1. Presentation for the World Bank Seminar on The Dynamics of Vertical Co-ordination (FAO, Rome, February 28 th 2005) Comparative study of agri-food chains in Armenia, Georgia, Moldova, Russia and Ukraine Matthew Gorton and John White

2. What Did We Do? Conducted interviews with 60 executives of agri-food enterprises in 5 CIS countries. All interviewees senior executives, established businesses, made recent capital investments and deal with farmers. Data collected on enterprise performance, extent of contracting, use and impact of contract support measures and wider business problems. Data collected for 4 years (1997, 1999, 2001, 2003). For each country: 4 milk processors, 4 plant based enterprises and 4 value-added companies selected.

3. What did we find out? Contracting between processors and farmers became more prevalent over the period 1997 to 2003. The use of contracts with both small and large farmers grew but growth in the latter case has been greater.

4. Use of Contract Support Measures Measure% offerMeasure% offer Prompt payments46.7Machinery16.7 Transportation45.0Specialist storage15.0 Credit38.3Harvest / handling11.8 Physical inputs33.3Market access10.0 Guaranteed prices23.3Bus / fin advice10.0 Farm loan guarantees18.3Investment loans 6.7

5. Impact of Contract Support Measures (2) Mean impact of contract support measures was a rise in farm yields by 9.1% and an increase of 9.5% in the amount of farm level output reaching higher standards. Measures with greatest impact: veterinary support, physical inputs and specialist storage (especially milk cooling equipment) and a set of market measures (prompt payments, guaranteed prices and market access). Returns to investment loans and machinery - relatively poor.

6. Characteristics of processors by change in product quality (1997-2003) Change in product quality % of sample % of raw material bought using contracts (2003) Average number of contract support measures used (2003) Worse quality 26.730.32.00 No change11.737.91.86 Improve Quality 61.756.54.24

7. Marginalisation of Small Farms? Little evidence for the marginalization of small farms. a) The number of small farms dealt with: 55% report that they deal with more small farms in 2003 than 1997. 22% deal with less. Few processors have specific plans to reduce the number of farms dealt with. b) Terms and conditions offered to small farms: Selected access to some contract support measures but not prices / late payment. Success > wider availability

8. Foreign Direct Investment (FDI) FDI-firms have made significantly greater capital investment (both as a total and per employee). Most of this investment has been in upgrading processing facilities. Western FDI-firms characterized by: a) Use significantly more contract support measures; b) Source a significantly greater proportion of agricultural inputs from small farms; c) Higher levels of exporting.

9. What are the Implications? (1) 1.Contracting and contract support measures have been beneficial. Improved yields and quality of output. Significant association with quality improvements. 2.Lessons on Impact of Contract support measures. a) Preserving the quality of what is already produced; b) Veterinary support and willingness to learn rather than just size; c)) Credit and loans - relatively poor return. Monitoring problems; d) Market measures - prompt payments.

10. What are the Implications? (2) 3. The positive benefits of FDI are apparent. Upgrading processing facilities and provide greater support to farmers. Not led to marginalization of small farms. 4. C hallenge of internationalization is a priority. Most domestically owned firms lack experience in this field (marketing, harmonization with international technical standards). Such specialist advice typically cannot be obtained from local educational establishments.