rapid assessment of value chain opportunities in armenia - RCI

37 Pages·2012·0.58 MB·English

by  Nick Segura

R APID ASSESSMENT OF VALUE CHAIN

OPPORTUNITIES IN ARMENIA

DISCLAIMER
The authors’ views expressed in this publication do not necessarily reflect the views of the United States
Agency for International Development or the United States Government.
Table of Contents
Acronyms ....................................................................................................................................... i

Background ................................................................................................................................... 1

Value Chains and Sectors ............................................................................................................ 1

I.
  Agriculture Sector Overview .............................................................................................. 1

A.
  Food Processors ............................................................................................................ 3

B.
  Cut Flowers .................................................................................................................... 6

C.
  Dairy and Cheese ........................................................................................................... 8

D.
  Fish and Fish Processing ............................................................................................. 10

E.
  Dried Foods .................................................................................................................. 11

F.
  Wine and Brandy .......................................................................................................... 12

G.
  Textiles and Apparel ..................................................................................................... 14

II.
  Sector Summaries ........................................................................................................... 15

A.
  Clean technology .......................................................................................................... 15

B.
  Meat and meat processing ........................................................................................... 15

Annex A: Summary of Primary Constraints ............................................................................... 17

A.
  Weak Business Sophistication ..................................................................................... 17

B.
  Understanding of end market ....................................................................................... 17

C.
  Quality, Grades and Standards .................................................................................... 18

Annex B: Sources ....................................................................................................................... 19

Annex C: Persons Interviewed ................................................................................................... 22

Annex E: Summary of Associations ............................................................................................ 24

Annex F: Related Activities, Republic of Armenia and other Donors .......................................... 27

Small and Medium Entrepreneurship Development National Committee of Armenia (SME
DNC) ....................................................................................................................................... 27

National Competitiveness Foundation of Armenia (NCFA) ..................................................... 27

The Armenian Development Agency (ADA) ............................................................................ 28

European Bank for Reconstruction and Development (EBRD) ............................................... 29

EBRD Business Advisory Services (BAS) Program ................................................................ 29

United Nations Industrial Development Organization (UNIDO) .............................................. 30

Center for Agribusiness and Rural Development (CARD), US. Department of Agriculture
(USDA) .................................................................................................................................... 30

Millennium Challenge Account – ACDI/VOCA Water to Market ............................................. 31

ProSME (GTZ) ........................................................................................................................ 31

World Bank .............................................................................................................................. 31

KfW ......................................................................................................................................... 32

European Commission (EC) ................................................................................................... 33
Acronyms
ADA Armenia Development Agency
ASME Armenian Small and Medium Enterprise project
BSP Business Services Provider
CAPS Competitive Armenian Private Sector project
CARD Center for Agribusiness and Rural Development
CEEP Center for Evaluation and Education Policy
CIS Commonwealth of Independent States
COP Chief of Party
EBRD BAS European Bank for Reconstruction and Development
Business Advisory Services program
FAA Federation of Agricultural Associations
GDP Gross Domestic Product
GCR Global Competitiveness Report
HACCP Hazard Analysis and Critical Control Points
IFAD International Fund for Agricultural Development
ISO International Standards Organization
MAP Marketing Assistance Program
MCA Millennium Challenge Account
MEASURE Enterprise Development Diagnostic
RA Republic of Armenia
SME Small and Medium Enterprise
SME DNC Small and Medium Entrepreneurship Development
National Center
SPS Sanitary and Phyto-Sanitary
UMCOR United Methodist Committee on Relief
UPOV Union for the Protection of New Varieties of Plants
USAID U.S. Agency for International Development
USDA U.S. Department of Agriculture
USSR Union of Soviet Socialist Republics

i
Background

Section one provides an overview of the Agriculture sector in Armenia, highlighting constraints
that affect related subsectors and summarizes seven value chains. Section two provides short
summaries of two additional sectors. Annexes provide additional information including a
summary of constraints, outline other donor activities and provide an overview of industry
associations.
Value Chains and Sectors
Objective: Conduct a rapid assessment of value chain opportunities in Armenia for potential
support by the United States’ Agency for International Development (USAID). This assessment
also identifies specific strengths of associations and the stakeholders that were interviewed.

The Armenia business sectors are dominated by vertically integrated businesses and
fragmented weak value chains. The few value chains that exist link the marzes (or provinces) to
the markets based in Yerevan and are related to the food processing and tourism sectors. All
require in depth analysis to determine the structure, stakeholders, enabling environment
conditions and export demand.

Approach: This report begins with a general assessment of the agriculture sector, which
provides the background for many of the constraints outlined in the specific agriculture related
value chains. The value chains addressed are: food processing, fish and fish processing, dairy,
cut flowers, dried fruit, wine and brandy, and textiles. Brief sector summaries are provided for
meat and meat processing, and clean technology. Analysis of the tourism and Information
Technology (IT) sectors has not been included in this report because the current USAID
Competitiveness Project has already conducted extensive analyses of these sectors.

Information provided draws on secondary resources from existing and previous donor
assistance activities, and primary sources consisting of interviews with sector stakeholders,
donors, and Republic of Armenia (RA) agencies. Reports, sector assessments, market surveys
from the USAID Armenian Small and Medium Enterprise (ASME) project were key reference
documents, as was the 2004 Competitiveness Assessment. Interviews were conducted with
trade associations, individual businesses, RA agencies and programs, and other donor
activities.

Criteria reviewed: The general overview of each value chain includes estimates on percent of
Gross Domestic Product (GDP), percent of employment, percent of the domestic and export
market, number of companies, products and production capacity, primary stakeholders, and
constraints. A summary of primary constraints across value chains is provided at the end of this
assessment.
I. Agriculture Sector Overview
The contribution of agriculture to the Armenian GDP has been around 20 percent since 2005.
Current employment in agriculture represents 47 percent of the labor force.1 The agriculture

1 National Statistical Service of RA: Statistical Yearbook 2008. This includes dairy and meat subsectors.
1
sector reviewed by this assessment includes value chains for food processing, dairy, fish and
fish processing, dried fruit and cut flowers.

Armenia produces a wide variety of fruits and vegetables. Notable products are apricots,
peaches, pears, grapes, tomatoes, and potatoes. Officially there are 338,000 farming
households registered. However, ACDI/VOCA believes the actual number of functioning farms
is much lower – around 200,000. Of this 200,000, approximately 100,000 are subsistence
farmers. While this is a large number of registered land holders, farm sizes are small.
Privatization of land following independence resulted in the distribution of holdings that are too
small and spread out to allow for economies of scale for most agricultural products. The
average farm size is 1.4 hectares. Large farms with more than 10 hectares currently represent
only 6 percent of all farms.2 ACDI/VOCA estimates that there are approximately 20,000-30,000
farms with at least 3-5 hectares per farmer; farms of this size can be targeted to produce high-
value horticulture products.

Food and agricultural exports account for approximately 10 percent of all exports, with the
primary markets being Russia and the Commonwealth of Independent States (CIS)3 (meats,
dairy products, fresh vegetables, spirits), EU-15 countries (fish, canned fruits and vegetables,
spirits), and Georgia (all types of agri-food exports). Fresh food products, which include exports
of eggs, fruits, vegetables and fish, account for the majority of the value of total food and
agricultural exports from Armenia.4

Given the size and number of small holdings, the organization of the farm sector is relatively
weak. The farm cooperative movement is gaining momentum in Armenia, having received
support from the United States’ Department of Agriculture (USDA), USAID’s ASME and other
donor funded activities. The Federation of Agricultural Associations (FAA) was created in 2001
and has received support from multiple donors, including the ASME project, USDA and the
Millennium Challenge Account (MCA) – Armenia. The FAA currently has 20 member-
cooperatives and includes an estimated 1,500 household farms. Although there are more than
180 formally registered cooperatives, only a few of them meet the FAA requirements of
operating with a social component.5 This was specifically noted in the dairy sector, where
cooperatives function more like limited liability companies. The processor manager operates the
facilities with limited involvement from the cooperative due to lack of interest from members.6

Armenia has a growing greenhouse sector. According to a USAID ASME survey of the
greenhouse sector conducted in 2003, 819 greenhouses were identified covering 70 hectares of
territory. The majority of greenhouses are small, sole proprietors. Greenhouses producing
vegetables and flowers have increased their production and capacity. Fresh vegetables account
for 60 percent of greenhouse production with floriculture the remaining 40 percent.7 The
advantage of greenhouse production is a continuous growing season, and the potential
efficiencies in growing techniques. The Greenhouse Association has received assistance from

2 FAA interview, confirmed by ACDI/VOCA.
3 Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Ukraine, and Uzbekistan.
4 38th IFAP World Farmers’ Congress, 1st June, 2008, Warsaw, Poland, Food Safety Requirements and Required
Actions .Vardan Hambardzumyan, President, Federation Of Agricultural Associations Union Of Legal Entities (FAA
ULE) Armenia.
5 FAA requires that all member cooperatives include an active social component in their organizational structure.
[What is the “social component?”]
6 Interview with CARD director.
7 USAID/CAPS’ Assessment of Potential of the Armenian Greenhouse Cluster. January 2007.
2
the MCA, USDA, United Methodist Committee on Relief (UMCOR) and Dutch foreign assistance
activities.

The greenhouses face the same challenges as other producers in agriculture. Holdings are
small and fragmented. Primary products are tomatoes, cucumbers, and peppers, but do not
meet current domestic demand. Greenhouse production meets only 50 percent of the domestic
demand; the remaining demand is met through imports from Turkey and Iran.

The structure of Armenia’s farm sector is a major constraint. Interviews with USDA, MCA and
other actors in the agricultural sector expressed support for strengthening the farm cooperative
system. Farm cooperative systems help organize supply, establish standards and can reduce
cost through consolidating limited resources for agricultural inputs, such as fertilizers, and
leasing of farm equipment. The FAA is the largest and most active farmers’ organization and
has undertaken this role, with support from donors.

Armenians do not have a strong cultural affinity for cooperatives given the recent history of the
Soviet cooperative farm system. The introduction of a US-type cooperative system has been led
by the USDA, however, progress has been slow. Information and education on the benefits of a
farm cooperative system is lacking. Armenian farm extension services are weak, as are linkages
to tertiary agriculture-related university degrees and research. In addition, the legislative
framework is unsupportive; Armenia has no separate law on cooperatives and they are currently
covered by a few articles from the Civil Code of the Republic of Armenia.

There are multiple donor activities working in the agriculture sector. USDA is the lead donor
providing support for primary agriculture. The MCA Water-to-Market activity is providing support
for high-value added horticulture products and agro-processors. The MCA activity, being
implemented by ACDI/VOCA, is also currently supporting the development of three fresh fruit
and vegetable collection centers. These collection centers are being built in Yerevan, Ararat
Valley, Armavir, Voyats Dzor, and Parakar8 (next to the international airport).
A. Food Processors
Overview: The food processing sector has an historical significance in Armenia; during the
Soviet era, Armenia was a primary supplier for agro-processed goods for the entire Soviet
Union. However, after independence, the government redistributed land and shifted to a market-
based economy. As a result, many of the value chains that supported the USSR market
collapsed.

Food processing and linkages to agriculture represent one of the strongest, well-developed
value chains in the country, connecting primary agriculture to local retailers and, to a lesser
extent, export markets. There are an estimated 20 producers of canned products in Armenia.9
Sector-specific suppliers and cross cutting providers have an opportunity to link into this chain.
This chain is especially valuable given the high share of agriculture in the country’s GDP (about
20 percent prior to the current financial crisis), as well as a major share in total employment (47
percent for the last five years before the crisis).10 Although these proportions may still hold true,
the actual sales of food processors, retail stores, and consequently, agricultural producers, has
shrunk by an estimated 20 percent as a result of the financial crisis.11

8
 Feasibility study completed in 2008. Activity implementation delayed.
9 USAID ASME. Food Distribution Survey. 2006.
10 National Statistical Service of RA, Statistical Yearbook 2008.
11 Consultant’s best estimate based on interview with stakeholders.
3
Products and production capacity: Armenia produces a limited number of manufactured food
products – primarily tomato paste, sauces, teas and herbs, juice and juice concentrate, and
canned and jarred fruits and vegetables.

Table 1. Armenia’s Exports and Imports of Agri-food products to EU 15

Most food processors import inputs for food processing, specifically prepared foods and juices.
Reasons cited by food processors include the high cost of local supply, and the limited ability of
local suppliers to consistently meet quality standards and packaging. A typical frozen food
processor company, that has about 30 percent of the domestic market share, buys only 30
percent of its inputs locally, the other 70 percent being imported. This proportion also represents
the sale of domestically produced (30 percent) and imported (70 percent) food products in local
supermarkets. Sales of locally produced products consist mainly of dairy, meat, and fresh
produce, with limited value added. The share of locally produced processed/canned food in total
domestic supermarket sales of similar products is 30-40 percent; this is predominantly due to
imported canned mushrooms and olives, which are high value products that make up a large
amount of the total sales of canned food.

Input suppliers for processed food goods have increased in the last 5-10 years. Currently,
ACDI/VOCA works with at least three local wooden box and foldable carton box suppliers.
These packaging suppliers support the food processing sector. Several food processors have
received Hazard Analysis and Critical Control Points (HACCP) certification, but demand for food
safety and quality certificates is lacking in the domestic market.

The value chain from farm to supermarket is gaining in strength in large part due to the market
pull of the big retail stores. The Star supermarket recently established its own central
warehouses and is taking steps to invest in cold chain/storage facilities. Star works with the
USAID Center for Agribusiness and Rural Development (CARD) and the MCA Water-to-Market
project. Star has also provided assistance to suppliers’ development of appropriate packaging
for local dairy products – specifically cheese. The improved packaging has reduced overall
costs in the supply chain and improved the shelf life of the products.

Market: Food processors are primarily serving the domestic market. An estimated 10-15% of
processed foods are exported,12 primarily to CIS countries and to the Armenian diaspora
market. The limited market for these products makes them highly vulnerable to inconsistent
purchasing patterns, as demonstrated in the last 12 months during the financial crisis. None of

12 Interview with CARD.
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the food processors interviewed were currently exporting (with the exception of wine and
brandy). Processed exports were tomato paste, peaches, grapes, and juice concentrate (fish
and dairy are discussed separately).

Stakeholders: Supermarkets, input suppliers, packagers, transportation companies, and the
FAA.

Constraints: The Armenian food processing sector faces constraints meeting both domestic
demand and potential export markets. Key among the constraints for the domestic market is the
quantity and quality of domestic supply. The lack of structured cold chains is also a major
constraint for both markets. It is critical to improve product sophistication and meet export
quality standards to expand the export market and to support the growing demand in the
tourism sector.

Quantity: Armenia has limited economies of scale for agricultural inputs for food
processing due to fragmentation and small land holdings. Multiple small suppliers are
difficult to organize to provide required quantities of similar quality and require costly
tracking systems for product traceability. This increases the overall cost of the primary
products. These factors have a direct impact on cost competitiveness.

Quality issues: On average, Star rejects 20-30 percent of fresh produce due to poor
quality. Suppliers cannot meet quality standards (note – Armenian fresh produce quality
standards are well below export standards). Star has worked with suppliers to provide
them with appropriate crates and handling materials to improve the handling of produce
and reduce losses between harvests to market.

Weak cold chains: A cold chain from farm to end market is required in order to reduce
losses due to spoilage. In this regard, producers and retail companies have developed
internal and often fragmented systems. Probably the most developed is the Star
supermarket cold chain. Star has a centralized distribution system and works closely
with local suppliers. Star recently invested in leasing four new refrigerated trucks with
loading dock capacity, which has reduced the time and labor required for loading and
un-loading, and resulted in a significant reduction in fresh produce loss due to quality
concerns. Small producers that own their own transportation have added thermal coolers
to vans and other trucks. The preference in the market, even for small producers, is to
invest in their own transport rather than to rely on the outsourcing of these services. 13

Food Safety and Certifications: Certification is not a concern for locally sold food
products, but it is a major constraint for exporters. Armenia has a limited number of firms
with production certifications. According to the World Bank Enterprise Survey, only 5.7
percent of Armenian firms possess such a certification; this is noticeably lower than all
comparison countries, including Turkey (12.6), Georgia (16.0), and Azerbaijan (10.3).14

Armenia has limited food safety testing facilities for HACCP and International Standards
Organization (ISO) requirements. University laboratories are not sufficient for advanced
testing and no private sector facilities for advanced testing were identified during this
assessment.

13 USAID. “MEASURE Armenia: The Enterprise Development Diagnostic for USAID/Armenia.” Business Growth
Initiative. September 2009.
14 Ibid.
5
A lack of government oversight in the application of existing food safety standards is of
concern. Regular inspections do not take place, and there has been a limited capacity to
undertake them, presumably due to a lack of political will to move forward. The ASME
project worked closely with the Ministry of Agriculture provided and detailed
recommendations to strengthen the current system including:
§ the development of direct assistance to food companies, including the setup
of laboratories, ISO and HACCP training, food safety education, improved
sanitation, assistance with labeling, training courses, etc.;
§ build the capacity of educational and private sector support organizations, so
that they can provide better developed seminars and training, development of
food science programs, curricula for food safety workshops and a Master’s
degree program, set-up of laboratories, expansion of agricultural extension
services, facilitation of academic exchange programs, technical assistance to
consultants, etc.; and
§ building of governmental infrastructure, including assistance with diagnostic
animal testing laboratories, training, thorough water analysis study, provision
of EU standards and regulations, etc.15

It is unclear if any elements of this program were implemented under the ASME activity.
Comments provided by the former project staff indicate that the Ministry of Agriculture
was not supportive of a comprehensive program and that very few, if any, of these
recommendations were implemented. The CARD 2007 Annual Report cites that the
National Food Safety Concept by the Ministry of Agriculture was in the approval process
at that time (it is unclear if it has been approved now). The Concept seeks to address the
following issues: legal and regulatory framework, risk analysis, HACCP-based food
safety management, consumer awareness, capacity building and training, and testing
laboratories.16

Donor Activities: The development of the three consolidation centers supported by the MCA in
the Water-to-Market project, in addition to farmer and processor training, seeks to address both
quality and quantity issues in the horticulture value chain. Star had plans to participate in the
activity as a private sector partner, however, withdrew from providing financial support due to
the impact of the financial crisis.

CARD is an HACCP certified trainer and provides support to targeted food processors, primarily
in the dairy and meat sectors. CARD also has limited laboratory facilities for basic food safety
testing. USDA has also worked in collaboration with the Armenia Agricultural Academy and the
University of Texas A&M to create a Master’s degree program and further develop the capacity
of the research center.
B. Cut Flowers
Overview: The fresh flower sector received support under the USAID ASME activity, which
helped to organize supply, identify markets, and identify supply constraints. Export potential is
considered high, based on a market assessment performed by the ASME activity. There are 12
large producers supplying a robust and large domestic market, primarily through greenhouse

15
 USAID ASME. Design of SPS Food Safety Project for Armenia. 2004.
16 USDA CARD. Accomplishment Report 2006-2007.
6
growing techniques.17 The sector represents a small part of the agriculture economy and has
experienced low growth rates in recent years. The low growth rates are attributed to the
saturated domestic market and market barrier for exports, specifically Armenia’s non-
compliance with members of the International Union for the Protection of New Varieties of
Plants (UPOV). In May 2009 Armenia initiated procedures for membership in the UPOV. 18

Products and production capacity: Armenia has earned an international reputation for high
quality flowers. This can be attributed in part to the ambient condition in Armenia; high light
intensity and 330 days of sunshine a year, matched with excellent volcanic soil containing
abundant micro-elements as well as trained and experienced agronomists.

Sixty percent of local greenhouses are specialized in vegetable growing and 40 percent in
floriculture (cut flowers). Average productivity per square meters of vegetable-growing
greenhouses is estimated at 10 kilograms during the whole season. Average productivity per
square meters of flower-growing greenhouses is estimated at 100 cut flowers during the whole
season.19

The vast majority of chemicals and fertilizers used in cultivation of greenhouse products (flowers
and vegetables) are imported. The import process is facilitated by the Greenhouse Association.

Market: Armenia has a considerable and demanding domestic market. Armenian producers
have historically sought to meet domestic demand first, often times at the expense of the export
market. Armenia does have limited experience of flower exports to Georgia, Russia and the EU.
Market surveys and a production assessment conducted in 2001 under the ASME project
indicated that demand in the Russian market was growing and that the market had an “affinity
for Armenian flowers”.20 Other potential markets include Turkey and Iran. The length of the
carnation’s stem is the prime determinant of price, and if properly packed and exported, can
obtain up to 50 percent more than domestically.

Local greenhouses can produce about 28 million pieces of cut flowers. Given the average
market price of a cut flower equaling 250 Armenia drams (AMD), it is estimated that the size of
the domestic market exceeds US$20 million. The major share of the market belongs to roses
and carnations, which comprise about 80 percent of domestic market demand.21

Stakeholders: FAA and the Greenhouse Association of Armenia.

Constraints: The main issues impeding the export of Armenian flowers to foreign markets
(mainly CIS countries) are insufficient volumes for export, inadequate packaging and
transportation and logistics. Armenia’s pending membership to the UPOV will help to alleviate
previous barriers to the EU market. However, most critical is that the current supply of cut
flowers only meets domestic demand. Without increased production, and a targeted export
strategy, continuous access to the export market is unlikely. In the past when fresh flowers were
exported, the prices on the domestic market rose. Exports were then diverted to the domestic

17 FAA interview.
18 UPOV download and Ibid. Intellectual property rights for flower breeders (the rights to collect royalties on the sale
of patented varieties of roses and other flower species) is protected under an international agreement called UPOV.
Armenia is not yet a signatory to this agreement.
19 Ibid.
20 Cut Flower Perspectives 2001-2005. Development of Armenian flower market development of cut flower exports.
2001. USAID ASME, DAI
21 USAID/CAPS. Assessment of Potential of the Armenian Greenhouse Cluster. January 2007.
7