BREAKING FREE FROM DEPENDENCE

The global food crisis and the associated increase in imported inflation have had a very negative impact on Azerbaijan as well. Avoiding such risks in the future requires a transformation of the agro-industrial complex (AIC). The primary goal of reforms is to reduce costs and increase profitability at all stages of production. The optimal solution is to expand the network of agriculture parks and enlarged farms, create a unified business ecosystem in the agriculture sector, and accelerate the sectoral clustering and digitalisation.

Challenges and gaps

Rising prices for food and raw farming materials, as well as for fertilizers and various chemical and biological components used in agriculture intensified further last year. According to the UN Food and Agriculture Organization (FAO), the ongoing crisis revealed a number of technological gaps in the production and processing of raw farming materials in developing countries with a weak structure of food import substitution.

Azerbaijan is also suffering from similar problems. Despite around 80-percent import substitution rate in a number of areas in Azerbaijan, the global food crisis has once again confirmed the presence of thin spots in the structure of the local agriculture industry, which hinder the development of the sector and create various risks amid the global market instability. For instance, farms are still heavily dependent on imported fertilizers and pesticides for crop production, while poultry and livestock farms depend on external supplies of feeds, fodder supplements, vitamins, and vaccines. The whole processing complex and companies importing packaging, containers, components, special equipment and raw materials also heavily depend on import prices. Obviously, inflation has hit all these items hard, increasing the costs of local producers buying raw materials and components abroad.

Low labour productivity remains an equally difficult problem affecting the competitiveness of farming production. Despite over a third of the working population being engaged in the farming sector, its share in the national economy has remained within 5% of GDP for many years.

The situation has not changed much over the years. According to the results of 2022, the total GDP growth in Azerbaijan reached 4.6%, raising the GDP volume to ₼134b. However, agriculture, forestry and fisheries accounted for around 4.8% of total GDP during the reporting period.

The key reason for the low productivity of Azerbaijani farmers is associated with the size of land parcels processed by many farming households and being no more than 5-7 hectares. This makes it technically and financially difficult for farmers to apply modern technical and irrigation solutions. Without this, the crop yield decreases, increasing the cost of the final product. Small farms—around 200,000 according to various estimates—cannot always meet the required quality standards, and have problems with the access to funds and advanced technologies.

To improve financial support

The 2nd Agribusiness Forum recently held in Baku discussed a wide range of issues in the sector, including the problems of financing small farms. Deputy Minister of Agriculture Ilhama Gadimova noted that the current terms for commercial lending in Azerbaijan are unprofitable for this category of farms for a number of reasons. Farmers still need substantial working capital to carry out operations in accordance with agricultural norms.

"We can see the growth of investments in the farming sector in recent years, especially due to non-state sources, whose share today exceeds that of the state sector," Gadimova said, noting that a significant portion of soft loans for investment projects in the AIC processing industries is still provided from the state budget.

Not so long ago, the bulk of concessional financing for the sector has been provided by the state. In particular, through authorised credit organisations of the Agrarian Lending and Development Agency (AKİA), as well as through agent banks of the Entrepreneurship Development Fund (SİF) and partly through international donor programs. The weak involvement of commercial banks was mainly due to the high level of sector risks (climate, irrigation, etc.) and the lack of insurance for small farmers and liquid and attractive collateral for banks.

Nevertheless, the situation with bank financing of agrarian projects is gradually changing. With the introduction of the automated information system Electronic Farming (EKTİS) by the Ministry of Agriculture, it has been possible to administer order and eliminate violations related to the allocation of subsidies to about 600,000 Azerbaijani farmers. Thanks to the EKTİS database, it has been possible to significantly expand the mechanism of preferential lending to agricultural producers and to reduce the negative effects of insurance risks and bank collateral for small farms.

For instance, according to data provided by Firdovsi Aghashirinov, Deputy Chairman of the Agrarian Insurance Fund, the amount of insurance premiums collected last year reached almost ₼13.7m (+18% compared to the 2022 indicator). The crop farming sector had the greatest insurance activity last year—₼8.8m of insurance premiums collected (41% more than in 2021). Premiums collected from farmers producing barley and wheat  made about 2/3 of all the insurance premiums for these strategically important crops. Overall, the total number of insured farmers in Azerbaijan now reaches 385,000, which is significantly more than it was a few years ago.

Improving insurance coverage for farmers and other factors have played an instrumental role in the gradual change of commercial banks' position on lending to the agro-industrial sector. According to Toghrul Aliyev, Director General of the Central Bank of Azerbaijan, last year the volume of agricultural loans grew by 22.5% of the total volume of business loans by the end of 2022. In total, the share of funds of commercial banks accounts for about 2/3 of business loans issued to the agricultural sector, while the rest of the loan portfolio was formed thanks to various state funds.

But this does not mean a reduction in state financing of the farming sector. On the contrary, in order to ensure reliable and sustainable food security, budget allocations to the sector have been increased to ₼1.2b in 2023, which is 20.5% more than last year.

This year and in subsequent years, state funding for projects to increase productivity in the agricultural sector will be expanded. These include further development of agricultural parks, including large grain farms, promotion of clustering and support for cooperative farming forms, and introduction of economical irrigation systems. Thus, it is planned to expand the area of lands with modern irrigation solutions from 50,000 to 200,000 hectares.

To develop agriculture parks

Today, the key vector of government efforts to upgrade the farming sector is the development of agriculture parks, especially since the project on the creation of registry has been completed. In total, 51 agriculture parks in 32 districts of Azerbaijan have been formed on 239,300 hectares of land with total project cost of ₼2.4b in the last eight years. Of them 34 are specializing in crop farming, 14 in plant growing and livestock farming, 1 in cattle breeding, 2 in sorting-packaging, processing and logistics. "At present, production has been established in 44 agriculture parks, with ₼1.4b invested in these projects, more than 4,600 people permanently employed in the sector, over 5,200 people involved in seasonal works, and over 9,300 people expected to be permanently employed in these clusters in the future," Chairman of the Azerbaijan Agency for Economic Zone Development Elshad Nuriyev said recently. He added that agriculture parks play an instrumental role in the production of grain and fodder crops: 152,000 tons of wheat, 71,000 tons of barley, 128,000 tons of corn, 2.7 tons of soybeans, and 55,000 tons of silage and 14,000 tons of alfalfa were produced in them in 2022. Today, agriculture parks provide over 25% of food wheat production. It has been possible to achieve these figures because approximately 80% of all pivotal and other water-saving systems, about a quarter of all elevators, as well as cold storage facilities and high-yield seed production facilities for sowing wheat and other crops are concentrated in these parks.

The trend will continue. For example, it is expected to grow 145,000 tonnes of food wheat in agriculture parks in 2023. Moreover, according to the presidential decree issued last year, additional subsidies will be provided to grain farms for a period of 5 years subject to the use of modern irrigation systems and the conclusion of appropriate contracts for the delivery of grain to the State Reserve Agency and milling companies. It is expected that the cost of about 40% of the purchased irrigation systems will be subsidised by the state, with the rest to be provided through soft loans.

Another innovation, according to Nuriyev, will be granting agriculture park status to enlarged farms and AICs that apply advanced technologies. This will entitle them to preferential loans and appropriate infrastructural support from the state. The latter is very important, as SİF has so far provided 195 million soft loans for the creation of 25 agriculture parks. In addition, 27 parks backed with an investment incentive document have received ₼44.7m as benefits on imports of machinery, technological equipment and installations.

The expansion of agriculture parks in meat and dairy farming will also be accelerated. 36,900 tonnes of milk and 2,300 tonnes of meat were produced in 10 dedicated parks in 2022. The development of large livestock farming clusters will be one of the key areas of the AIC sector in the Garabagh region. Such projects include the Azerbaijani-Turkish Dost agriculture park in the Zangilan district, which has commissioned farms for 3,500 cattle in the first phase last year and created a respective fodder base.

Ultimately, the creation of sectoral clusters will strengthen interaction between their participants. This includes access to new technologies, risk sharing, access to foreign markets, sharing of scientific knowledge and access to key inputs. According to Orkhan Mammadov, Chairman of the Board of the Small and Medium-sized Business Development Agency (KOBİA) under the Ministry of Economy of Azerbaijan, this will make it possible to achieve an average annual growth rate of 4% in agriculture.