Cesar Flores Agribusiness Marketing Consultant East-West Management Institute 575 Madison Ave 25th Floor New

York, NY 10022

Phone: 212-843-7660 Fax: 212-843-1485 E-mail: cesarflor@yahoo.com



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


Introduction Executive Summary 1.1 Background 1.2 Comparison of Greenhouse Systems 1.3 Constraints 1.4 Objectives Market analysis 2.1 Target Market 2.2 Crop Selection 2.3 Market Timing Brand Strategy 3.1 Horizontal linkages 3.2 Trade brand 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





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 1.1 Introduction 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 Steel tube construction Double layer UV resistant cover

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

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

Table 1 Comparison of greenhouse technologies

Open Flame Heating

Flood Irrigation Soil

Photo 3 Traditional Azeri Greenhouse—inside view

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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

Longer structural lifespan 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.

Less expensive to construct Easier technology to adopt

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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-tomarket 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 2.1

Market Analysis 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).







1000 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 coolseason crops, timed to harvest during the highest price months: Spring Harvest March through May Fall Harvest Oct through Dec

3.0 1.1

Horizontal Linkages 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



6821 3241 100

Farm gate Price


Middleman Margin

Market Fee

Trader Margin

Baku 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



0.20 1.34

Farm gate Transport Price

Middleman Margin

Tariff 15%

Market Fee

Trader Margin

Moscow 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 Double layer 8 kg box

Photo 7 Corrugated fiberboard 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 IRC EWMI RED USD AZM RUB USDA Aqro Informasiya Merkezi International Rescue Committee East-West Management Institute Rural Economic Development Project US Dollar Azerbaijan Manat Russian Rouble 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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