YEREVAN 2014 AGRICULTURE IN ARMENIA SNAPSHOT

YEREVAN 2014 AGRICULTURE IN ARMENIA SNAPSHOT

AGRICULTURE Historically, Armenia s economy has been based on agricultural production, especially in fresh and processed vegetables and fruits. In Soviet times, the Country managed to internally satisfy milk and meat demand both for primary use and processing. Armenia was also well known for its leather and shoes production, the raw material of which was mainly supplied locally. After the dissolution of the Soviet Union, the central market economy collapsed, large Soviet Kolkhoz and Sovkhoz were broken up into small farm plots, input drivers became increasingly more expensive, and supply lines to international demand were broken. Combining these factors with the degradation of irrigation systems throughout the country led to a decrease in domestic production. This made it necessary to rely upon imported products from abroad, during those periods. Out of total 915 communities of Armenia 866 are rural (around 36.0% of the country population resides in villages), hence agriculture plays an important strategic role also in terms of rural area development. As of 2012, agriculture employs 457.4 thousand people, which accounts for 38.9% of the country's total employment and 75.2% of rural area employment 1. In the foreign trade turnover structure the share of agricultural origin and processed food products in 2013 was 21.1%, and in the structure of exported goods 28.5%. In 2013 the value added of agricultural sector in GDP of Armenia amounted to 19.54%. This figure has started to increase since 2009. The average share of Agriculture in GDP during the period of 2010-2013 was about 19%. Figure 1 Dynamics of Value Added of Agricultural Sector Compared with GDP Growth, billion AMD 2 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500-20.33% 19.54% 18.65% 18.20% 16.11% 16.91% 17.00% 19.11% 2006 2007 2008 2009 2010 2011 2012 2013 GDP Agrictultural Secto Value Added Share of Agriculture in GDP 25% 20% 15% 10% 5% 0% In agricultural sector the most active Marzes of Armenia are Armavir, Ararat and Gegharkunik, the cumulative gross production of which in 2013 constituted 464.9 billion Armenian drams, which makes 50.6 percent of gross agricultural output of Armenia. 1 Source: National Statistical Service of Armenia 2 Source: National Statistical Service of Armenia 2

Table 1 Gross agricultural output per Marzes of Armenia and Yerevan 3 Year 2009 2010 2011 2012 2013 Gross output, billion Drams Yerevan 5 5.4 5.8 7.5 8.5 Aragatsotn 54.6 61.4 80 82 89.1 Ararat 89.1 108.5 139.4 124 136.4 Armavir 109.1 104.5 136.2 144 163.2 Gegharkunik 94.6 125.7 160.6 160.6 165.3 Lori 37.3 41.8 56.1 59.7 67.3 Kotayk 39.9 40.6 51.1 52.7 56.7 Shirak 56.4 71.2 94.1 97.8 106.1 Syunik 33.8 36.3 47.9 52.7 62.3 Vayots Dzor 11.5 13.9 15.7 18.2 20.0 Tavush 24.4 28.3 38.3 41.2 43.7 Total for Armenia 555.7 637.6 825.2 840.4 918.6 As the abovementioned table shows, during the last 5 years exceptional gross production growth in money terms was registered in Gegharkunik Marz (about 70.7 million Armenian drams), while in percentage terms the growth of highest 88.12% was recorded in Shirak Marz. The distribution of gross agricultural output values between plant growing and animal husbandry is as follows: Table 2 Gross agricultural output, billion AMD4 Year 2009 2010 2011 2012 2013 Agriculture, of which 555.7 637.6 825.2 840.4 918.6 Plant growing 346.4 392.7 456 511.5 572.9 Share of Plant Growing in Agriculture 62.34% 61.59% 55.26% 60.86% 62.37% Animal husbandry 209.3 244.9 369.2 328.9 345.7 Share of Animal Husbandry in Agriculture 37.66% 38.41% 44.74% 39.14% 37.63% As the preceding table reveals, agriculture of Armenia is focused mainly on plant growing, growth rates of which are considerable. The animal husbandry, in its turn has recorded an exceptional growth for the recent years, namely that of more than 120 billion Armenian drams in 2011. In recent years, the output capacities of both milk and meat production have increased remarkably in Armenia. However, the sector is experience significant challenges, not only in production, but also in market access and competitiveness. There is a lack of economies of scale, increased input costs, and Armenian farmers have not invested in the appropriate food safety certifications, such as Global GAP, that would allow them to enter 3 Source: National Statistical Service of Armenia 4 Source: National Statistical Service of Armenia 3

higher-value markets like the EU. Armenian farmers are also facing increased regional competition from other CIS and Eastern European countries. Other factors conditioning the limitation of Armenian agricultural products are: Price of raw materials and fertilisers Technological limitations Lack of highly qualified personnel Lack of irrigation systems Lack of infrastructure (on harvesting and further stages, storage/ cold storage, processing, etc.) Interruption of supplies, seasonality. Absence of insurance from natural disasters, etc. The development of agriculture is hindered also due to the following factors: There are problems with coordinated and targeted use of natural feeding areas particularly pastures and hayfields. Poor use of arable lands is essentially dependent on the lack of financial resources of businesses employed in agriculture, low profitability, difficult access to machine works, fragmented land parcels, difficulties in marketing agricultural products, etc. In some boarder communities, designated use of arable lands is affected by dangers associated with borderline land cultivation. Due to a number of factors, marketing of agricultural products continues being a problem. The level of agricultural product marketability during the past years varies around 56%. The existing situation is the result of the lack of agencies responsible for marketing of agricultural products or their imperfect activities. Currently, around 95% of agricultural machinery has expired term of use, which resulted in low functioning and productivity and high maintenance costs. 4

Policies and Priorities Taking into account the importance of agriculture for the country s economy as well as its crucial role for the country s food safety issues, Armenian Government emphasizes the importance of State support for agriculture. Besides, recognizing agriculture as a priority sector is dwelled on two principle reasons. Firstly, agriculture is the key link of the food industry value chain, which is one of the sub branches with export potential. Secondly, development of agriculture is critical for increase of productivity and creation of nonagricultural jobs in rural areas, thus contributing to balanced regional development. The lion's share of revenues of the rural population comes from agriculture products and hired labor. Hence, poverty in this sector is largely contingent on agriculture development. These policy level priorities were set especially after the World Economic Crisis. The main focal points of the latter are: Formation of a legal framework in agrarian sector, Provision of favorable climate for operating and investment activities of agricultural operators, Introduction of scientific achievements and new technologies, Development of infrastructure, food safety and professional advisory schemes, enhancement of food processing volumes, etc. Develop industrial agriculture based on the efficiently operating cooperative schemes. According to 2010-2020 RA Strategy for Sustainable Rural and Agricultural Development, Armenian agri-food structure encompasses about 340 thousand rural farms, commercial entities employed in agriculture and numerous private companies focusing on agricultural service provision and marketing and processing of agricultural products. The main land users in agricultural production of the republic are rural farms, which retain more that 82.0 percent of arable lands, 75.0 percent of perennial plantations and 50 percent of hayfields. Agriculture and rural development vision of GoA includes but not limited with: 1) Development of commercial agricultural organizations, cooperatives and family farms integrated with market infrastructures through application of intensive technologies; 2) Stable food security of the population and meeting demands of agriculture processing raw materials through realistic combination of food security interests and comparative advantage of external trade of agriculture and food products; 3) Increase of gross product in agriculture due to increase of labor productivity, comparative reduction of the number of people employed in agriculture and use of part of surplus workforce in non-agriculture sphere through agriculture service and trainings. 4) Processing of produced agriculture raw materials at SME production units; 5) Domination of production of agriculture products with high added value in the plant cultivation and animal husbandry intra branch structure; 6) High level of food security of the country population, ensuring self sustainability for basic foodstuffs, reduction of rural poverty and migration. Agricultural industrialization is seen as the key approach by the GoA to modern agriculture development, which means increased productivity, economic efficiency, compliance with the agro technical requirements, application of modern technologies and management systems. The following can enable addressing this issue: 5

1) Improved use of resource potential of farms, particularly full use of arable lands, 2) Increase of crop and animal productivity and through intensified production; 3) Promotion of non-agriculture employment, 4) Improvement of demographic picture of rural communities, 5) Development of craftsmanship, 6) Processing of agricultural products, 7) Support in creation of agriculture services and infrastructure 8) Development of agro-tourism in rural communities. It is envisaged that further more importance will be attached to the support to local seeds production development, pedigree animal husbandry, and implementation of state supported programs in these spheres, as well as to the improvement and quality increase of plants protection and veterinary assistance mechanisms. To solve the problems associated with the development of cattle breeding, milk production and cropping the following measures will be implemented: Government assistance projects in the spheres of primary seeds production, renewal of plants sorts and seeds provision; Complex measures to ensure plants protection, including those aimed at fight against pests and establishing anti-hail; Technical recovery of currently acting artificial insemination stations in the Republic of Armenia and full utilization of their capacities; Widespread application of artificial insemination, training for the specialists in the field and exchange of experience; Development and implementation of projects of agricultural animals deceases control, activities aimed prevention of deceases and revision of strategic measures applied with that purpose, taking into account international experience and efficiency of its application in local conditions; Development of network of milk collection centers in rural communities specialized in whole milk production. To improve designated use of arable lands it is important to: Restart implementation of programs introducing targeted subsidies earmarked for land cultivation in most unfavorable areas; Continue subsidizing prices of most important resources used in the sector, as well as improvement of the mechanisms for their implementation, Improve servicing of agricultural equipment, Implement projects for mutual utilization of segmented lands, applying different motivating techniques (loans, grants, state programs and others), Carry out measures for inclusion into agricultural turnover degraded land areas, Found field protecting forests in communities. Addressing the problem of coordinated and targeted use of natural feeding areas particularly pastures and hayfields includes: Development of programs to improve effectiveness of the use of natural feeding areas, 6

Implementation of schemes on coordinated and effective use of pastures and hayfields, Implementation of state supported programs on irrigation of pastures, ensuring access to and from pastures (road rehabilitation), Promoting creation and development of cooperatives of pasture users and supporting their activities. According to agriculture policy of GoA it is envisaged improving of business forms, particularly the policy of encouraging and promoting cooperatives. Below four directions for development of cooperation are considered most appropriate: Improvement and supplementing of the legislation, Application of mechanisms for economic promotion of cooperation development; Improvement of awareness of farmers on the principles and advantages of cooperation; Creation of institutional structures promoting development of cooperation in agriculture. The following measures are planned to address marketing of agricultural products: Development of regulated wholesale markets of agricultural products, collection centers, promotion of activities of agricultural product marketing information centers, Creation of agricultural product fairs in big cities of the country and ensuring their proper activities, Establishing long term and mutually beneficial contractual relationships between processors of agricultural products and their producers, Promotion of export of high value agricultural products. Activities geared at addressing agriculture production and technical services include: Continue negotiations with international companies producing and supplying agricultural machinery in order to provide businesses involved in agriculture with affordable adequate machinery under leasing mechanisms, particularly applying leasing prepayment and interest subsidizing mechanisms. Creation of local representations of international agricultural machinery producing companies, and structures/agencies dealing with maintenance and assembling of agricultural machinery. Promoting creation of structures for joint use of agricultural machinery in rural areas. For the effective use of agricultural resource potential a special focus should be made on promotion of creation of greenhouses in farming entities. The following activities are planned in this regard: Provision of tax privileges for import of main equipment and construction materials needed for creation of greenhouses, Provision of affordable targeted loans for creation of greenhouses for farmers. One of the key challenges faces by agriculture is improvement of the census system and online database of resources. The following is needed to address the problem: Implementation of general agriculture census program, which is aimed at collection of reliable information on the structure of agriculture, particularly farming lands, number of animals, agriculture machinery, farming structures and potential (human, mater ial) and reliable information of their use, with marz and community breakdown; One of the ways to improve the registration system is implementation of a general system of agriculture administrative register; and 7

Implementation of agricultural animal recording /inventory and numbering system. Stabilization and development of agriculture requires improvement of the irrigation water supply system, which can be achieved through transition from pumping to gravity water supply system; Implementation of new irrigation technologies, in particular drip irrigation, leading to use of water saving regimes. Implementation of the system of guaranteed prices for key agricultural products is one of the forthcoming goals in agriculture. The following activities are needed to address the goal: Development of mechanisms for implementation of the system of guaranteed prices for key agricultural products, and Development and enforcement of legal basis for application of guaranteed prices. One of the priority issues is implementation of modern technologies in seed production, animal breeding, processing of agriculture products. This can be achieved through application of the following tools: Provision of affordable target loans, Implementation of competition grant programs; Providing for a component to promote modern technologies in credit programs; Technical modernization/upgrading with application of leasing mechanisms in line with specifics of agriculture. Development of food safety system is attached a special attention. Main directions include: Revision of the RA legislation, implementation of relevant actions and exchange of information within the framework of interstate and international cooperation in food security, veterinary and plant health areas, as well as affiliation with the Customs Union. Customizing food safety, as well as veterinary and phytosanitary international and interstate standards, implementation of safety systems, procedures and principles; Implementation of proper food production hygiene and manufacturing practices, analysis of risk sources and control of critical point (HAACCP) system or quality and safety ISO 22000 standard, with state support; Capacity building of food safety laboratories and accreditation of ISO 17025 standard; Proper organization of training and education of food safety human resources. Construction and utilization of slaughterhouses or slaughter points across the whole territory of the Republic, Improvement of regulations regarding genetically modified organisms (GMOs) in the respective legislations to ensure absence of threat to human life and health, animals and biodiversity, as well as protect consumer rights. As mentioned earlier, one of the major impediments hindering agricultural development is natural disaster and climate change issues. To mitigate such agricultural risks the following measures are envisaged by GoA: i. Introduction of an insurance system, which requires implementation of a program to evaluate insurance related risks in the sector of agriculture: based on the findings of the evaluation develop mechanisms for the introduction of the insurance system and implementation of its phase by phase approach. 8

ii. Expansion of areas under protection from unfavorable atmosphere events, particularly hail protection stations, improvement of their effectiveness, support in implementation of other hail protection measures. One of the most important issues related to rural development is the creation of non agricultural jobs and increase of share of non-agricultural incomes for the rural population, especially related to processing of agricultural products and agriculture servicing. The following is needed to boost agriculture product processing and export: Application of a simplified customs clearance regime for import of specimen; Develop Armenian trademark and place orders for goods considered competitive by the state, State support and co funding for selection of the most attractive pavilions at international exhibitions to exhibit Armenian goods, Provision of long term loans under state guarantees, Simplify documentation used in agriculture goods production and processing, exclude false documentation or their forced acquisition (creative accounting), Support marketing of products of food processing companies in foreign countries; create a structure supporting export of the products, Regulate and align with European standards border crossing points operations. Based on the abovementioned policies and strategies as well as concrete measures to be implemented, the following picture of agricultural sector development is forecasted: Table 3 Agriculture and Rural Development Forecasts 5 2013 2017 2021 2025 Value added in agriculture (GDP, bln. dram), 835.0 1,116.7 1,524.7 2,046.8 Value added in agriculture, y o y % change 9.3% 4.0% 3.8% 3.5% Value added in agriculture, % of GDP 19.6% 17.9% 16.3% 14.6% Labor productivity in agriculture, thousand drams 1,826 2,554 3,487 4,682 Non farm labor productivity, thousand drams 4,396 6,440 9,009 12,562 Non farm employment in rural area, thousand 108.2 116.2 121.2 126.2 persons Credits to agriculture, mln. drams 100,115 162,229 251,982 379,206 Credits to agriculture to GDP ratio, % 2.3% 2.6% 2.7% 2.7 % Designated use of arable land, % 67,9% 74.0% 82.0% 90.0% Weighted average rate of marketability, % 56.1% 60.0% 67.0% 75.0% 5 Source: 2010-2020 RA Strategy for Sustainable Rural and Agricultural Development 9

Animal Husbandry The share of animal husbandry has increased in the structure of agriculture branches from 32% (in 2007) to 38-39% (in 2012-2013). The average weighted marketability level almost did not undergo changes staying within 55 56 %. As for designated use of arable lands in 2013 the negative trend of past years has improved and the share reached 68% slightly exceeding the figure for 2008. Table 4 Structure of Agriculture by Sub-branches, billion AMD 6 2007 2008 2009 2010 2011 2012 2013 Agriculture 633.9 628.1 552.1 636.7 795 841.5 918.6 Plant Growing 429.9 405.9 346.7 392.7 465.1 516 572.9 Share of Plant Growing in Agriculture, % 68% 65% 63% 62% 59% 61% 62% Animal Husbandry 204 222.2 205.4 244 329.9 325.5 345.7 Share of Animal Husbandry in Agriculture, % 32% 35% 37% 38% 42% 39% 38% Similar to other agricultural products, small households play a key role in animal husbandry, production of whole milk and meat. Small farms and households contribute more than 90% of country s meat production. For example, According to the National Statistical Service of Armenia, in 2013 in total 83,300 tons of meat was slaughtered, out of which 91% or 75,700 tons were produced and slaughtered by small households and only 9% by private companies. The positive dynamic of slaughtered cattle and sheep was indicated during 2010 2012 and was 5% and 14% respectively. Volume of slaughtered pork has decreased by 4% during 2010-2012. The number of cattle during 2010-2013 increased from 570,600 to 661,000 heads or by 16%, while the number of cows increased only by 10.7%. The number of pigs increased in 2013 by 34.1% and decreased by 6% or by 6,700 heads in 2012. Sheep and goat production showed a steady growth during the studied period (2010-2013) and increased almost by 14% in 2013 in comparison with 2012 and exceeded the indicator of 2006. Table 5 Livestock and Poultry Population Dynamics in Armenia 7 As of January 1 st 2008 2009 2010 2011 2012 2013 Cattle, of which 629,146 584,779 570,633 571,357 599,243 661,000 cows 310,610 283,048 273,854 272,572 283,349 303,277 Pigs 86,710 84,801 112,608 114,777 108,088 145,044 Sheep and goat 637,101 559,218 511,029 532,515 590,214 674,731 sheep population 599,983 526,638 481,342 503,624 561,634 645,711 goat population 37,118 32,580 29,687 28,891 28,580 29,020 Poultry population 4,018,200 4,188,183 4,134,638 3,462,529 4,023,482 4,050,001 While all marzes are involved in production of beef, pork and lamp, each region is specialized on a certain type of animal breeding, which is reflected in livestock figures. For instance, in Aragatsotn, Ararat, Armavir, Syunik and Vayots Dzor marzes sheep and goat became predominant, due to the lamb meat export increase to the 6 Source: National Statistical Service of Armenia 7 Source: National Statistical Service of Armenia 10

Islamic countries (Iran and UAE). In other marzes, except for Yerevan, cattle production has a leading position. Although pork production decreased in the country on the whole, in Yerevan its production remained high. Table 6 Livestock and poultry sold for slaughter (in live weight, thousand tons) 8 Year 2008 2009 2010 2011 2012 2013 Total for Armenia 125.9 126.2 124.3 127.9 130.3 146.8 Yerevan 0.7 0.5 0.5 0.6 0.8 1.8 Aragatsotn 13.7 14 14.4 14.7 14.7 15.6 Ararat 11.1 8.5 8 8.3 8.7 9.8 Armavir 11.9 9.7 10 10.3 11 15.4 Gegharkunik 19.7 21.7 21.5 2.8 21.8 23.5 Lori 12.5 14.8 14.6 15 15.1 16.3 Kotayk 15.6 13.1 12.1 12.6 12.9 14.7 Shirak 17.2 19.4 19.8 20 20 21.4 Syunik 9.7 11.6 11.1 11.8 12 13.9 Vayots Dzor 4.4 5.3 4.7 4.8 5 5.6 Tavush 9.4 7.6 7.6 8 8.3 8.8 According to expert assessments, around 52.4% of the milk produced in the republic is being processed, including processing by rural farms. Milk sales prices, contingent on collection period vary within a range of 100 to 180 drams. Presently, the average annual milk yield per cow makes up 2,035 kg. For comparability purposes, note that the same indicator comes close to 2,700 kg in Moldova, 3,400 kg in Ukraine, 6,700 kg in Germany, 7,000 kg in Great Britain and 8,900 kg in the USA. The distribution of livestock production for the years 2012 and 2013 by marzes is as follows: Table 7 Production of livestock products in Armenia per Marzes and Yerevan 9 Marzes Livestock and poultry sold for slaughter (in live weight), thsd. tons Milk produced, thsd. tons Eggs produced, million pieces 2012 2013 2012 2013 2012 2013 Yerevan 0.8 1.8 2.2 2.5 35.6 28.7 Aragatsotn 14.7 15.6 76.5 79.9 61.7 59.4 Ararat 8.7 9.8 38.2 40.1 55 54.7 Armavir 11 15.4 37.4 40.5 140.1 127.7 Gegharkunik 21.8 23.5 116.3 120.7 57.1 58.2 Lori 15.1 16.3 77.7 81.3 47.3 43.7 Kotayk 12.9 14.7 53.5 57.9 132.1 117.3 Shirak 20 21.4 101.5 107.6 40.9 40.1 Syunik 12 13.9 57.2 62.2 27.2 26.3 Vayots Dzor 5 5.6 21.1 24.8 18.2 17.4 8 Source: National Statistical Service of Armenia 9 Source: National Statistical Service of Armenia 11

Tavush 8.3 8.8 36.6 39.5 42.9 41.7 Total for Armenia 130.3 146.8 618.2 657 658.1 615.2 Milk production capacities between 2008 and 2010 experienced a decline, which can be explained by the global financial crisis, the letter causing a strict decline almost in every branch of the economy. Table 8 Milk Production Volumes per Marzes and Yerevan, thousand tons 10 Year 2008 2009 2010 2011 2012 2013 Total for Armenia 661.9 615.7 600.9 601.5 618.2 657 Yerevan 3.6 2.1 2.3 2 2.2 2.5 Aragatsotn 76.4 77.1 74.1 74.8 76.5 79.9 Ararat 49.5 41 38.1 36.5 38.2 40.1 Armavir 42.8 39.8 36.1 36.1 37.4 40.5 Gegharkunik 117.5 116.4 112.4 114.5 116.3 120.7 Lori 77.8 77.8 77.1 76.2 77.7 81.3 Kotayk 68.2 54.6 51.3 51.8 53.5 57.9 Shirak 98.9 97.5 99 98.8 101.5 107.6 Syunik 56.4 59.7 55.8 55.9 57.2 62.2 Vayots Dzor 25 17.3 19.9 20 21.1 24.8 Tavush 45.9 32.4 34.8 34.9 36.6 39.5 From the data provided by the National Statistical Service (NSS) on food import volumes the following conclusions can be drawn: Poultry meat and beef import volumes have declining trends, while pork imports exhibits a growth trend. Import volumes of all types of milk have declining trends. Table 9 Production Volumes of Meat (in slaughter weight, thousand tones) 11 Year 2008 2009 2010 2011 2012 2013 Beef 49.3 49.6 48.0 48.2 47.6 53.7 Mutton 7.4 8.9 8.2 8.4 8.5 0.1 Pork 7.5 7.2 7.9 9.4 9.5 10.7 Chicken 6.7 5.0 5.4 5.7 8.3 9.4 The declining import volumes of poultry meat, beef and milk are contingent on the growth of domestic production volumes. The meat market demand of Armenia is to some extent met owing to the imports. Thus, in 2013, 5.4 thousand tons of cattle meat (mostly buffalo), 8.1 thousand tons of pork and 31.3 thousand tons of poultry meat have been imported. In terms of competitiveness, the meats of domestic production, including poultry meat, give in considerably to the imported ones. 10 Source: National Statistical Service of Armenia 11 Source: National Statistical Service of Armenia 12

Table 10 Import volumes of selected food products for each kind, tone s12 Year 2008 2009 2010 2011 2012 2013 Poultry meat 38,285 28,145 36,434 38,971 33,635 31,376 Beef 15,367 10,822 6,078 10,116 8,335 5,453 Pork 7,543 5,131 4,609 5,082 8,262 8,136 Milk (all types) 3,494 4,168 3,636 3,507 3,067 3,095 Industrial type of livestock slaughtering in Armenia is on its first stage of development. Industrial slaughter for commercial purposes is practiced mainly for export reasons. While, following the objective of supplying meat to domestic market, traditional slaughter methods are applied. In line with the results of 2013 survey conducted by FREDA organization, roughly 83% of rural farms engaged in livestock breeding carry out the livestock slaughter on the spot. At present, there are almost 20 slaughterhouses registered in Armenia, the significant part of which, though, is out of operation (these are either outlived soviet era heritage, or slaughterhouses, constructed under different international projects, yet idle). Currently, there are 3-4 functioning slaughterhouses in general, which are either specialized in slaughtering arranged in accordance with the Ministry of Defense contracting, or engaged in the meat export value chain (mostly mutton). It is planned by the GoA to build 5 slaughterhouses in coming 2 years with financial support of international organizations. 12 Source: National Statistical Service of Armenia 13

Plant Growing As already mentioned the share of Plant Growing in agriculture rather exceeds the animal husbandry share. During the recent 7 years the share of plant growing in overall agriculture was fluctuated from 59% to 68%. While analyzing the dynamics of the structure one may conclude that the share of plant growing is steadily decreasing. From other hand, the absolute values of plant growing output increase in the post crisis period. If in 2009 the overall plant growing output equaled to AMD 347 billion than in 2013 this indicator reached up to AMD 573 billion with 13.4 average annual growth rate (2009-2013). Figure 2 Structure of Agricultural outputs by sub-branches, % 13 120% 100% 80% 60% 40% 20% 0% 32% 35% 37% 38% 42% 39% 38% 68% 65% 63% 62% 59% 61% 62% 2007 2008 2009 2010 2011 2012 2013 Plant Growing Animal Husbandry The official statistics encounters certain difficulties when gathering and classifying information on land and agriculture. The official numbers do not always reflect the complete picture and can be contradictory. This particularly affects the statistics of perennial plants areas. One of the issues is that due to lower taxation of arable areas compared to perennial plants, owners prefer to register their land as an arable area. As a result, the aggregate numbers underestimate the areas classified to grow perennial plants and overestimate the arable land area. Although a law was adopted, which allows for tax exemption for perennial plant owners, yet the problem remained. Throughout the first four years, newly founded perennial plantation owners still estimate that it is cheaper for them to report their plantations as arable area. Another underestimation is created when plants on the premises of houses are not included in the perennial plants areas, but are rather classified as land under settlements. Due to such issues of data gathering and classification, the perennial plant area is rather underestimated. As of 2013, according to the official statistics, 33.4 thousand ha of land in Armenia is listed as being perennial, while the sown area under perennial plants is over 57 thousands ha. Table 11 The Dynamics of the Structure of Land Resources of Armenia, thousands ha 14 2006 2007 2008 2009 2010 2011 2012 Total land area, 1 000 ha 2,974.3 2,974.3 2,974.3 2,974.3 2,974.3 2,974.3 2,974.3 of which: agricultural land 2,129.6 2,122.1 2,121.2 2,120.3 2,100.9 2,077.0 2,052.4 of which arable land 452.9 452.1 450.4 449.4 448.5 449.2 448.4 13 Source: National Statistical Service of Armenia 14 Source: National Statistical Service of Armenia 14

perennial grass 27.3 29.6 31.6 32.6 32.9 33.0 33.4 plough-land 127.5 127.5 127.3 127.3 127.1 128.3 121.6 pastures 1,125.0 1,118.3 1,117.1 1,116.6 1,104.3 1,067.2 1,056.3 other 396.9 394.6 394.8 394.4 388.1 399.3 392.7 Around 22% (~448 thousand ha) of agricultural land is arable land. The sown area of arable land is ~320 thousand ha, indicating that there are unused arable land areas. In the Development Strategy 2010-2020, adopted by the Ministry of Agriculture of Armenia, the cultivation of unused arable land is addressed and an objective is set to reduce these unused areas. Table 12 The Dynamics of the Structure of Sown Areas of Armenia, thousands ha 15 2006 2007 2008 2009 2010 2011 2012 Total sown area 310.2 306 304.5 300 283.6 286.7 304.2 Grains and leguminous plants 182.4 176.2 172.8 171.6 159.3 157.8 172.2 Technical crops 0.8 1.6 2.4 2.4 2.4 3.2 3.5 Potatoes 33 31.7 34.3 32 28.4 28.7 31.2 Vegetables 24.4 25.6 24.2 23.9 23.5 25 25.2 Water-melons 4 5.9 5.5 6.2 4.5 5.8 5.1 Forage crops 65.6 65 65.3 63.9 65.5 66.2 67 Almost half of arable land in Armenia is classified as grain (mainly wheat). Technical crops (mainly tobacco) and forage represent the second largest usage of arable land. Since 2005, the areas under grains and legumes have been declining. In 2013, only 180 thousand ha of land was classified under grains and legumes as compared to 211 thousand in 2005, an overall reduction of over 30 thousand ha. Much of this land was converted into fruit farms (particularly apricot and plum) plantations as a result of growing demand for fruit for export. Both vegetable sown areas and fruit orchards have been showing overall growth over the last decade. The same dynamic has been recorded in the harvested area of fruits. The annual harvested area is slightly less than the sown area due to the fact that these newly planted lands have not been harvested. One of the crucial issues pending for horticulture in Armenia is irrigation. Only 30% of arable lands are irrigated. Table 13 The Dynamics of the Structure of Perennial Plant Lands (Orchards), ha 16 Total fruit and berries, of which 2007 2008 2009 2010 2011 2012 2013 38,020 36,748 36,959 37,710 37,149 39,285 40,229 pome fruits 12,968 12,422 12,873 13,266 12,879 14,373 14,403 stone fruits 20,435 19,880 19,590 19,948 19,538 19,864 20,688 berries and nuts 1,651 1,649 1,701 1,692 1,703 1,888 1,939 tropical fruits 703 691 677 680 710 738 745 Berries 2,263 2,106 2,118 2,124 2,319 2,422 2,454 15 Source: National Statistical Service of Armenia 16 Source: National Statistical Service of Armenia 15

Grape 15,888 16,796 16,480 17,373 16,288 17,415 17,465 Horticulture output dynamics are prone to considerable fluctuations. The yield from the same area varies widely from year to year due to weather conditions and a plant s natural yield cycle. In terms of quantity, grapes are the leading fruit harvested in Armenia and account for one quarter of the total fruit output. Table 14 The Dynamics Annual Yield of Fruits, Berries and Grape, thousand tons 17 2006 2007 2008 2009 2010 2011 2012 2013 Total fruit and berries, grapes 487.4 479.1 503.7 540.8 351.4 469.0 573.2 578.9 Pome fruits 120.1 140.9 147.9 150.5 73.8 101.8 135.3 138.7 Stone fruits 151.3 99.1 148.5 161.1 39.4 117.4 174.4 176.1 Berries and nuts 5.3 5.0 4.5 4.3 3.2 4.9 4.2 4.8 Tropical fruits 2.2 2.4 1.5 2.1 2.1 2.6 3.6 5.0 Berries 7.1 12.9 15.5 14.1 10.1 12.6 14.3 13.5 Grape 201.4 218.9 185.8 208.6 222.9 229.6 241.4 240.8 Pome-fruits such as apples, pears and quince are the second most produced, followed by drupes (including apricots, peaches and plums). On average ~58% of fruit (except grapes) produced by individual farmers appears in the market while the remaining 42% is consumed by the farmer's household. The marketability ratio for fruits, berries and grape may differ considerably depending on the specifics of the marz. Table 15 Marketability Level of Fruits, Berries and Grape in the Regions of Armenia,% 18 Marzes Fruits and Berries Grape Armenia 58.0% 76.5% Aragatsotn 54.7% 90.8% Ararat 75.5% 83.2% Armavir 82.3% 73.4% Gegharkunik 14.9% Lori 11.9% 23.2% Kotayk 46.3% 33.3% Shirak 30.1% Syunik 41.2% 6.1% Vayots Dzor 12.0% 85.6% Tavush 9.4% 62.8% Tomatoes are the most widely cultivated vegetable in Armenia, accounting for more than a quarter of total vegetable output. Cabbage is the second most produced vegetable, followed by cucumber. The average ratio of 17 Source: National Statistical Service of Armenia 18 Source: National Statistical Service of Armenia 16

vegetables that appear on the market is higher than that for fruits and is estimated at ~78%. This greatly varies across marzes, ranging from as low as ~14% in Tavush up to ~90% in Armavir. Table 16 The Dynamics Annual Yield of Vegetables, thousand tons 19 Sown Area, ha 2009 2010 2011 2012 Output, thousand tons Sown Area, ha Output, thousand tons Sown Area, ha Output, thousand tons Sown Area, ha Output, thousand tons Total Vegetables 23,477 690 24,913 764 25,038 813 25,331 845 Cabbage 3,535 123 3,776 138 3,835 142 3,927 143 Cucumber 2,241 55 2,548 64 2,360 63 2,306 63 Tomato 6,521 249 6,837 273 6,273 262 6,270 271 Beet 717 16 776 18 814 17 859 21 Carrot 941 20 980 24 954 23 970 24 Onion 1,871 38 1,961 41 1,904 45 1,867 45 Garlic 898 9 1,010 11 1,042 12 1,033 13 Green Pees 68 0 145 1 97 1 169 1 Other Vegetables 6,618 179 6,825 195 7,696 248 7,874 263 Others 67 0.16 55 0.12 63 0.13 56 0.04 19 Source: National Statistical Service of Armenia 17

Agricultural Value Chains The following 4 agricultural value chains are identified within the framework of current study: 1. Milk Value Chain 2. Meat Value Chain 3. Vegetable Value Chain 4. Fruits and Berries Value Chain MILK VALUE CHAIN The demand in the dairy sector in domestic markets is linked to increase in disposable income, while the Russian market holds promises for export. A major reported export from Armenia is cheese, mainly from the Lori, Shirak and Syunik regions. Interviews with the dairy industry indicate the actual volume of dairy based exports (especially cheese) is in excess of recorded figures, as a large amount of production of artisanal cheeses goes to Georgia, passing through unofficial trading channels. The increase of domestic demand for dairy products is largely linked to disposable incomes of the domestic population. As incomes increase it is likely that demand in this sector will further increase as a whole and also that market differentiation will occur based on quality and price. However, any major expansion of the sector is going to rely on exports, for which there is a clear current demand. The demand base in Russia, while it may have been initially created through Diaspora markets, is certainly wider than that and is based on the historical demand created during the Soviet era. The total demand for cheese in Russia is estimated at 450,000 MT per year and production has only managed to reach 50 per cent of this level, leaving a huge market for imports. Armenia is well placed to compete in the Russian market, if it can supply high quality and consistent quantity of cheeses to high end specialty markets. Milk yields in Armenia compare well with its neighbors, and the majority of increase in milk production seems to be due to yield increases. However, it is notable that only 44.7% of milk yield is marketable in Armenia. The rest of milk is used either for bartering or for internal use of rural households. In that about 70% of internally used milk is processed by rural households and also used either for bartering or for direct sale in local agricultural markets. Table 17 Milk Marketability by Marzes of Armenia, % 20 Sold, % Bartered, % Used by Households, of which Processed, % Aragatsotn 29.2 16.4 54.4 77.9 Ararat 61.3 1.8 36.9 66.6 Armavir 65.3 2.0 32.7 74.4 Gegharkunik 30.6 20.3 49.1 86.8 Lori 52.8 2.8 44.4 28.1 Kotayk 79.0 1.1 19.9 61.8 Shirak 49.7 3.2 47.1 75.7 Syunik 51.6 8.0 40.4 29.7 Vayots Dzor 14.8 19.7 65.5 53.5 Tavush 24.0 12.0 64.0 87.8 20 Source: National Statistical Service of Armenia 18

Total Armenia 44.7 9.9 45.4 69.7 Official statistics proves that there are certain regions, where milk marketability is very low. E.g. in Vayots Dzor marz the marketability is 14.8%, in Tavush marz 24%, in Aragatsotn 29.2%. This situation is mainly due to the insufficient development of collection center network in regions. Besides, the seasonal fluctuations of whole milk price also impede the continuous growth of whole milk marketability, thus negatively impacting on the overall development of the value chain Figure 3 Dynamics of Whole Milk Price Sold by Farmers, AMD 21 200 150 100 50 129 120 127 171 168 170 0 2008 2009 2010 2011 2012 2013 The average annual productivity of cows is also rather low. It does not exceed 2,036 liter, which is about 300% lower than that of European averages. Figure 4 Average Annual Milk Yield per Cow, liters 22 2050 2000 1950 1900 1890 1957 1992 2027 2035 2035 2036 1850 1800 2006 2007 2008 2009 2010 2011 2012 21 Source: National Statistical Service of Armenia 22 Source: National Statistical Service of Armenia 19

MEAT VALUE CHAIN Meat Value chain in Armenia is rather fragmented and generally the local production of meat and meat processing are not linked with specific value chains due to several reasons: Comparatively high prices of locally produced meat Limited quality and quantity of stable supply of locally produced meat Absence of developed national network of slaughter houses and corresponding standards of slaughtering Underdeveloped logistics As mentioned earlier, local meat production is based on the cattle breeding. This sub-sector of agriculture is mainly run by rural households or farms. The share of commercial organization in animal husbandry is rather low 1.49%. The only exclusion can be made for poultry farming, where the share of commercial organizations is 54%. In other words, poultry farming is the most industrialized sub-sector in agriculture. If comparing the marketability level of meat with the one of the milk, one may find that meat is rather marketable. About 81% of locally produced meat is generally sold and only 19% is used either internally by rural households or for bartering. Table 18 Dynamics of Local Production of Meat by Major Types, tons, % 23 2006 2007 2008 2009 2010 2011 2012 2013 Meat (slaughter weight), of which 66.8 69.7 70.9 70.7 69.5 71.7 73.9 83.3 beef and vea 40.4 43.3 49.3 49.6 48.0 48.2 47.6 53.7 mutton and goat meat 7.2 7.3 7.4 8.9 8.2 8.4 8.5 9.6 pork 14.1 13.3 7.5 7.2 7.9 9.4 9.5 10.7 poultry meat 5.1 5.8 6.7 5.0 5.4 5.7 8.3 9.4 If matching the local meat production, export and import of meat, retail prices of different types of meat and their marketability level, one may conclude that the volume of local meat market is about 227 billion AMD, 27.5% of which is satisfied by different types of imported meat, including pork, beef, poultry, mutton, etc. In this value chain the share of farmers is about 52% or 119 billion AMD. If matching this figure with the number of rural households, it is evident that average annual earnings per rural household from meat production are about AMD 418,300. Production volumes of meat products through 2008-2013 have increased by almost 50 percent. Growth dynamics have been recorded especially in production of sausages, which made up more than 40 percent. Average retail prices per 1 kg of local meat products in 2013 totaled to 2,595 drams for beef, 3,122 drams for pork, 1,600 drams for poultry, while the customs price (including value added tax and customs duties) of imported meat products constituted almost 1,320 drams for beef, 1,265 drams for pork and 660 drams for poultry. For this reason meat products producing companies resort mainly to the use of imported meat in production. The storing quantities of local meat in line with estimates are minute (no statistical data exists). 23 Source: National Statistical Service of Armenia 20

Just about the complete range of meat products and sausages in high demand in local market are being produced. Table 19 Dynamics of Local Production of Processed Meat, tons, % 24 Year 2008 2009 2010 2011 2012 2013 Meat products 3,182 4,147 3,954 4,489 4,672 4,757 Semi-finished meat products 316 394 545 499 499 633 According to the official statistics the production volumes of meat products, including sausages in 2012 totaled to 4,672 tons. In the same year, 5,200 tons of sausages (smoked, semi -smoked etc.) were imported to the country. The average customs price per 1 kg of imported sausages amounted to 554.9 drams. Table 20 Foreign Trade of Meat and Meat Products, tons % 25 Import Export 2011 2012 2013 2011 2012 2013 Meat 18,758 18,703 15,260 0 18 0 Meat Products 7,073 5,162 5,388 185 234 367 Semi-finished meat products 116 185 484 97 396 130 Meat products and sausages of local production generate 46% of domestic consumption. However, according to the estimates based on observations and accounting for the level of effective demand, this figure should have made up a greater fraction. This inconsistency is conditioned by the following phenomena: 5.4 thousand tons of beef and 8.1 thousand tons of pork have been imported in 2013, the vast share of which was consumed by local meat processing companies. Meat products processing sector almost entirely relies on imported meat. This means that the connection between local beef production and processing sectors from the standpoint of the value chain is missing. Consequently, implementation of certain interventions in the processing sector, meant for development of this value chain is deemed unreasonable. It is possible to secure the meat products value chain integrity, in the event that international meat prices rise considerably, as well as slaughterhouses begin to fully operate all over the republic under prevailing relevant legislature. 24 Source: National Statistical Service of Armenia 25 Source: National Statistical Service of Armenia 21

VEGETABLE VALUE CHAIN Potential demand in the vegetable sector includes high volume staple foods, high value fresh exports to the CIS, and niche products. In terms of bulk production, vegetables, and potatoes appear to offer Armenia the opportunity for the largest expansion in production. However, in the absence of domestic processing and an eventually saturated local demand, the success of such development will mainly depend upon stable exports. Both the Georgian and Azeri markets offer the chance for major exports, as the growing season in Georgia is limited and slightly differs in time from Armenia and Azerbaijan produces only limited quantities of potatoes themselves (yet have a very high demand). However, the interviews with industry representatives and experts show that the basis for exports to these countries is extremely precarious. Potatoes are now exported to Georgia informally, and do not pay the 35 per cent Georgian import duty. If Georgia collects those duties in the future, these exports would not likely be profitable. For the Azeri market, continuing border incidents mean that exports (no matter how unofficial) are going to continually suffer from a degree of uncertainty. The export potential of Armenian potatoes is already being realized as can be shown by increasing production volumes during the recent years. The increase in production is yet slow, but is largely due to productivity increases in parallel with very slight increase in overall planted area. In order to compete for Georgian market, the diversification of the growing season will not be enough. In the longer term Armenia must increase per hectare yields of potatoes that still compare with its CIS partners, but are very low compare to Turkey. During recent years the increase in vegetable yields in Armenia has added considerable potential for vegetable exports to CIS countries. Nevertheless, yet variable the vegetable yields in Armenia compare well with Turkey. With progress in domestic processing and storage there is a potential for Armenian vegetables and vegetable products (especially dried or frozen vegetables) to be exported to their traditional markets in CIS. With the improvement in ground transportation through Georgia and the existence of regular flights to Moscow, it is foreseeable that the export of standard high value vegetables such as tomatoes, cabbage, cucumber and peppers to the fresh retail markets in Russia are a considerable opportunity for Armenian producers, especially if they are able to store for the off-season or increase greenhouse production. The development of such business is dependent on the involvement of traders with sufficient connections in the Russian wholesale and retail markets to be able to make such a system work. One of those traders and logistics leaders is SPAYKA LLC, which aggressively penetrate into this market niche ensuring stable supply of vegetables to Russian retail market. It is also foreseeable that Armenia is relatively well placed for the supply of non-traditional high value vegetables (e.g. broccoli, asparagus, capers) to the Russian markets. Table 21 Selected Vegetable Value Chain Rapid Assessment Value Chain Source of Future Growth Tomato Emerging exports of tomato paste and juices to CIS markets, especially to Russia Import substitution of ketchup and tomato sauces Cucumber Limited pickled cucumber import substitution and export Pepper Marinated pepper export expansion Possibility to increase dried, crushed or ground pepper exports Cabbage Integration of high value cabbage varieties into domestic agriculture for Growth Potential Medium to High Low to Moderate Medium to High Low Possible Interventions Actions towards productivity increase and cost reduction for farmers and processing companies No need for interventions within the scope of the strategy Promotion of grounded and canned pepper production and export No need for interventions within the scope of the strategy 22

export Tomato is the most common vegetable cultivated in Armenia with a 25-30% share in the total sown vegetable area. Sown area has been fluctuating each year depending on results of the previous year (price and harvest). 82% of total tomato sown area is concentrated in the marzes of Armavir and Ararat, with an increasing share of the later. The sown area in greenhouses comprises about 40 ha, which makes up only 0.6% of total sown area in 2013 and serves the off-season demand within the country. Various tomato sorts are cultivated interchangeably. There is a growing tendency towards cultivating imported tomato sorts that are firmer and have a more attractive product appearance. Tomato productivity in both Ararat and Armavir is around 47-48 tons/ha, much lower than the achievable productivity for most of the tomato sorts cultivated in Armenia, which indicates an inefficiency of the crop cultivation process: irrigation technology and volume depend on weather conditions, evaporation, altitude, and the slope of the cultivation area. The recent outspread of tomato moth in Armavir and Ararat marzes caused harvest downturn in 2012. Open field tomato harvest periods depend on the altitude of the cultivation area: the Ararat plains yield between July and October, while low-lying and foothill areas yield between August and October. During the months October-May, the market is supplied by imported and domestic greenhouse tomato. Cucumber yield had been growing steadily until it reached its peak of 71 thousand tons in 2009, followed by a drop of 23% in 2010, due to atypical weather conditions. Since then, yield has been showing an upward trend. Cucumber cultivation has a higher overall level of difficulty: it is very sensitive to irrigation and temperature and should be provided with the appropriate soil moisture and relative humidity. Yet, below 10 0C, cucumber harvest may spoil. Consequently, cucumber cultivation is less attractive for farmers as compared to tomato cultivation. There are various local sorts of cucumber suitable for both fresh consumption (Gayane, Hayarphi) and processing (Mane, Sis). Yield productivity in Ararat has been growing with 7% annual rate and reached 44 tons per ha in 2013, exceeding second most productive marz s (Armavir) productivity by 68%. In all marzes, except Ararat, Armavir, Shirak, and Aragatsotn, actual cucumber yield has been below 20 ton/ha, which is lower than yield productivity of the 4 sorts mentioned above. Shirak reached 25 tons/ha only in 2013 by showing 11% average annual growth since 2005. Cucumber is planted twice a year in the Ararat plain and harvested between June-July and mid-august to mid- October. It is also harvested from the foothill areas during mid-july through mid-september and from low-lying areas during mid-august to mid-october. The only significant and stable fresh/chilled cucumber import flow comes from Iran (91% of import share with 300 tons in 2012). Total import value is around 810 thousand USD. Imported fresh cucumbers supply off-season demand. Fresh cucumber export is negligible. Only a small portion of harvest is processed. Around 90% of processing output serves to meet 30% of domestic demand. Food processing companies together bought between 350 and 530 tons per year during 2003-2013, excluding the peak year in 2010 (1,140 tons). Only a negligible part of the harvest (about 1%) goes through processing. Unattractive pricing for small-size cucumbers, demanded by processing companies, does not motivate farmers to harvest cucumbers at earlier stages. 23