Cesar Flores

Agribusiness Marketing Consultant

East-West Management Institute Phone: 212-843-7660
575 Madison Ave Fax: 212-843-1485
25th Floor E-mail: cesarflor@yahoo.com
New York, NY 10022

HORTICULTURAL CROP MARKETING

STRATEGY
 HORTICULTURAL CROP MARKETING STRATEGY

February 2006

International Rescue Committee/Azerbaijan

Rural Economic Development Project

Submitted by:
Cesar Flores
East-West Management Institute Inc.

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 TABLE OF CONTENTS

Executive Summary

1.0 Introduction
Executive Summary
1.1 Background
1.2 Comparison of Greenhouse Systems
1.3 Constraints
1.4 Objectives

2.0 Market analysis

2.1 Target Market
2.2 Crop Selection
2.3 Market Timing

3.0 Brand Strategy

3.1 Horizontal linkages
3.2 Trade brand

4.0 Marketing Linkages

4.1 Value Chain

4.2 Supply Chain Logistics
4.2.1 Consistent Product
4.2.2 Standardized Packaging
4.2.3 Consolidated Transport

6.0 Crop Scheduling

6.1 Fall Crop Schedule
6.2 Spring Crop Schedule

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 Horticultural Crop Marketing Strategy

Executive Summary

This report provides an analysis of the market potential and a recommended market
strategy for greenhouse grown vegetables and other fresh produce from the Rural
Economic Development project demonstration farms in Azerbaijan. It is intended to
offer guidance to the producers on ways to approach decision making in their efforts
to enter domestic and international markets. A number of simple and practical
implementations can be made in individual and joint greenhouse operations to
optimize production and make marketing choices that will maximize prices and sales
volume as well as return the highest profits to the producers.

1.0 Introduction

1.1 Background

IRC’s Rural Economic Development Project was initiated in September 2004 with a
goal to establish profitable and sustainable agricultural production and processing
systems in order to improve food security, increase farmer income and assist in the
building of integrated rural market chain systems in nine targeted regions of
Azerbaijan. A central objective was the creation of nine demonstration farms with
greenhouses that incorporate a blend of advanced technology and local materials. The
greenhouses feature hydroponic systems and the capability for both vegetable and
seedling cultivation with the flexibility to divide or change production to meet market
conditions.

The farms have community limited liability shareholder ownership, with an average
of 5 shareholders per farm. The shareholders have a wide range of business
backgrounds, but in general, they are entrepreneurs with little direct farming
experience, and are new to the commercialization of agricultural products.

1.2 Comparison of Greenhouse Systems

The majority of traditional greenhouses in Azerbaijan are constructed of wood and

single sheets of plastic sheltering crops sown in garden soil. They are simpler than the
demonstration farm greenhouses both in construction and the cultivation systems they
employ (Photos 1, 2, 3, 4).

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 Wood construction
Single sheet plastic
Photo 1 Traditional Azeri Greenhouse
Traditional Azeri Greenhouses
Wood frame
Single Sheet clear polyethylene
Soil with potential pathogens
Flood irrigation
Conventional fertilizers
Heated with open gas flames
Not insulated
Not ventilated
Often shaded by walls
Table 1 Comparison of greenhouse technologies
Open Flame Heating
Flood Irrigation
Soil
Photo 3 Traditional Azeri Greenhouse—inside view
Rural Economic Development Project
Steel tube construction
Double layer UV resistant cover
Photo 2 Demonstration Farm Greenhouse
Demonstration Farm Greenhouses
Steel Tube Frame
UV resistant diffusing double layer
Sterile Planting media
Drip irrigation
Controlled Fertigation
Thermostatic forced air heat
Thermal blanket
Bi-lateral controlled venting
Full Sun
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 Support for thermal blanket

Thermostat controlled
Forced air heating

Drip irrigation

Sterile media

Photo 4 Demonstration Farm Greenhouse – inside view

Both styles of greenhouses have advantages and disadvantages from both operational
and production perspectives (Tables 1 and 2):

Traditional Azeri greenhouses Demonstration Farm Greenhouses

Less expensive to construct Longer structural lifespan
Easier technology to adopt Higher potential yield per plant
Reduced heating fuel costs
Fewer disease vectors and lower
pesticide costs
Labor saving automated systems
Table 2. Comparison of greenhouse system advantages

In general, the demonstration greenhouses are more expensive to construct and install,
but less expensive to operate. The lower operating costs are due to savings in fuel,
pesticide application and labor. Fertilizer applications may also be less expensive,
when controlled doses delivered by Fertigation are compared to bulk applications of
commercial fertilizers on soil.

In the long-term, the demonstration greenhouses should be much more cost-effective

when greater yields, fewer lost harvests, and a longer useful life of the greenhouse is
computed.

Nevertheless, the consequences of introducing a more complex technology should not

be underestimated. It is critical that the Greenhouse operators receive sufficient
technical training and support to match their needs.

Equally important, the traditional Azeri greenhouses are in use precisely because they
are able to produce crops at a profit. They are not an inferior system, and may be the
more appropriate choice in some cases, especially for the undercapitalized investor.

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1.3 Constraints

The introduction of efficient small-scale horticultural farm enterprises provides the

potential for introducing a means for real gains in farm income. However, as in all
agricultural activities, higher profits are closely linked to high risks. The new farm
entrepreneurs can be expected to resist risking their investment in new and unfamiliar
markets. Therefore, making clear the market risks is a prerequisite for expecting
investment agreements from potential grower/investors.

The key existing constraints that must be confronted to ensure a greater chance of
success for the demonstration farm enterprises include:

• Cool season greenhouse crops generate much higher per kilogram production
costs than field crops and must be offset by buyers willing to pay higher
prices to the growers

• Horticultural crops have volatile seasonal price movements and require careful
planting schedules to capture the market trends

• Limited marketing cost information may result in growers accepting lower

than fair prices

• Fresh horticultural crops have a limited shelf-life and demand fast time-to-
market logistics. The demonstration farms are located in regions with poor
road conditions and are generally far from urban markets

These pre-production issues may be resolved with a strategy that incorporates product
varieties which give higher likely net yields, techniques that take maximum advantage
of the greenhouse ability to extend production into the higher priced periods, and a
focus on reducing losses through post-harvest product quality management.

1.4 Objectives

Preliminary analysis resulted in these objectives and recommendations:

• Identify crops with the highest returns in the highest priced target market

• Plan production to coincide with a limited competing supply

• Provide marketing information that empowers growers to negotiate from a

position of strength

• Prevent excessive losses through coherent grading, packing and shipping

solutions

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2.0 Market Analysis

2.1 Target Market

Rural and regional markets are unlikely to support sufficient demand in the price and
volume necessary for a profitable greenhouse operation. Thriving urban markets for
horticultural crops are the Azerbaijan capital, Baku; and Moscow in the Russian
Federation.

Russia was estimated to purchase almost $15 billion of food and agricultural products
in 2005. Retail sales are growing at impressive rates, 12% in 2004. Forty four percent
of products sold through retail are imported from abroad. And according to experts,
90 percent of food prepared in restaurants and cafes in Western Russia is imported
(USDA GAIN Report: RS5318, 2005).

It is generally estimated that 60-80% of fresh Azeri produce is grown for export to
Moscow. Much of the Azeri-Russia trade, although well established; is
undocumented, moves through unofficial channels and is little understood by
outsiders. However, it cannot be accidental that immigrants from Azerbaijan have a
well-known reputation for firmly controlling Moscow’s outdoor vegetable markets.

In just one example, the region centered on the town of Shamkir in northern
Azerbaijan has several dozen sustainable greenhouse operations that enjoy a robust
trade in fresh tomato, cucumber and greens with Russia. This evidence indicates that
the high transport and transaction costs to Russia can be overcome. Additionally, this
provides a ready model for the newly established demonstration farms for potential
export market development.

Fresh vegetable trade with Russia should not be rejected as a target market for this
project’s produce when considering the traditional trade relationship and considering
that Azerbaijan’s neighbor is now one of the world’s fastest growing economies.

2.2 Crop Selection

At this time, technology has been provided in the nine demonstration farms for only
greenhouse cucumber and tomato crops.

Criteria for selecting tomato cultivars are:

• Long shelf-life to withstand potentially long, difficult road transport and other
post-harvest delays

• A medium fruit weight to appeal to established consumer preferences

• Indeterminate, widely resistant varieties, suitable for early and cooler

temperature production in plastic greenhouses

Appropriate cultivars that meet these criteria and available in Azerbaijan are:

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Jaguar F1. A new indeterminate tomato hybrid of early maturity. The plant is
vigorous, with an open habit. The outstanding cold tolerance of Jaguar makes this
variety suitable for a wide range of growing techniques and areas. The uniform, flat
round-shaped and nicely ribbed fruits are medium-sized and have an average weight
of 160-180 g and long shelf life. Fruits can be harvested green. At full maturity, the
fruit color is red. Resistant to Fusarium wilt (races 1 and 2), Tobacco Mosaic Virus
(strains 0-2), Nematode and Verticillium wilt. Suitable for cultivation in glasshouses
and plastic greenhouses and in the open field.

Marissa F1. An early-maturing indeterminate tomato hybrid with vigorous plants and
a high yield potential. Produces firm, round to flat round fruits that weigh 150-170 g,
have good shipping capability and hold well, without loss of quality, for over two
weeks after picking. Suitable for the fresh market. Resistant to Tobacco Mosaic Virus,
Cladosporium fulvum (races 1-5), Alternaria stem canker, Verticillium wilt, Fusarium
wilt (races 1 and 2), Fusarium crown and Root rot . Recommended for trellis culture
under glass, plastic and in the open field.

Marfa F1. An indeterminate tomato hybrid with an early maturity, very good vigor
and excellent root system. Produces firm, round fruits that weigh 130-160 g and hold
for up to 15 days at room temperature after picking. Suitable for fresh market. Fruit
setting is very good even at subnormal temperatures (1-2 C lower than for other
hybrids in its class). Resistant to Tobacco Mosaic Virus, Verticillium wilt, Fusarium
wilt (races 1-2), Cladosporium, Nematodes, Gray leaf spot and Fusarium crown and
Root rot. Recommended for trellis culture under glass, plastic and in the open field

2.3 Market Timing

Traditional greenhouse growers in Azerbaijan tend to be risk averse and economical

to a fault, especially if they are new to greenhouse technology and are accustomed to
field crops, which are much more dependant on climate. They often over-economize
on heating fuel by waiting to plant in warmer spring weather, thus harvesting during
rapidly falling prices. The decision of when to plant is ideally based strictly on

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market prices to take full advantage of the benefits of greenhouse performance.
Higher prices can subsequently more than recover the higher production costs.

Tomatoes prices follow a steep seasonal pattern in the Baku markets (table 3).

10

R
8

4 W

1000 J F M A M J J A S O N D
AZM

Table 3 Baku Retail and Wholesale Fresh Tomato Prices 2005

(AIM 2005)

Generally, prices are high in winter and early spring, and are low in the summer
reaching their peak in early April. An optimal planting schedule includes two cool-
season crops, timed to harvest during the highest price months:

Spring Harvest Fall Harvest

March through May Oct through Dec

3.0 Horizontal Linkages

1.1 Shared logistics

Nine identical greenhouses producing similar products provide the opportunity for
strong economies of scale. The larger the volume of product marketed, the greater the
scope for lowering unit costs. Leveraging of financial resources is possible through
interfirm collaboration. A marketing group formed with the nine demonstration farms
will encourage the following cooperation:

• Reducing costs through bulk input purchases

• Increasing efficiency through exchanging production skill and resources

• Ensuring product quality through shared production standards.

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 • Reducing transportation and transaction costs by consolidating shipments

An effective implementation would be the creation of an efficient and low-cost

market supply chain. This involves using production and marketing agreements to
bring all nine greenhouse crops to the market in a joint effort. Input supply
agreements will also generate efficiencies.

Opportunities can be created for the growers themselves to become input suppliers, as
in the case of a single greenhouse propagating seedlings for distribution to all nine
greenhouses; or one of the growers can undertake the manufacture of packaging for
use by the group.

These linkages can be either formal or informal. If cooperation becomes difficult

among the individual growers, they can be networked by a channel partner. This
could be a third-party broker or trader who manages the group and essentially
becomes part of the marketing chain.

3.2 Trade brand

Establishing a single trade brand has the advantage of building consumer recognition
and loyalty. Agricultural Brands are often associated with a geographic reference.
This will leverage the existing value and fame Russian consumers attach to
"Azerbaijan grown" tomatoes. The graphic images and the name itself should be
associated with Azerbaijan culture to add impact to the recognition. Appropriate
examples are:

• "Aran Shirvan” or similar geographic trade name

• Caravan graphics on the label
• "Product of Azerbaijan" featured boldly on the label

A generic brand for second grade produce can also be created for either the domestic
or export market.

4.0 Marketing Linkages

4.1 Market Value Chain

It is not sufficient for growers to have accurate final market price information to
negotiate the prices they receive. They must also be aware of marketing margins.
Knowing the real costs that accumulate after the product leaves the farm, gives the
grower negotiating strength. Tables 4 and 5 describe sample market value chains for
tomatoes in the Baku and Moscow markets during the peak price season:

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 Azeri Manat per kilogram
2046

1431 2

6821
3241 100

Farm gate Transport Middleman Market Trader Baku

Price Margin Fee Margin wholesale
price

Table 4. Greenhouse tomato value chain / Baku market

Analysis of the price increases in the supply chain also helps the growers make
decisions about possibly capturing more of value by integrating forward. For
example, by supplying their own transport and acting as their own intermediary.

0.75

US Dollars per
kilogram
0.10

0.17 3.00
0.44

0.20
1.34

Farm gate Transport Middleman Tariff Market Trader Moscow

Price Margin 15% Fee Margin wholesale
price

Table 5. Greenhouse tomato value chain / Moscow outdoor vegetable market

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4.2 Supply Logistics

Product uniformity and coordinated operations across all nine demonstration farms is
essential to sell under a single brand. This can be achieved by all growers in the group
by:

• Transplanting the same seedlings on the same date to synchronize production

• Growing out the crops using the same fertigation regime
• Harvesting fruit at the same maturity and ripeness
• Sorting and grading produce using shared standards
• Packing into standardized packaging at the greenhouse
• Assembling shipments and transporting on a fixed schedule

4.2.1 Consistent Product

Seedlings. In order to synchronize production, 9,000 seedlings can be started in one

centrally located greenhouse (photo 5) and after propagation, distributed to the 9
greenhouses for transplanting. This will ensure that all greenhouses are growing the
same variety at the same time.

Photo 5 Seedling propagation

Tomatoes. After growing out the crops using similar fertilization regimes, tomatoes
are best harvested when “mature-green” and not “firm-ripe” as is common practice
for local consumption. Tomatoes should be uniform size when packed: the difference
of the most cross diameter between tomatoes should not exceed 0.5 cm.

Mature means: that the tomato has reached the stage of development which will
ensure a proper completion of the ripening process, and that the contents of two or
more seed cavities have developed a jelly-like consistency and the seeds are well
developed. (USDA)

Green means: "the surface of the tomato is completely green in color. The shade of
green color may vary from light to dark (USDA)

Tomatoes are then sorted and packed at the greenhouses using agreed upon standards

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Potential Production Volume per greenhouse
One Greenhouse:
• 1000 tomato plants (9000 per greenhouse)
• 10,000 kilos tomato per greenhouse per harvest
• 1250 crates per greenhouse
• 13 crates per day per greenhouse

Total Potential Production Volume

Total group production from 9 greenhouses:
• 9000 tomato plants
• 90000 kg
• 90 Tons
• 11,250 total crates
• 125 crates per day
• 9 truck loads
• One 10 ton truck every ten days for 3 months

4.2.2 Standardized Packaging

Currently, most of the fresh tomato production in Azerbaijan is packed in handmade

wooden boxes of 15-18 kilograms. These crates are loaded 4 or 5 tomatoes deep.
Product losses consequently tend to be high. A one or two layer container will greatly
reduce these losses. Corrugated fiberboard is lighter than wood and will reduce tare
weight, yet is strong enough for stacking.

In Russia, wholesale buyers are often small grocery shops that prefer a smaller weight
container that can be used for retail display and will sell out before spoiling. Prices
paid per kilogram are higher for this smaller size crate.

The ideal new packaging is a 6-8 kilogram double or single layer tomato “flat” made
of corrugated fiberboard (photos 6 and 7). This packaging is not currently available
in Azerbaijan and will need to be imported. Costs for this packaging can be expected
in the USD 0.06 to 0.12 per kilo range.

Approximately 11,250 8 kg crates are needed to pack one complete growing season

Photo 6 Corrugated fiberboard Photo 7 Corrugated fiberboard

Double layer 8 kg box Single layer 8 kg box
(loaded double for display)

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If imported fiberboard boxes cannot be sourced, an alternative may be to manufacture
stackable wooden crates to a uniform standard size particularly in length and width;
common dimensions are 50 cm X 40 cm X 15 cm. This option provides the benefit of
a potentially new local micro-enterprise opportunity to participate as input supplier.

4.2.3 Consolidated Transport

Shipments can be transported in Russian made trucks with payload capacities of 5 or

10 tons (photo 8 and 9). Each can carry approximately 625 and 1300 8 kg crates
respectively. The GAZ-53212 averages 22 L/100 km fuel consumption. The round
trip fuel cost for the 1600 km trip Baku to Moscow is approximately USD 342 (diesel
price 12.09 RUB/lt) or USD .03 per kilo.

The total transport cost could be as high as USD 0.20 per kilo when computing lease
of truck and driver and assuming no backhaul cargo.

Photo 8 GAZ-53 5 ton truck Photo 9 GAZ-53212 10 ton truck

Table 6 Nine greenhouse consolidation and transport scheme

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The large GAZ-53212 truck can run the 9 greenhouse route every ten days (table 6)
and collect up to 130-140 crates from each location during the peak season. The trip
to Moscow takes 2-4 days enroute, tomatoes ripening in transit.

5.0 Crop Scheduling

The goal in planning a crop schedule is to align the supply chain with the marketing
strategy. The following are sample crop schedules for 2006 and 2007:

5.1 Fall Crop Schedule

1. Sow a minimum of 9000 certified "Marissa F1" seeds into plug seedling trays
in one centrally located greenhouse on or about June 30th

2. Propagate the 9000 seedlings for six weeks

3. Distribute 1000 seedling starts to each greenhouse and transplant into beds no
later than August 14

4. Grow out tomato plants using standardized drip fertigation regime

5. Harvest October-December when tomatoes are "mature green".

6. Pack into standard crates at the rate of approximately 13 crates per greenhouse
per day.

7. Load a 10 ton truck every ten days with 130 crates from each of the nine
greenhouses making up 1200-1300 total crates. Transport 3 days to Moscow.
Sell out in 2 days and return

8. December 16 - remove plants and sterilize beds

5.2 Spring Crop Schedule

1. Plant a minimum of 9000 certified "Marissa" seeds into plug seedling

trays in one centrally located greenhouse on November 7th

2. Propagate the 9000 seedlings for 6 weeks

3. Distribute 1000 seedling starts and transplant into the 9 association

greenhouses no later than January 6

4. Grow out tomato plants using the standardized fertigation regime

5. Harvest March 15 until Early July. Pick tomatoes "mature green"

6. Pack into standard crates at the rate of approximately 13 crates per

greenhouse per day

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 7. Load a 10 ton truck every ten days with 130-140 crates from each of
the nine greenhouses making up 1200-1300 total crates. Transport 3
days to Moscow. Sell out in 2 days and return

8. July 30 - remove plants and sterilize beds

ACRONYMS

AIM Aqro Informasiya Merkezi

IRC International Rescue Committee
EWMI East-West Management Institute
RED Rural Economic Development Project
USD US Dollar
AZM Azerbaijan Manat
RUB Russian Rouble
USDA United States Department of Agriculture

Acknowledgments

This report would not have been produced without the

generous assistance of IRC staff members in Baku and the
regional offices. I especially thank Rose Wellington and
Amir Omanovic, and Kim Gildersleeve for their
administrative support, and for helping this effort. Also, as
always, Husseyn Huseynov of Agroservis for sharing ideas;
Peter Wotowiec of Farmer-to-Farmer for his timely technical
assistance; Nazakat Bayverdiyeva at AIM and Mathilde
Groh at Accion Contra el Hambre for providing
indispensable technical data. A very special thanks to Ressa
Charter of Peace Corps without whose collaboration, this
report would have been much more difficult.

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