The Georgian Egg of Discord

The Georgian Egg of Discord

eggs.jpgThe FINANCIAL -- While the Khachapuri Index continues to climb up in a perfectly predictable fashion – driven by the seasonal increase in the price of cheese – a bit of drama is being provided by the ups and downs in the price of eggs.

eggs.jpgThe FINANCIAL -- While the Khachapuri Index continues to climb up in a perfectly predictable fashion – driven by the seasonal increase in the price of cheese – a bit of drama is being provided by the ups and downs in the price of eggs. According to ISET data, egg prices, which for a couple of years hovered around 29 tetri a piece, suddenly collapsed in June and July 2013 to a minimum of about 26 tetri. A month later, however, eggs started increasing in a very sharp manner, reaching an all time high of more than 32 tetri in October. In November egg prices stabilized at 31 tetri, well above the multiyear trend.

What is going on?

isetkhachapuri.jpgLike the golden apple of discord in the Greek mythology, eggs have recently become a major bone of contention in Georgia’s politics. Consumers started ringing alarm when egg prices soared in August, and the UNM opposition used the opportunity to slam the new government for “prohibiting” egg imports. The Ministry of Agriculture responded to these accusations with an explanation.


As it turns out, the drama has its origins in a series of trade policy measures implemented by the new Georgian administration since its accession to power in October 2013. The Georgian egg market, so it appears, has been protected from imports by non-tariff measures implemented (or tolerated) by the Saakashvili administration until its last day in office. According to the Ministry of Agriculture’s explanation, these measures were in a “complete violation of law and international agreements”. Whether their purpose was to protect particular producers or the industry at large, they have effectively sealed Georgia’s borders for egg imports (see chart).

 

Thus, one of the first policy changes implemented by the Georgian Dream government was to lift these “illegal” restrictions and open the market for competition with foreign producers.


While egg imports were slow to gain momentum, prices reacted very quickly (and positively) to this policy change. Starting from the peak of 31 tetri in November 2012, prices declined in December 2012 and January 2013, finding “support” at the level of about 28 tetri until May 2013.


In the meantime, imports grew very fast, rising from 1.5mln physical units (1.3% of total domestic consumption) in the last quarter of 2012, to 6.1mln (4.8%), to 10.8mln (7.9%) in the first and second quarter of 2013, respectively (see chart).


As Georgian chicken did not stop laying eggs, domestic producers could not immediately adjust their level of production. As a result, by the second quarter of 2013, the total quantity of eggs supplied in the Georgian market reached an all time high of 136mln pieces. By the end of the quarter, in June 2013, egg prices collapsed to 26 tetri.


By April 2013, domestic egg producers have become nervous. The issue was publicly discussed in the Georgian language Business Courier at the end of April (“SOS Kartuli Kvertskhi”) and multiple follow-up publications in various media, including an article in The Financial. Georgian egg producers were calling for protective measures to be imposed against increased egg imports, claiming that otherwise domestic egg production in Georgia would be crippled by competition with larger-scale producers in Turkey, Moldova and Ukraine, who enjoy protection in their own countries and face lower prices for cereals and electricity.


On June 11, 2013, the government came forth with a set of regulations establishing stricter rules for transportation, storage, import, and transit of eggs. The new policy purported to impose quality control measures on both domestic production and imports of high-risk products such as eggs. One welcome change was the requirement to mark producers’ names and production date on the eggs.


Perhaps ironically (but not surprisingly), the new measures appear to have affected both importers and domestic producers. In the third quarter of 2013, imports shrank to a mere 2.6mln eggs. At the same time domestic production contracted by a solid 20%, from 125 to a mere 100mln. Prices skyrocketed, increasing from 26 to 32 tetri (almost by 25%) in a span of only three months, from July to October.


There are important lessons learned to this story. As Georgia eyes greater trade integration into the EU, its producers will be subjected to greater pressure associated with the need to implement quality control measures at home AND removing non-tariff barriers on goods originating in Europe. For one thing, higher quality comes at a cost – such as the cost of machines to mark producers’ names and production date on eggs – which will be reflected in the price of the final product. Second, the higher cost of domestic egg, meat and dairy production will allow European firms to enter the Georgian market, applying further competitive pressure on the Georgian producers.


The overall impact on the Georgian economy will depend on whether or not Georgia will be able to take advantage of the opportunity to export to the European market. The opportunity will certainly be there, but Georgia would have to act in a strategic manner in order to carve out a niche for its products in a large but highly competitive market, such as the EU.