logistics. The stores also require phytosanitary certification, which is primarily the province of governments, and the implementation of HAACP systems, which start in the field. Table 4.7: Product standards for vegetables in the United Kingdom Supermarket requirements Wholesale markets Legal Commercial Legal Commercial Quality/Service Product conformity None Fully required None Mostly required Supply continuity None Fully required None Mostly required Packaging specifications None Fully required None Mostly required Food Safety MRL tolerances Spot checks Fully required Minimal enforcement Not required HAACP system None Fully required None Beneficial Microbiological testing None Fully required None Not Required Product traceability None Fully required None Beneficial Other Phytosanitary certificate Strictly enforced Fully required Strictly enforced Fully required GAP/ environmental planning None Mostly required None Not required Social welfare planning None Beneficial None Not required Source: Jaffee (2003). An example of reputational risk and lost markets. In 1996, 85 growers from Guatemala were seasonally exporting raspberries to the United States, with exports valued at USD 3 million. Following an outbreak of a food-borne illness in the United States attributed to Guatemalan raspberries, imports from Guatemala were banned in 1997. The Guatemalan government and an industry association worked quickly to establish a supply chain management certification system and exports to the United States resumed in 1999. In 2000, another outbreak of the illness occurred, which was traced back to a single farm. The farm was excluded from future exports, which resumed without further incidents. Nevertheless, the Guatemalan raspberry industry had suffered a blow to its reputation and many of the growers shifted their operations to Mexico. By 2001, only four raspberry growers remained in Guatemala and annual 22 Jafee, Steve. 2003. From challenge to opportunity: transforming Kenya’s fresh vegetable trade in the context of emerging food safety and other standards in Europe. ARD Discussion Paper No. 2. Washington: World Bank. 57 exports had shrunk to less than USD 200,000. In the meantime, Mexico’s raspberry exports to the United States grew from USD 2.9 million in 1998 to USD 89 million in 2002. Building a brand name for Uzbek products. A key ingredient to the success of horticultural industries in the United States, Turkey and Chile has been their success at building a reputation for quality, safety and reliability extending beyond the reputation of individual firms and farms within the industry. Putting in place the investments and institutions needed to support quality, safety and reliability is a needed first step, but building a brand name can complement public and private investments in quality controls and a robust certification. Creating awareness that, for example, Uzbek melons are preferred by consumers because they are more favorable and that they meet stringent safety standards can open up new markets for melons. Additionally, organized efforts can also have a positive spillover effect on a wide range of Uzbek products, as buyers familiar with melons begin to think about other Uzbek fruit. Annex II contains a discussion of private sector led, government facilitated high-value market channels in Chile that is especially relevant to Uzbekistan. To summarize, the Chilean approach is based on the development of high standards for food safety and quality, enforced through a certification process, developed in partnership with the private sector, but backed by government regulation. A larger share of the Chilean produce is destined for export, and there is a strong sense among sector participants that such a framework benefits the subsector as a whole since it provides producers with an advantage in overseas markets. This strength is leveraged by building a made-in-Chile brand. The key public institutions take responsibility for setting broad policy, for safeguarding the sanitary integrity of Chile and Chilean products. A public development agency lends support to small and medium businesses and farms, and helps promote productivity enhancing technologies starting at the farm and extending along the market chain. Other public entities help promote the industry internationally and help the subsector leverage general efforts to promote Chilean businesses. Others complementing the public sector institutions include trade associations of growers and exporters that promote Chilean fruit and vegetables worldwide and participate in discussions of global industry standards for quality and safety. Other private entities manage long-term breeding and biotechnology efforts, packaging and handling technologies and oversee programs to train growers and exporters. Creating a National SPS Management Strategy and Action Plan can be a good start. The examples above illustrate why it is important for governments to take a proactive approach that anticipates developing trends. A good place to start is developing a strategy and action plan. Other countries have successfully sought financial and technical support on plans and leverage past country experiences. For example, The World Bank has helped fund trade-related food safety project components in Bosnia, Jordan, Peru and Tunisia, and has helped other clients implement stricter food safety frameworks in anticipation of EU accession. 23 23 See Food Safety and Agricultural Heal Standards: Challenges and Opportunities for Developing Country Exports. Report number 31207, Washington: World Bank. 58 Incentives are seasonal. For fresh markets, there are agro-climatic constraints on when horticultural goods can be grown and limits on how long they can be stored. This leads to significant seasonal variations in prices, with peak prices doubling or tripling prices (Figure 4.5). In Uzbekistan, there are technical and logistical constraints that, if solved, could extend the storage life of the products and dampen price swings; however, some seasonality will remain. Opportunities in export markets are seasonal. There are also seasonal variations in the prices in destination markets. As mentioned, this often creates an opportunity for Uzbek horticultural products, especially in Russia, since Uzbek products can reach markets there ahead of domestic crops and supplies from competitors. For example, Moscow grape and cucumber prices, shown in Figure 4.6, remain high during winter months and early Spring, but fall by half during the summer months. Still, current rules governing horticultural exports sometimes make it difficult for farmers to benefit from seasonal high prices abroad. 59 In Uzbekistan, exports of horticultural products are carried out with the permission of the Cabinet of Ministers Working Group. The Working Group was established by the Resolution of the Cabinet of Ministers, Number 238, dated August 20, 2009, and is charged with the following tasks: i) to address the issues of stable and continuous supply of the domestic consumer market with fruit, vegetables, melons, potatoes, grapes and beans in required quantities and assortments, as well as monitor the prices of these products; ii) to improve and implement basic forecast tools for fruit, vegetables, melons, potatoes and grapes demand and supply; iii) to determine the volumes and assortment of fruit, vegetables, melons and grapes offered for exports under the approved forecast parameters, as well as to consider proposals from Uzulgurjisavdoinvest Association and the territorial joint-stock companies of Matlubotsavdo on the exports of products in justified volumes, varieties and with a reasonable price factor; and iv) to promptly resolve any issues related to the organization of transport, timely arrangements for cars and refrigerators, customs clearance and reporting on the shipment of fruit, vegetables, melons and grapes for exports. For fresh horticultural products, formal export channels are restricted to approved companies. Under this Resolution, the procedures for exporting horticultural products are implemented as follows, with due allowance for the priority objective of supplying domestic consumer markets with these products: i) fresh fruit, vegetables, melons and grapes are exported by Uzulgurjisavdoinvest Association; and the foreign trade companies of the Ministry of Foreign Economic Relations, Investments and Trade; ii) dried and frozen fruit, vegetables, melons and grapes, as well as beans are exported by legal entities irrespective of their form of ownership. The Cabinet of Ministers sets the minimum export prices and sometimes intervenes to prohibit exports. Under regulations, organizations engaged in exports of horticultural products are to be included 60 in the list of exporters approved by the Cabinet of Ministers. The Cabinet of Ministers approves, on a monthly basis, all organizations engaged in exports of horticultural products, and volumes and export prices for types of horticultural products to be exported. Since the Working Group is given the task of assuring that domestic markets are well supplied, this means that export requests can be sometimes denied. The Working Group also establishes the minimum export prices, and this can stand in the way of exports as well. The number of products affected by the minimum price rules is extensive and the swings in minimum price levels are quite large. See Table 4.8 for the minimum prices set in 2011. The consequences of export restrictions. While the Government tries to avoid disruptions of existing contracts, the system works to discourage the development of marketing channels that reach premium markets. The rules provide a mandate for the Working Group to consider local markets and meaning that foreign buyers may be unable to obtain their product should domestic prices in Uzbekistan rise. For cash wholesale markets, this creates a loss of business and income, but does not do lasting damage, since the purpose of wholesale markets is to clear spot demand and supply. However, for grocery chains or other high-end buyers are interested in consistent quality and the smooth delivery of product, this makes Uzbekistan an unreliable source, and undermines efforts to invest in quality and safety procedures that are primarily relevant for export destinations. Export restrictions also work to discourage new investments on the farm. Peak seasonal prices in Uzbekistan correspond to peak prices in export destination markets as well. In the longer term, private and dehkan farmers might be willing to expand production in order to take advantage of both sources of peak revenue, but limiting exports to favor domestic markets blunts incentives to invest in new orchards or more productive technologies. Contract registration and currency rules. Under Resolution 238, fruit, vegetables, melons and grapes are exported for hard currency on a contract basis under strict control over the fulfillment of such contracts in accordance with the legislation on currency exchange regulation. Specifically, formal exporters have to sign a contract providing for a price not lower than the one specified by the protocol of the Cabinet of Ministers, and get this contract registered with authorized agencies. The Ministry of Foreign Economic Relations, Investments and Trade is responsible for the registration of contracts and for guaranteeing price consistency. 24 After the contract is registered, exporters arrange for an invoice for a 100 percent advance payment to be made by the buyer. Half of the hard-currency proceeds must be converted into UZS. To obtain the cash needed to prepare the goods for exports, the exporter has to submit to the bank a certificate issued by local authorities proving that the given seller has a land plot to cultivate the crops prepared for selling and invoices for the products purchased. 24 As per the Resolution of the Cabinet of Ministers Number 137, (dated March 31, 1998). 61 Table 4.8: Minimum export prices set by the Cabinet for 2011 ($/ton) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Apples 2,000 1,500 1,500 Apricots 2,500 1,200 500 500 500 Carrots 500 500 500 600 1,000 600 600 Cherries 3,000 1,500 1,500 1,000 1,000 Cucumbers 2,000 2,500 2,000 1,100 500 500 500 Garlic Grapes 3,000 1,500 1,500 1,000 1,000 Melons 2,000 500 500 500 500 Onions Peaches 2,000 1,000 1,000 1,500 1,500 Pears 2,000 2,000 Persimmons 1,000 1,000 Plums 1,500 1,000 800 600 600 Pomegranates 2,000 2,000 2,500 2,500 2,500 Potatoes Quince 1,200 1,200 1,200 800 800 800 Tomatoes 1,500 1,500 1,500 1,500 800 800 Watermelons 1,200 500 500 Note: Shaded months are harvest months. Source: IFC (2011) Cold Storage in Uzbekistan: Creating Opportunity Where It’s Most Needed. Export documents. The following documents are required to clear fruit and vegetables exported by legal entities: 1) a contract that has been registered with authorized agencies; 2) a Cargo Declaration (CD); 3) a Settlements Certificate issued by an authorized bank; 4) transportation and shipping documents; 5) a Certificate of Conformity; 6) a Phytosanitary Certificate; 7) a Hygienic Certificate; and, 8) documents certifying that customs duties have been paid. Once the exporter can show that the full payment for the goods has been received, and submitted all documents to the customs authorities, the customs authorities are expected to register and formalize the Cargo Declaration within one day. While the goods are in transit, the seller and buyer have to sign an acceptance certificate for the goods. Currency controls add to transaction costs. Potentially, the currency control rules constrain trade in two ways. The first is that foreign firms purchasing Uzbek horticultural products may be unwilling to pay in advance for a product where quality is hard to establish in advance. As a practical matter, the first constraint adds to transaction costs, but is not otherwise binding, as exporters can often establish their own foreign entities and essentially sell to themselves on behalf of their ultimate clients. This means that the local client can inspect their goods prior to final payment. Currency controls undermine incentives to establish formal market channels. A second problem is that, as mentioned earlier, unofficial exchange rates often exceed official rates and this creates an adverse set of incentives. As discussed, supermarkets and other quality-and-safety focused foreign buyers are often willing to pay a premium in order to fully manage their supply chain from field to store, and therefore the kinds of certification provided by the formal export channels are valuable for them. Farmers and agents along the marketing chain may be willing to make the types of investment needed to improve the quality and safety of their product in return for higher prices in the destination market. When the spread between formal and black-market rates become sufficiently high, agents along this informal channel may choose to give up the possibility of earning quality premiums, granted they are able to make up for it by capturing the difference between official and unofficial exchange rates. This also decreases 62 the value of government investments in the public institutions devoted to ensuring quality certification and safety described below, since informal agents skirt these institutions in order to obscure their activities. Steps to ensure food safety. In 1997, Uzbekistan adopted a new legal framework covering the issues of food safety, called “On Quality and Safety of Food Products".25 The law assigns responsibility in the area of food quality and safety assurance to the State Sanitary and Epidemiologic Service of the Ministry of Health of the Republic of Uzbekistan, Main State Inspectorate on Plant Quarantine under the Ministry of Agriculture and Water Resources of the Republic of Uzbekistan, Uzbek Agency of Standardization, Metrology and Certification. Specifically these agencies: a) state norms; b) provide official/state registration of food products and food processing equipment operated in contact with foodstuffs; c) grant certification of food products; d) provide state supervision and control; and, e) plan of activities on food quality and safety assurance. Quality certification. In May 2011, a new quality certification process was established under The Resolution of the Cabinet of Ministers of Uzbekistan Number 122, (dated April 28, 2011). The relevant legislation, called “On Additional Measures to Improve the Procedures for Certification and Implementation of Quality Management Systems” approved the application of the Provisions for the Procedures Used by Producers to Notify of the Conformity of Their Products with Quality and Safety Requirements of the Republic of Uzbekistan, starting from May 1, 2011. The Provisions outline a process whereby the firm seeking quality certification provides the relevant documentation the product conforms to standards and a notification of conformity is registered free of charge within one working day. This is potentially a supportive vehicle for expanding the types of certifications that are required to suit a range of destination markets. Free advisory services. The Resolution also establishes an Export Promotion Bureau within "UzStandard" Agency whose functions include, among others, rendering free advisory services to producers of export-oriented products on international and national requirements for product standards, certification, labeling, packaging and other parameters. If strengthened, this type of outreach can help smaller firms and firms without international partners know what is required to expand their exports. One-stop Export Mechanism. To speed the certification process, the Cabinet of Ministers established a one-stop certification mechanism. 26 Under the program, exporters submit to authorized certification agencies at customs posts a single application form with the following documents. To obtain a certificate of origin, recognized exporting firms submit: a copy of export contract; a copy of the invoice for consignment; copies of documents confirming the information about the manufacturer, the origin of raw materials and components used to manufacture the exported goods (supply contracts for raw materials, 25 Law of the Republic of Uzbekistan "On Quality and Safety of Food Products" (Bulletin of the Oliy Majlis [Parliament], 1997, Number 9, Art. 239; 2003, Number 5, Art. 67; Code of Laws of the Republic of Uzbekistan, 2006, Number 14, Art. 113). 26 The Resolution of the Cabinet of Ministers "On the Measures for Phased Implementation of One-Stop-Shop Export Mechanism" (dated November 17, 2011, Number 305) approved the "Interim Provisions for the Implementation of One-Stop- Shop Export Mechanism". 63 invoices); and copies of documents regulating the production process. 27 To obtain a phytosanitary certificate (from the Main State Inspectorate of the Republic of Uzbekistan for Plant Quarantine under the Ministry of Agriculture and Water Resources of Uzbekistan) exporters must submit: an import quarantine permit from the importing country (for individual countries, in accordance with intergovernmental agreements); permission for transit (for individual countries); quarantine phytosanitary certificate; disinfection certificate; and, document of payment for certification services. To a hygienic certificate (from the Center of State Sanitary and Epidemiological Supervision under the Ministry of Health of the Republic of Uzbekistan), exporter must provide: a copy of a regulatory document for certified products: corresponding intergovernmental standard (GOST), the National Standard of the Republic of Uzbekistan (O'zDSt); and a document of payment for certification services. For the exports of agricultural products, the timeframe for laboratory tests and issuing required certificates should not be more than 5 working days. If all is in order, authorized representatives of certification agencies shall, within one working day, issue required certificates to the applicant immediately at the FEA customs post. A mismatch in standards. Despite the measures taken in Uzbekistan, food safety and quality certification systems still have certain gaps and problems. Food safety is currently ensured through GOST standards (State Standards) which are not flexible enough to meet international standards, especially in the markets of value-added products, which have adopted effective food safety management systems. Technical and personnel capacities of the laboratories which analyze foodstuffs for safety are not up-to- date in terms of equipment modernization and improvement of analytical skills and expertise to meet emerging needs. Apart from that, Uzbekistan has no reference laboratories, and the calibration of laboratory toolkits are few and far between. The current regulatory system is costly for many producers and discourages trade between Uzbekistan and WTO countries which apply FAO International Plant Protection Convention and Codex Alimentarius standards, established by the Food and Agriculture Organization and the World Health Organization. Importantly, the current system for ensuring the safety of horticultural products is not based on the comprehensive "from-field-to-table" approach which would help minimize the risks in food safety chain and facilitate trace-backs when problems do emerge. In the case of processed foods, for example juices or dried vegetable products, foreign-domestic partnerships have been effective in closing this gap, matching foreign capital and expertise on destination standards with local production and market knowledge. Organic products. As discussed, Uzbekistan’s agro-climatic conditions are well suited for growing organic fruit and vegetables. However, at present, there is no market for green-labeled, environmentally friendly products. In some cases, foreign processing firms put in place their own set of controls that result in organic certification, but a general framework is still lacking. Most dehkan farm production is organic and there may be potential for certification. Overall, the size of the market for organic goods is relatively small, but organic products often fetch premiums and markets appear to be growing. Apart from quality and competitive advantage, the introduction of green-labeled products encourages the continuation of 27 Additional steps are required if the exported good contains a portion of foreign goods. 64 sustainable farming practices, limiting the negative effects of chemicals, especially pesticides, in soil and water systems. 65 5. Recommendations Many destinations, many channels. More so than most crops, the final price at which horticultural products are sold depending crucially on steps taken along the value chain. That having been said, horticultural goods flow to multiple markets, local and distant and it is useful to think of the sector in terms of multiple channels. At one end of the spectrum, high-quality fresh horticultural items flow to supermarkets or restaurants in export markets, where stream-lined logistics and trace-back quality controls are vital. Contracts, firm performance, banks and formal institutions for certifying quality and safety are key components of these markets, and products flowing through them earn a higher price and incur higher costs. At the other end are products grown on dehkan farms, some consumed at home and some sold in local markets. For these goods, transactions and marketing are done informally, quality controls are based primarily on personal reputation and sales are mostly cash-based. Still, these markets account for the bulk of Uzbekistan’s horticultural market and will continue to do so in the foreseeable future. They are vibrant and important as well for producers and consumers in Uzbekistan. For policy, it is therefore important to think broadly about markets and incentives and realize that multiple channels are needed to deliver goods to a diverse set of consumers and processors. Potential opportunities for productivity gains from farm to export markets. Agriculture is a key element to obtaining the type of economic growth and restructuring laid out in the Government’s Vision 2030. Doing so requires a coordinated set of actions that enhances improved productivity in the field with added value and lower costs along the value-chain. Otherwise, potentially profitable markets are not accessed and field productivity gains lead only to surpluses and depressed prices. The value chain starts at the farm; and the policy recommendations below for improving farm productivity include three types of action. The first is finding ways to continue Uzbekistan’s strong history of support for crop-specific productivity improvements, including the development of improved varieties. A second set of actions rely on improvements of allocative efficiency; that is, actions that allow land and water resources to be put to better use. A third important area encompasses actions that safeguard vital land, water and genetic resources. At the other end of the value chain is the development of markets based on a reputation for quality and reliability. This is primarily a task best left to the private sector, but there are important steps that the Government can take to help. And finally, there are opportunities along the value-chain, starting with post-harvest improvements on the farm through the development of supportive trade policy. 5.1 Recommendations to improve farm productivity Protecting genetic resources and conducting related research. Broadly, there are three groups of important horticultural genetic resources in Uzbekistan. Studied varieties cataloged at Uzbekistan’s two long-standing research centers, the Schroeder Institute and RIVMP comprise the first. Another important source are the heritage varieties of fruit and vegetables grown on the small dehkan farms throughout Uzbekistan. Wild varieties of plants in Uzbekistan’s forests and meadows, some of which are the progenitors of modern domesticated fruit, nuts, and vegetables, make up the final group. The three groups differ in the extent to which they are documented, studied, preserved and protected. Both research institutes and donor sponsored programs are engaged in identifying and protecting these resources, but 66 there does not appear to be a coordinated program to do so. Schroeder and RIVMP are well positioned to expand basic scientific programs related to these sources and attract international researchers through partnership with other academic institutions. Restoring land and improving water resource management. As discussed, land and water resources are limited in Uzbekistan and some of the land resources are denigrated. Water and land quality policies and programs go beyond the scope of this policy note, but in some places, the shift of land into horticulture has also been associated with the adoption of improved irrigation techniques. It will be important to link efforts designed to strengthen the horticultural sector with new and on-going projects aimed at land restoration and improved water management. It will be especially important to adopt standards that prevent salinity problems in places like Tashkent and Samarkand, where new irrigation systems are going in to support an expanding horticultural subsector. Sustaining domestic improvements in production technologies. The horticulture subsector has benefited from past investments in basic and applied agricultural research. It will be important to sustain and fully equip the Schroeder Institute and RIVMP. Finding innovative ways to deliver extension services. Horticultural products are grown on 4.7 million dehkan farms and 66,000 private farms. As discussed, the horticultural sector is expanding and much of the new area being brought under production relies on new varieties and modern techniques. Moreover, improvements in post-harvest and quality management, which begin at the farm, are needed to take advantage of growing and profitable export markets. There is no traditional extension service in Uzbekistan, although regional offices of RIVMP and the Schroeder Institute engage in training and showcasing farming practices, and donors such as USAID have programs aimed at providing basic training on good crop husbandry. Numerous equipment fairs are held as well. It will be important to draw on lessons stemming from these various practices to find effective ways to deliver production and marketing information to Uzbekistan’s many farmers. Sustaining support for new investments. As documented, the Government of Uzbekistan has successfully promoted the expansion of private input markets and helped remove unnecessary obstacles to the importation of equipment and planting materials. Private investment in storage and processing is on the rise as well. It will be important to continue to support private investment and competition and make continued improvements to the supportive programs where possible. Expanding the successful program of granting farmers greater autonomy. As a consequence of Government policy, horticultural producers have greater latitude in deciding what they produce and how they produce it. The policy has proven very successful and this note documents how farm revenue and export revenue have grown as a result. It is strongly recommended that the Government find ways to expand the policy of granting farmers greater autonomy concerning production choices. In particular, changes that permit private farmers to shift from cotton to other crops can improve farmer incomes, reduce the demand for limited water resources, and mitigate contentious labor practices. Putting in place baseline measures by surveying farms and rural households to document the effects of the program’s 67 expansion on incomes and resource use can facilitate ex post evaluations and help guide the Government on the appropriate pace of reform. Facilitating land markets. The farm budget models developed in this note suggest that both dehkan farms and private farms can be highly productive and that productivity can differ for farms of the same size in different regions. Trying to find the “right” farm size through top-down land optimization reforms has been partly successful; however it is likely that further adjustment can improve outcomes, especially if successful dehkan and private farmers are allowed to expand. To that end, the Government may want to consider pilot programs that allow farmers to lease or sell land-use rights, while investing in the institutions required for transparent and efficient land markets. 5.2 Recommendations to support high-value export markets Strengthening support for quality and food safety standards. Horticultural products that merit quality and food safety certification can earn price premiums and gain access to markets that would otherwise be closed. The Government of Uzbekistan has made good progress in promoting standards and reducing certification barriers, but more can be done to implement the type of standards needed to enter the EU and other high-end markets. Russia’s ascension to WTO member status adds urgency since Uzbek products will need to compete on quality grounds, once the currently preferential tariff treatment for Uzbek horticultural goods is negated. Moreover, Russia’s membership will likely accelerate the growth of supermarkets that value quality and safety certifications. In particular, the Government of Uzbekistan may want to work with donors on enhancing food safety standards consistent with WTO standards, and creating a framework that supports private sector voluntary HACCP systems. Priority should be given to high potential crops, such as cherries, grapes, melons and organics. The World Bank is in a position to help, since it has assisted other countries implement improved food safety frameworks. Building a brand for Uzbek horticulture. Creating an Uzbek brand can help take advantage of efforts that improve the quality and safety of the country’s horticultural products by opening up new markets. Industry-led, government facilitated lessons from Chile are especially relevant. Continuing to improve private market access to quality and productivity enhancing equipment. The Government of Uzbekistan has moved to ease hurdles related to the importation of the equipment needed to improve the quality and safety of horticultural products. The Government may want to review current practices and seek input from exporters and processors about improving them. Continuing to remove obstacles to foreign direct investment in the sector. Joint partnerships often help horticultural processors and other firms enter new markets. This is because partners often bring with them know-how related to destination standards, preferences and distribution channels. Foreign firms also often provide capital and access to credit lines. The Government may want to review current rules and practices regarding foreign direct investment in the horticultural subsector in order to further facilitate foreign participation. 68 5.3 Recommendations aimed at eliminating unintended incentives that encourage the use of informal, low-valued market chains. Eliminating export restrictions. Export bans and restrictions brought about by minimum pricing rules hurt Uzbekistan’s reputation as a reliable supplier of quality horticultural goods. They also encourage the use of informal and illegal marketing channels, and this stands in the way of building up the type of formal markets needed to access premium markets, domestically and abroad. The policies create disincentives for producers to expand and they likely channel fresh produce to lower-valued uses. Low level export taxes could provide some protection to local consumers as a second-best option, although this, to a lesser extent, discourages production and the use of formal markets. Easing restriction on the use of foreign currencies in trade. Although banking and currency policies go beyond the scope of this Note, current policies implicitly tax farmers by over-valuing the local currency. They also undermine efforts to build-up the type of formal marketing channels needed to access premium markets by increasing transaction costs and by encouraging the use of informal markets in order to capture the spread between official and informal exchange rates. The Government may want to consider ways to lessen the burdens imposed by current currency exchange rules. Dropping the revenue tax on farm products. Anecdotal evidence suggests that the revenue tax encourages farmers to sell into informal cash markets. An attractive policy option would be to drop the revenue tax and, if tax revenue is needed, increase the land-value tax. There are potential advantages to charging farmers directly or through water user associations for the water they use, rather than using land- tax revenues to cover costs related to irrigation system. However, if land-rental markets are allowed in order to encourage the “right-sizing” of farms, then additional land-tax revenue may come about as land values adjust, obviating the need to change land-tax rates. Promoting competition by bringing more firms into the formal export chain. Uzbek farmers and processing firms would be better served by allowing qualified firms to freely engage in the exporting business, thereby creating a competitive environment for their products. The government may want to consider a plan for allowing firm entry in concert with a reduction in export restrictions. Developing a baseline to evaluate the impact of policy changes through household and farm surveys. Indirect evidence and logic suggests that many of the recent changes in policy have benefited women and the poor. However, it is difficult to verify this because good survey data on households and farms is lacking or unavailable. By implementing household and farm surveys today, the Government can better identify the needs of rural households and communities and better gauge the impact of future policies. 69 Annex I: Estimated Costs and Margins for Selected Crops, Per Hectare28 Annex I Table. 1: Cabbage in Fergana, private farms Unit Quantity Price (sum) Value (sum) Acreage ha 1.00 Total revenue (1 ha) ton 25.00 270,000.00 6,750,000.00 Operational expenses Seed kg 1.50 80,000.00 120,000.00 Fuel liter 150.00 1,650.00 247,500.00 Machinery hire lump sum 1.00 150,000.00 150,000.00 Fertilizer (N) kg 200.00 398.00 79,600.00 Fertilizer (P) kg 150.00 271.00 40,650.00 Fertilizer (K) kg 75.00 840.00 63,000.00 Organic fertilizer ton 10.00 20,000.00 200,000.00 Chemicals lump sum 1.00 200,000.00 200,000.00 Irrigation sum/ha 1.00 15,000.00 15,000.00 Electricity Kwt/hour 0.00 0.00 0.00 Labor (5 persons x 3 months) person/month 15.00 160,000.00 2,400,000.00 Taxes lump sum 1.00 160,000.00 160,000.00 Other expenses lump sum 1 735150 735,150.00 Total operational expenses 4,410,900.00 Gross Margin (sum/ha) 2,339,100.00 Gross Margin (USD/ha) 1,250.86 Note: Exchange rate is set at 1,870 UZS per USD. Source: Field surveys. 28 The following taxes were included while calculating taxes for the models: Revenue tax - 0,035 percent of the total revenue, paid by the farm; Social fund tax - 0,25 percent of the salary paid to employee, paid by the farm; Income tax - 0,09 percent of the salary paid to employee, paid by employee; Social fund tax - 0,025 percent of the salary paid to employee, paid by employee; Land tax - 0,06 percent of the cadastral value of land. The cadastral value is set at 500,000 sum/ha. 70 Annex I Table. 2: Tomatoes in Fergana, private farms Unit Quantity Price (sum) Value (sum) Acreage ha 1.00 Total revenue (1 ha) ton 22.00 350,000.00 7,700,000.00 Operational expenses Seed kg 0.50 500,000.00 250,000.00 Fuel liter 120.00 1,650.00 198,000.00 Machinery hire lump sum 1.00 170,000.00 170,000.00 Fertilizer (N) kg 180.00 398.00 71,640.00 Fertilizer (P) kg 140.00 271.00 37,940.00 Fertilizer (K) kg 50.00 840.00 42,000.00 Organic fertilizer ton 10.00 20,000.00 200,000.00 Chemicals lump sum 1.00 200,000.00 200,000.00 Irrigation sum/ha 1.00 15,000.00 15,000.00 Electricity Kwt/hour Labor (5 persons x 3 months) person/month 15.00 160,000.00 2,400,000.00 Taxes lump sum 1.00 190,000.00 190,000.00 Other expenses lump sum 1 754916 754,916.00 Total operational expenses 4,529,496.00 Gross Margin (sum/ha) 3,170,504.00 Gross Margin (USD/ha) 1,695.46 Note: Exchange rate is set at 1,870 UZS per USD. Source: Field surveys. Annex I Table. 3: Onions in Fergana, private farms Unit Quantity Price (sum) Total (sum) Acreage ha 1.00 Total revenue (1 ha) ton 22.00 400,000.00 8,800,000.00 Operational expenses Seed kg 18.00 40,000.00 720,000.00 Fuel liter 100.00 1,650.00 165,000.00 Machinery hire lump sum 1.00 150,000.00 150,000.00 Fertilizer (N) kg 200.00 398.00 79,600.00 Fertilizer (P) kg 150.00 271.00 40,650.00 Fertilizer (K) kg 75.00 840.00 63,000.00 Organic fertilizer ton 10.00 20,000.00 200,000.00 Chemicals lump sum 2.00 250,000.00 500,000.00 Irrigation sum/ha 1.00 15,000.00 15,000.00 Electricity Kwt/hour Labor (4 persons x 3 months) person/month 12.00 160,000.00 1,920,000.00 Taxes lump sum 1.00 200,000.00 200,000.00 Other expenses lump sum 1 810650 810,650.00 Total operational expenses 4,863,900.00 Gross Margin (sum/ha) 3,936,100.00 Gross Margin (USD/ha) 2,104.87 Note: Exchange rate is set at 1,870 UZS per USD. Source: Field surveys. 71 Annex I Table. 4: Cotton in Fergana, private farms Unit Quantity Price (sum) Total (sum) Acreage ha 1.00 Total revenue (1 ha) ton 3.50 750,000.00 2,625,000.00 Operational expenses Seed kg 55.00 2,100.00 115,500.00 Fuel liter 162.00 1,650.00 267,300.00 Machinery hire lump sum 1.00 350,000.00 350,000.00 Fertilizer (N) kg 450.00 398.00 179,100.00 Fertilizer (P) kg 160.00 271.00 43,360.00 Fertilizer (K) kg 50.00 840.00 42,000.00 Organic fertilizer ton 10.00 20,000.00 200,000.00 Chemicals lump sum 1.00 200,000.00 200,000.00 Irrigation sum/ha 1.00 32,000.00 32,000.00 Electricity Kwt/hour Labor (2 persons x 2.5 months) person/month 5.00 160,000.00 800,000.00 Taxes lump sum 1.00 152,700.00 152,700.00 Other expenses lump sum 1 200000 200,000.00 Total operational expenses 2,581,960.00 Gross Margin (sum/ha) 43,040.00 Gross Margin (USD/ha) 23.02 Note: Exchange rate is set at 1,870 UZS per USD. Source: Field surveys. Annex I Table. 5: Melon in Fergana, private and dehkan farms Private Dehkan farms farms Unit Quantity Price (sum) Total (sum) Quantity Price (sum) Total (sum) Acreage ha 1.00 1.00 Total revenue (1 ha) ton 18.00 400,000.00 7,200,000.00 20.00 400,000.00 8,000,000.00 Operational expenses Seed kg 6.00 60,000.00 360,000.00 5.00 60,000.00 300,000.00 Fuel liter 150.00 1,650.00 247,500.00 100.00 1,650.00 165,000.00 Machinery hire lump sum 1.00 150,000.00 150,000.00 1.00 100,000.00 100,000.00 Fertilizer (N) kg 75.00 398.00 29,850.00 75.00 398.00 29,850.00 Fertilizer (P) kg 75.00 271.00 20,325.00 75.00 271.00 20,325.00 Fertilizer (K) kg 50.00 840.00 42,000.00 50.00 840.00 42,000.00 Organic fertilizer ton 20.00 20,000.00 400,000.00 10.00 20,000.00 200,000.00 Chemicals lump sum 1.00 0.00 0.00 1.00 0.00 0.00 Irrigation sum/ha 1.00 15,000.00 15,000.00 1.00 32,000.00 32,000.00 Electricity Kwt/hour Labor (5 persons x 3 months) person/month 15.00 160,000.00 2,400,000.00 15.00 100,000.00 1,500,000.00 Taxes lump sum 1.00 160,000.00 160,000.00 1.00 0.00 0.00 Other expenses lump sum 1 764935 764,935.00 1 0 0.00 Total operational expenses 4,589,610.00 2,389,175.00 Gross Margin (sum/ha) 2,610,390.00 5,610,825.00 Gross Margin (USD/ha) 1395.93 3000.44 Note: Exchange rate is set at 1,870 UZS per USD. Source: Field surveys. 72 Annex I Table. 6: Grapes in Fergana Unit Quantity Price (sum) Total (sum) Investment costs Saplings (planting 4 x 2 meters) number 1,250.00 2,000.00 2,500,000.00 Land preparation: ploughing, chiseling, harrowing, drilling holes for saplings etc (fuel) liter 330.00 1,650.00 544,500.00 Land preparation (machinery hire) sum 1.00 300,000.00 300,000.00 Planting saplings (two persons x 125 saplings/day) person/day 20.00 15,000.00 300,000.00 Drip irrigation (cost + installation at 3000 USD/ha: pump, pipes, fittings, filter) unit 1.00 5,610,000.00 5,610,000.00 Water supply pipes for drip irrigation meter 294.00 7,000.00 2,058,000.00 Poles (25 rows, 10 poles per row at 10 meter distance between poles: 25х10=250) pieces 250.00 12,000.00 3,000,000.00 Wire (saplings are tied to the wire as they grow and bear fruit) kg 445.00 2,776.00 1,235,320.00 Wire to protect the perimeter of orchard meter 444.00 1,333.00 591,852.00 Mounting poles and wire (two persons mounting 25 poles per day + wire) person/day 20.00 20,000.00 400,000.00 Subtotal investment costs 16,539,672.00 Operational costs Operation and maintenance of drip irrigation system (% of investment cost), including % 10.00 300,000.00 30,000.00 electricity Soil mellowing, application of chemicals and fertilizer (fuel) liter 40.00 1,650.00 66,000.00 Soil mellowing, application of chemicals and fertilizer (machinery hire) lump sum 1.00 280,000.00 280,000.00 Fertilizer (N) kg 200.00 500.00 100,000.00 Fertilizer (P) kg 100.00 600.00 60,000.00 Fertilizer (K) kg 50.00 1,000.00 50,000.00 Organic fertilizer ton 40.00 15,000.00 600,000.00 Chemicals lump sum 1.00 200,000.00 200,000.00 Irrigation ha 1.00 32,000.00 32,000.00 Electricity Kwt/hour 0.00 0.00 0.00 Labor (2 persons х 7 months) person/month 14.00 160,000.00 2,240,000.00 Taxes (all taxes except for revenue tax which is included separately) sum 1.00 847,600.00 847,600.00 Other expenses (admin and overhead costs etc) sum 0.00 0.00 0.00 Subtotal operational costs 4,505,600.00 Price sum/ton 1,500,000 Net Present Value of Benefits (NPV) sum 68,115,023 Net Present Value of Production Costs (NPV) sum 47,529,693 Benefit/Cost Ratio 1.43 IRR 20% Net Present Value of Net Benefits (NPV) sum 20,585,330.37 Note: Projected yields are 15 tons at full maturity. Yield take the following profile: trees starts bearing fruit in year 4, yield in year 4-5 at 25% of projected yield; year 6-7 at 50%; and year 8-15 at 100%. Exchange rate is set at 1,870 UZS per USD Source: Field surveys. 73 Annex I Table. 7: Cherries in Fergana Unit Quantity Price (sum) Total (sum) Investment costs Saplings (planting 4 x 5 meters) number 500.00 2,500.00 1,250,000.00 Land preparation: ploughing, chiseling, harrowing, drilling holes for saplings etc (fuel) liter 330.00 1,650.00 544,500.00 Land preparation (machinery hire) sum 1.00 300,000.00 300,000.00 Drip irrigation (cost + installation at 3000 USD/ha: pump, pipes, fittings, filter) unit 1.00 5,610,000.00 5,610,000.00 Water supply pipes for drip irrigation meter 294.00 7,000.00 2,058,000.00 Planting saplings (two persons x 100 saplings/day) person/day 10.00 15,000.00 150,000.00 Subtotal investment costs 9,912,500.00 Operational costs Operation and maintenance of drip irrigation system (% of investment cost), including % 10.00 5,610,000.00 561,000.00 electricity Soil mellowing, application of chemicals and fertilizer (fuel) liter 40.00 1,650.00 66,000.00 Soil mellowing, application of chemicals and fertilizer (machinery hire) lump sum 1.00 280,000.00 280,000.00 Fertilizer (N) kg 200.00 500.00 100,000.00 Fertilizer (P) kg 100.00 600.00 60,000.00 Fertilizer (K) kg 50.00 1,000.00 50,000.00 Organic fertilizer ton 40.00 15,000.00 600,000.00 Chemicals lump sum 1.00 200,000.00 200,000.00 Irrigation ha 1.00 32,000.00 32,000.00 Electricity Kwt/hour 0.00 0.00 0.00 Labor (2 persons х 7 months) person/month 14.00 160,000.00 2,240,000.00 Taxes (all taxes except for revenue tax which is included separately) sum 1.00 847,600.00 847,600.00 Other expenses (admin and overhead costs etc) sum 0.00 0.00 0.00 Subtotal operational costs 5,036,600.00 Price sum/ton 5,000,000 Total revenue sum 0 0 Net Present Value of Benefits (NPV) sum 68,450,667 Net Present Value of Production Costs (NPV) 45,240,891 Benefit/Cost Ratio 1.51 IRR 19% Net Present Value of Net Benefits (NPV) 23,209,775.74 Note: projected yield is 10 tons at full maturity in year 12. Trees start bearing fruit at 8 years. Yields increase in the following way: 8-9 year, 25% of projected yield; 10-11 year, 50% of projected yield; 12-15 year: 10 tons. Exchange rate is set at 1,870 UZS per USD. Source: Field surveys. 74 Annex I Table. 8: Tomatoes in Samarkand, private and dehkan farms Private farms Dehkan farms Unit Quantity Price (sum) Total (sum) Quantity Price (sum) Total (sum) Acreage ha 1.00 1.00 Total revenue (1 ha) ton 30.50 222,000.00 6,771,000.00 32.00 250,000.00 8,000,000.00 Operational expenses Seed kg 0.50 180,000.00 90,000.00 0.50 180,000.00 90,000.00 Fuel liter 443.00 1,650.00 730,950.00 200.00 1,650.00 330,000.00 Machinery hire lump sum 1.00 304,920.00 304,920.00 1.00 150,000.00 150,000.00 Fertilizer (N) kg 176.00 886.00 155,936.00 176.00 886.00 155,936.00 Fertilizer (P) kg 117.00 1,430.00 167,310.00 117.00 1,430.00 167,310.00 Fertilizer (K) kg 64.00 750.00 48,000.00 64.00 750.00 48,000.00 Organic fertilizer ton 0.00 0.00 0.00 20.00 15,000.00 300,000.00 Chemicals lump sum 1.00 56,200.00 56,200.00 1.00 56,200.00 56,200.00 Irrigation sum/ha 1.00 16,500.00 16,500.00 1.00 16,500.00 16,500.00 Electricity Kwt/hour 1.00 58,500.00 58,500.00 1.00 0.00 0.00 Labor lump sum 1.00 2,973,612.00 2,973,612.00 1.00 2,000,000.00 2,000,000.00 Taxes lump sum 1.00 225,000.00 225,000.00 1.00 0.00 0.00 Other expenses lump sum 1 683565 683,565.00 1 0 0.00 Total operational expenses 5,510,493.00 3,313,946.00 Gross Margin (sum/ha) 1,260,507.00 4,686,054.00 Gross Margin (USD/ha) 674.07 2505.91 Note: Exchange rate is set at 1,870 UZS per USD. Source: Field surveys. 75 Annex I Table. 9: Onions in Samarkand, private and dehkan farms Private farms Dehkan farms Unit Quantity Price (sum) Total (sum) Quantity Price (sum) Total (sum) Acreage ha 1.00 1.00 Total revenue (1 ha) ton 20.00 370,000.00 7,400,000.00 22.00 370,000.00 8,140,000.00 Operational expenses Seed kg 16.00 180,000.00 2,880,000.00 16.00 180,000.00 2,880,000.00 Fuel liter 214.80 1,650.00 354,420.00 120.00 1,650.00 198,000.00 Machinery hire lump sum 1.00 259,182.00 259,182.00 1.00 130,000.00 130,000.00 Fertilizer (N) kg 176.00 886.00 155,936.00 176.00 886.00 155,936.00 Fertilizer (P) kg 117.00 1,430.00 167,310.00 117.00 1,430.00 167,310.00 Fertilizer (K) kg 64.00 750.00 48,000.00 64.00 750.00 48,000.00 Organic fertilizer ton 0.00 0.00 0.00 20.00 15,000.00 300,000.00 Chemicals lump sum 1.00 56,200.00 56,200.00 1.00 56,200.00 56,200.00 Irrigation sum/ha 1.00 16,500.00 16,500.00 1.00 16,500.00 16,500.00 Electricity Kwt/hour 1.00 58,500.00 58,500.00 1.00 0.00 0.00 Labor lump sum 1.00 1,686,531.00 1,686,531.00 1.00 1,100,000.00 1,100,000.00 Taxes lump sum 1.00 225,000.00 225,000.00 1.00 0.00 0.00 Other expenses lump sum 1 341257 341,257.00 1 0 0.00 Total operational expenses 6,248,836.00 5,051,946.00 Gross Margin (sum/ha) 1,151,164.00 3,088,054.00 Gross Margin (USD/ha) 615.60 1651.37 Note: Exchange rate is set at 1,870 UZS per USD. Source: Field surveys. 76 Annex I Table. 10: Cabbage in Samarkand, private and dehkan farms Private farms Dehkan farms Unit Quantity Price (sum) Total (sum) Quantity Price (sum) Total (sum) Acreage ha 1.00 1.00 Total revenue (1 ha) ton 22.00 310,000.00 6,820,000.00 22.00 310,000.00 6,820,000.00 Operational expenses Seed kg 2.00 220,000.00 440,000.00 2.00 220,000.00 440,000.00 Fuel liter 372.00 1,650.00 613,800.00 190.00 1,650.00 313,500.00 Machinery hire lump sum 1.00 156,272.00 156,272.00 1.00 80,000.00 80,000.00 Fertilizer (N) kg 176.00 886.00 155,936.00 176.00 886.00 155,936.00 Fertilizer (P) kg 117.00 1,430.00 167,310.00 117.00 1,430.00 167,310.00 Fertilizer (K) kg 64.00 750.00 48,000.00 64.00 750.00 48,000.00 Organic fertilizer ton 0.00 0.00 0.00 0.00 0.00 0.00 Chemicals lump sum 1.00 56,200.00 56,200.00 1.00 56,200.00 56,200.00 Irrigation sum/ha 1.00 16,500.00 16,500.00 1.00 16,500.00 16,500.00 Electricity Kwt/hour 1.00 58,500.00 58,500.00 1.00 0.00 0.00 Labor lump sum 1.00 2,734,715.00 2,734,715.00 1.00 1,800,000.00 1,800,000.00 Taxes lump sum 1.00 225,000.00 225,000.00 1.00 0.00 0.00 Other expenses lump sum 1 944971 944,971.00 1 0 0.00 Total operational expenses 5,617,204.00 3,077,446.00 Gross Margin (sum/ha) 1,202,796.00 3,742,554.00 Gross Margin (USD/ha) 643.21 2001.37 Note: Exchange rate is set at 1,870 UZS per USD. Source: Field surveys. 77 Annex I Table. 11: Wheat in Samarkand, private and dehkan farms Private farms Dehkan farms Unit Quantity Price (sum) Total (sum) Quantity Price (sum) Total (sum) Acreage ha 1.00 1.00 Total revenue (1 ha) ton 5.20 325,000.00 1,690,000.00 5.50 350,000.00 1,925,000.00 Operational expenses Seed kg 230.00 825.00 189,750.00 300.00 700.00 210,000.00 Fuel liter 132.30 1,451.00 191,967.30 87.00 1,650.00 143,550.00 Machinery hire lump sum 1.00 333,825.00 333,825.00 1.00 125,000.00 125,000.00 Fertilizer (N) kg 170.00 886.00 150,620.00 170.00 886.00 150,620.00 Fertilizer (P) kg 60.00 1,341.00 80,460.00 60.00 1,341.00 80,460.00 Fertilizer (K) kg 25.00 950.00 23,750.00 25.00 950.00 23,750.00 Organic fertilizer ton 0.00 0.00 0.00 10.00 15,000.00 150,000.00 Chemicals lump sum 1.00 36,500.00 36,500.00 1.00 36,500.00 36,500.00 Irrigation sum/ha 1.00 13,250.00 13,250.00 1.00 13,250.00 13,250.00 Electricity Kwt/hour 1.00 14,250.00 14,250.00 1.00 0.00 0.00 Labor lump sum 1.00 233,979.00 233,979.00 1.00 120,000.00 120,000.00 Taxes lump sum 1.00 155,000.00 155,000.00 1.00 0.00 0.00 Other expenses lump sum 1 55250 55,250.00 1 0 0.00 Total operational expenses 1,478,601.30 1,053,130.00 Gross Margin (sum/ha) 211,398.70 871,870.00 Gross Margin (USD/ha) 113.05 466.24 Note: Exchange rate is set at 1,870 UZS per USD. Source: Field surveys. 78 Annex I Table. 12: Apples in Samarkand, private farms Unit Quantity Price (sum) Total (sum) Investment costs Saplings (planting 4 x 0.8 meters) pieces 3,100.00 8,024.00 24,874,400.00 Land preparation: ploughing, chiseling, harrowing, drilling holes for saplings etc (fuel) liter 330.00 1,650.00 544,500.00 Land preparation (machinery hire) sum 1.00 300,000.00 300,000.00 Poles (25 rows, 10 poles per row at 10 meter distance between poles: 25х10=250) pieces 250.00 12,000.00 3,000,000.00 Wire (saplings are tied to the wire as they grow and bear fruit) kg 445.00 2,776.00 1,235,320.00 Drip irrigation (cost + installation at 2400 USD/ha: pump, pipes, fittings, filter) unit 1.00 4,488,000.00 4,488,000.00 Water supply pipes for drip irrigation meter 294.00 7,000.00 2,058,000.00 Wire to protect the perimeter of orchard meter 400.00 1,333.00 533,200.00 Labor lump sum 945,000.00 Storage facility (cost + installation, capacity 30 tons at 700 USD/ton) unit 1.00 39,270,000.00 39,270,000.00 Subtotal investment costs 77,248,420.00 Operational costs Operation and maintenance of drip irrigation system (% of investment cost), including % 10.00 4,488,000.00 448,800.00 electricity Operation and maintenance of storage facility (% of investment cost), including electricity % 10.00 39,270,000.00 3,927,000.00 Soil mellowing, application of chemicals and fertilizer (fuel) liter 40.00 1,650.00 66,000.00 Soil mellowing, application of chemicals and fertilizer (machinery hire) lump sum 1.00 280,000.00 280,000.00 Fertilizer (N) kg 200.00 500.00 100,000.00 Fertilizer (P) kg 100.00 600.00 60,000.00 Fertilizer (K) kg 50.00 1,000.00 50,000.00 Organic fertilizer ton 40.00 15,000.00 600,000.00 Chemicals lump sum 1.00 200,000.00 200,000.00 Irrigation ha 1.00 32,000.00 32,000.00 Electricity Kwt/hour 0.00 0.00 0.00 Labor (3 persons х 7 months) person/month 21.00 160,000.00 3,360,000.00 Taxes (all taxes except for revenue tax which is included separately) sum 1.00 1,256,400.00 1,256,400.00 Other expenses (admin and overhead costs etc) sum 0.00 0.00 0.00 Subtotal operational costs 10,380,200.00 Net Present Value of Benefits (NPV) sum 313,860,321 Net Present Value of Production Costs (NPV) sum 146,839,872 Benefit/Cost Ratio 2.14 IRR 34% Net Present Value of Net Benefits (NPV) 167,020,449.59 Note: projected yield is 50 tons at full maturity in year 6. Trees start yielding in two years and increase in the following way: 2-3 year, 25 percent of projected yield; 4-5 year, 50 percent of projected yield; 6-15 year: 50 tons. Exchange rate is set at 1,870 UZS per USD. Source: Field surveys. 79 Annex I Table. 13: Cabbage in Tashkent, private and public farms Private farms Dehkan farms Unit Quantity Price (sum) Total (sum) Quantity Price (sum) Total (sum) Acreage ha 1.00 1.00 Total revenue (1 ha) ton 35.00 180,000.00 6,300,000.00 35.00 180,000.00 6,300,000.00 Operational expenses Seedlings pieces 35,000.00 25.00 875,000.00 35,000.00 25.00 875,000.00 Fuel liter 87.00 1,650.00 143,550.00 87.00 1,650.00 143,550.00 Machinery hire lump sum 1.00 95,000.00 95,000.00 1.00 95,000.00 95,000.00 Fertilizer (N) kg 500.00 350.00 175,000.00 500.00 350.00 175,000.00 Fertilizer (P) kg 200.00 500.00 100,000.00 200.00 500.00 100,000.00 Fertilizer (K) kg 20.00 700.00 14,000.00 20.00 700.00 14,000.00 Organic fertilizer ton 5.00 20,000.00 100,000.00 10.00 20,000.00 200,000.00 Chemicals lump sum 1.00 64,000.00 64,000.00 1.00 50,000.00 50,000.00 Irrigation sum/ha 1.00 32,000.00 32,000.00 1.00 32,000.00 32,000.00 Electricity Kwt/hour 0.00 0.00 0.00 0.00 0.00 0.00 Labor (5 persons x 3 months) person/month 15.00 160,000.00 2,400,000.00 15.00 100,000.00 1,500,000.00 Taxes lump sum 1.00 250,000.00 250,000.00 1.00 0.00 0.00 Other expenses lump sum 1 849710 849,710.00 1 0 0.00 Total operational expenses 5,098,260.00 3,184,550.00 Gross Margin (sum/ha) 1,201,740.00 3,115,450.00 Gross Margin (USD/ha) 642.64 1666.02 Note: Exchange rate is set at 1,870 UZS per USD. Source: Field surveys. 80 Annex I Table. 14: Wheat in Tashkent, private and public farms Private farms Dehkan farms Unit Quantity Price (sum) Total (sum) Quantity Price (sum) Total (sum) Acreage ha 1.00 1.00 Total revenue (1 ha) ton 6.00 280,000.00 1,680,000.00 6.00 300,000.00 1,800,000.00 Operational expenses Seed kg 300.00 500.00 150,000.00 350.00 600.00 210,000.00 Fuel liter 158.00 1,650.00 260,700.00 87.00 1,650.00 143,550.00 Machinery hire lump sum 1.00 315,000.00 315,000.00 1.00 125,000.00 125,000.00 Fertilizer (N) kg 500.00 350.00 175,000.00 500.00 350.00 175,000.00 Fertilizer (P) kg 200.00 500.00 100,000.00 200.00 500.00 100,000.00 Fertilizer (K) kg 20.00 700.00 14,000.00 20.00 700.00 14,000.00 Organic fertilizer ton 5.00 20,000.00 100,000.00 10.00 15,000.00 150,000.00 Chemicals lump sum 1.00 42,500.00 42,500.00 1.00 42,500.00 42,500.00 Irrigation sum/ha 1.00 16,000.00 16,000.00 1.00 13,250.00 13,250.00 Electricity Kwt/hour 0.00 0.00 0.00 1.00 0.00 0.00 Labor person/month 1.00 160,000.00 160,000.00 1.00 120,000.00 120,000.00 Taxes lump sum 1.00 147,200.00 147,200.00 1.00 0.00 0.00 Other expenses lump sum 0 0 0.00 1 0 0.00 Total operational expenses 1,480,400.00 1,093,300.00 Gross Margin (sum/ha) 199,600.00 706,700.00 Gross Margin (USD/ha) 106.74 377.91 Note: Private farms must sell at least half of their wheat to Government buyers. This table assumes 60 percent is sold to government at 260,000 UZS and 40 percent at going market price of 300,000 UZS. Exchange rate is set at 1,870 UZS per USD. Source: Field surveys. 81 Annex I Table. 15: Apples in Tashkent, private farms Unit Quantity Price (sum) Total (sum) Investment costs 21,600,000.0 Saplings (planting 4 x 0.9 meters) pieces 2,700.00 8,000.00 0 Land preparation: ploughing, chiseling, harrowing, drilling holes liter 330.00 1,650.00 544,500.00 for saplings etc (fuel) Land preparation (machinery hire) sum 1.00 300,000.00 300,000.00 Planting saplings (two persons x 135 saplings/day) person/day 40.00 15,000.00 600,000.00 Poles (25 rows, 10 poles per row at 10 meter distance between pieces 250.00 13,000.00 3,250,000.00 poles: 25х10=250) Wire (saplings are tied to the wire as they grow and bear fruit) kg 500.00 3,000.00 1,500,000.00 Wire to protect the perimeter of orchard meter 400.00 1,333.00 533,200.00 Mounting poles and wire (two persons mounting 25 poles per day person/day 20.00 20,000.00 400,000.00 + wire) Drip irrigation (cost + installation at 3000 USD/ha: pump, pipes, unit 1.00 5,610,000.00 5,610,000.00 fittings, filter) Storage facility (cost + installation, capacity 30 tons at 700 39,270,000.0 39,270,000.0 unit 1.00 USD/ton) 0 0 73,607,700.0 Subtotal investment costs 0 Operational costs Operation and maintenance of drip irrigation system (% of % 10.00 5,610,000.00 561,000.00 investment cost), including electricity Operation and maintenance of storage facility (% of investment 39,270,000.0 % 10.00 3,927,000.00 cost), including electricity 0 Soil mellowing, application of chemicals and fertilizer (fuel) liter 40.00 1,650.00 66,000.00 Soil mellowing, application of chemicals and fertilizer (machinery lump sum 1.00 280,000.00 280,000.00 hire) Fertilizer (N) kg 200.00 500.00 100,000.00 Fertilizer (P) kg 100.00 600.00 60,000.00 Fertilizer (K) kg 50.00 1,000.00 50,000.00 Organic fertilizer ton 40.00 15,000.00 600,000.00 Chemicals lump sum 1.00 200,000.00 200,000.00 Irrigation ha 1.00 32,000.00 32,000.00 Electricity Kwt/hour 0.00 0.00 0.00 person/mont Labor (3 persons х 7 months) 21.00 160,000.00 3,360,000.00 h Taxes (all taxes except for revenue tax which is included sum 1.00 1,256,400.00 1,256,400.00 separately) Other expenses (admin and overhead costs etc) sum 0.00 0.00 0.00 10,492,400.0 Subtotal operational costs 0 Price sum/ton 1,500,000 Total revenue sum 18,750,000 Net Present Value of Benefits (NPV) sum 313,860,321 Net Present Value of Production Costs (NPV) sum 144,353,408 Benefit/Cost Ratio 2.17 IRR 35% 169,506,913.4 Net Present Value of Net Benefits (NPV) 5 Note: projected yield is 50 tons at full maturity in year 6. Trees start yielding in two years and increase in the following way: 2-3 year, 25 percent of projected yield; 4-5 year, 50 percent of projected yield; 6-15 year: 50 tons. Exchange rate is set at 1,870 UZS per USD. Source: Field surveys. 82 Annex II: Chilean Experience in the Fresh Produce Sector – Relevant Lessons for Uzbekistan29 A2.1 Introduction The fresh produce business of Uzbekistan today and Chile 40-50 years ago have a lot in common despite being in different hemispheres. However, the major difference between these countries lies beyond technologies and logistics – it is found in the business climate and private initiative. In Chile, the Government assures good conditions for business and makes sure that there is a significant degree of competition. Government makes sure there is enough transparent information about the market and global fresh produce business opportunities, but allows producers and other market participants decide how to respond. In Chile, some farmers come from other countries, bringing their experience and technologies along with them. Many farmers in Chile are US orchard growers, who have similar farms in the US, but spend their winters in Chile harvesting fruit and summers in the US doing the same thing. There are many positive lessons for Uzbekistan from the vast experience of Chile in all elements of the value chain: production, storage, post-harvest handling, processing, trade and marketing. Chile is probably the best global example for Uzbekistan of how a fresh produce industry could be developed very quickly to become a very important contributor to the economy. In early 1960s, very few people had heard of fruit or vegetables from Chile, which today is the top exporter in the Southern Hemisphere, accounting for nearly 60 percent of all fresh produce exports (Table A2.1). Annex II Table 1: Fresh fruit exports from South America 1961 1964 1970 1980 1990 1998 2001 2003 2007 Chile 18.45 35.23 45.43 266.83 11,016.79 1,616.95 1,781.41 2,070.47 3,866.86 Southern Hemisphere 468.92 601.57 704.46 1,062.59 2,263.72 3,465.54 3,569.11 4,222.97 6,517.56 Share, Chile 3.90 5.90 6.40 12.10 44.90 46.70 49.00 49.90 59.30 Source: FAO Stat 2007. Exports in thousand tons of temperate fruit; grapes, apples, kiwis, avocados, plums, peaches, pears, cherries and blueberries In global terms, the Chilean fresh fruit exporting industry is an important exporter of table grapes blueberries and plums, being ranked number 1 in the world (Annex II Figure 1). That’s where similarities with Uzbekistan are noted; while blueberries are almost unknown in Uzbekistan (they are also very new to Chile), Uzbekistan’s strategic export categories include table grapes and plums. Chile is also the number 3 world exporter of fresh sweet cherries, which are an also important export item for Uzbekistan. 29 This section relies heavily on Yarmak, Andriy. 2012. Chile vs. Uzbekistan: Chilean experience in the fresh produce sector— relevant lessons for Uzbekistan (unpublished). 83 In many ways, Uzbekistan today has a much better starting position than Chile did in 1960s when it started developing fresh produce business. Uzbekistan already has developed markets and relatively high production. Moreover, unlike Chile, Uzbekistan has a very large domestic market. Similarities between Chile and Uzbekistan include long distance to clients (although Uzbekistan is much closer to main consumption centers in Russia than Chile is to its US buyers), high dependence on exports and possibilities to supply off-season produce. Challenges are also quite similar; how to ship produce to a long distance in a good shape and how to compete on saturated markets. Chile’s fresh fruit industry is made up of 7,800 growers of fresh fruit, which only includes growers that have more than 5 hectares. There are also 835 exporting companies, which distribute their products to more than 1.300 fruit importers across the globe (ASOEX 2010). The fruit industry in Chile currently exports more than 75 different species of Chilean fruit to 100 different countries across the world (ASOEX 2010). As illustrated in Annex II Figure 2, Chile exported 2,466,824 tons of fresh fruit around the world during the 2009/2010 season. Fresh fruit and vegetable exports have evolved from USD 168 million in 1980 to USD 2,600 million in 2008, which represents an average annual rate of growth equivalent to 10.6 percent (ProChile 2009). 84 A2.2 Chilean institutions that support horticultural exports Support for horticulture exports was part of a larger policy of supporting trade. The country was an early active player in trade liberalization efforts, which allowed it to obtain favorable conditions for their exports. The country has also actively negotiated and implemented quality and safety standards with its various clients. While Chilean suppliers initially focused on the US market, they understood the importance of trade diversification as a way to protect themselves from risks stemming from one market. Chile’s early reliance on the US is similar to the case of Uzbekistan today, which mainly supplies produce to Russia. While the USA and Canada remain the main destination for Chilean fresh produce, accounting for about 34 percent of all exports, the share of European buyers is substantive at 27 percent. Moreover, in the recent years China was the fastest growing market for Chilean suppliers and the total share of Asian buyers has reached 10 percent (Annex II Figure 3). 85 Besides geographic diversification, Chile has also diversified its produce variety and now exports around 75 different types of fruit and vegetables. Therefore, Chile is diversified against risk associated with products as well as destination markets. Product diversification helps Chile in other ways too. When Chilean exporters negotiate exports of one product, they almost always manage to include other products in the assortment supplied. The Chilean industry closely follows global demand prospects, trying to determine products with the best potential. For example, when global demand for cultivated blueberry started picking up, Chilean producers, who did not grow the crop, quickly adopted its production and PHH technologies and developed this business rapidly. 30 Today Chile is the top global exporter of fresh blueberries. These achievements of Chilean fresh produce are a result of a productive cooperation between public and private sector, where public sector serves as a facilitator and mediator, but does not intervene in the market. They describe their reasons for success in the format of the following chart (Annex II Figure 4). 30 PHH – Post Harvest Handling (usually includes best picking practices, pre-cooling, sorting, grading, packing and logistics all the way to retail) 86 The core message is that the government assures full freedom of entrepreneurship and creates favourable conditions for all market participants to freely compete on the market. However, the focus of competition for the Chilean fresh produce industry is largely external; that is, the industry view suppliers from other countries as their main competitors and not their Chilean colleagues. This is a fundamental factor allowing for successful cooperation and functioning on numerous industry associations. The following public sector organizations are involved in the support of Chilean fresh produce sector (Annex II Figure 5). The first two agencies set policy and standards. The next three are agencies that provide support for private sector activities related to firm innovation and marketing. 87 Source: Yarmak, Andriy. 2012. Chile vs. Uzbekistan: Chilean experience in the fresh produce sector—relevant lessons for Uzbekistan. As the chart shows, the key aspects of the state’s support include: i) transparent and efficient policy development for the industry; ii) produce safety assurance, as it impacts the reputation of the whole industry; iii) support to innovations as well as small and medium enterprise support; iv) supporting private initiatives in export promotion areas; and, v) liberalization of trade policies and negotiating best possible conditions with current and potential trade partners of Chile. There are several private industry-related associations and organizations, which represent various segments of the fresh produce sector and which cooperate closely with the government entities to ensure efficient use of public and private funds. The following private organizations are amongst the most important for the fresh produce industry (Annex II Figure 6). 88 As the chart makes clear, these private organizations largely correspond to the focus of the public organizations. Since they represent specific segments of the industry, they communicate the needs of growers, traders and other industry players to the government to ensure efficient and effective use of public funds. In most support programs, the Chilean government tries to match private funding with its money or various technical support efforts. Export programs are usually managed via ASOEX – association of Chilean exporters, which includes various specialized organizations, such as Chilean Fruit Exporters Association. This organization has a budget formed from membership fees and develops an annual promotion plan. Based on this plan, the government matches up to 50 percent of its promotional budget via its state support agencies. We will describe these efforts in greater details in a separate section below. Transparency for the industry is a key factor. As a result, Chile is one of the very few world countries, which openly publishes trade statistics broken down by companies-exporters and by types and even varieties of products. This serves as a very powerful promotional tool as anyone can contact the company-exporter directly and buyers know how much experience each company has in exports of certain products. Transparency of market information ensures the quality of industry decisions. There are private and cooperative market information systems in the country, which offer a variety of publications supporting these decisions. These companies also offer technical and technological information. The industry also holds a large number of information sharing events in the country and internationally. 89 Industry organizations are also very active internationally. Chilean Fruit Exporters Association is a member of numerous international organizations, as listed in the chart below (Annex II Figure 7). In Chile, a robust R&D program is in place to support the supply of safe and high quality fresh produce to clients located around the globe. Private and public sector cooperate closely in this area, although private finding is growing much faster than public. Significant R&D efforts are also noted on the production level, where Chile tries to develop and adopt new varieties and growing techniques, which would allow long-term transportation, as well as excellent taste characteristics. New technologies and market challenges require constant upgrade of workers’ skills. Therefore, fresh produce industry pays a lot of attention to capacity development. AGROCAP organization discovers and coordinates training needs for the industry and provides training in various aspects of production and PHH for permanent and even temporary workers. ChileGAP is one of the most commonly accepted voluntary quality assurance programs worldwide (Annex II Figure.8). Most of its requirements are stricter than those of the standard GlobalGAP certification, which makes it easier for Chilean produce to enter demanding markets and improves efficiency of production and trade. The ChileGAP industry’s sustainability model looks as follows. 90 A2.3 Promotional Programs The already-mentioned export promotion agencies and organizations are very diverse, and Chile probably spends more per-capita funds for export promotion than any other fresh produce exporting country in the world. Chile’s target groups of fresh produce export promotion efforts include: i) fresh fruit importers; ii) retailers; iii) wholesalers; iv) distributors; v) foodservice companies; and, vi) consumers (secondary). By targeting all key groups, the industry creates demand for their produce on all elements of the marketing chain, promoting their product to consumers to make sure that they come to the store looking for Chilean produce, and letting retailers know how to buy from local importers or directly from Chilean suppliers. The industry has also recognized a need for a strong unified brand, which resulted in the launch of a new image uniting all previously specialized promotional programs for different products. These programs have the same easily recognizable style, supporting each other (Annex II Figure 9). 91 Chilean fresh produce industry pursues a very active consumer advertising program in the US and Canada. It always tailors these programs to changing consumption patterns and preferences. Therefore, awareness and the image of the Chilean produce in the US are very high. In the recent years attention of Chilean suppliers has increasingly been switching towards alternative markets. Besides traditional major markets such as the UK, Germany and Holland, companies from Chile have been actively exploring export opportunities in Russia, Ukraine and Central Asia. Their efforts included participation in trade fairs, trade missions, on-line promotion via local web-portals and some limited POS activities gradually growing into more complex consumer-targeted advertising. A2.4 Crops where Chilean experience could be relevant for Uzbekistan Chile and Uzbekistan are very different today, but Chile, when it started developing its fresh produce business, had many similarities with Uzbekistan today. Similarities include relatively inexpensive labor, early season opportunities, the potential to grow crops that require warm climate and a large market to the north (the US for Chile and Russia for Uzbekistan). Climatic conditions in the two countries are different as most areas of Uzbekistan experience significant frosts in the winter while the fruit and vegetable production areas of Chile rarely register freezing temperatures. This limits crop variety and approaches to production in Uzbekistan. Nevertheless, there are some key crops in both countries, which are common for both countries. These include: table grapes, sweet cherries, apples, plums, peaches and nectarines. In the recent years, Chilean production of walnuts, almond, hazelnuts and pomegranates have been expanding, crops which have also received new attention in Uzbekistan. Moreover, although they are not grown in significant quantities, blueberries and raspberries, important crops in Chile, could be grown in some regions of Uzbekistan. 92