Graph 1 shows the density of Georgian farmers’ revenues received from selling their produce, generated from the sample of 3,000 Georgian rural households. (For the motivation and methodology of our study, please refer to the article that was published here last week. It is also available online on the ISET Economist Blog: “Dumb Farmers Do Not Grow Big Potatoes”, by Florian Biermann and Ruediger Heining). 

When the curve of the graph is high, it means that there are many farmers in the respective income range. When it is low, there are few. With respect to agricultural extension efforts, an important question is how those farmers who can be found in low-income ranges of zero to 3,000 laris are different in their knowledge and skills from those few on the right side of the horizontal axis. In other words, what is the relevant human capital that allows for being successful in Georgian agriculture? In this article, we will give a preliminary answer to this question.

When interpreting the chart, it is important to note that the graph is restricted to monetary revenue. It does not include the non-monetary income of a farm, like tomatoes, potatoes, cheese, etc. that were consumed by the members of a rural household directly. This explains why there are farmers that do not report any income from selling their products – they just consume their own products and may have non-agricultural income. It is also important that none of these farms are agricultural companies, but all are smallholders or medium-sized farms. The registered companies were surveyed separately and are not part of the analysis we present here.

FARM MANAGEMENT IS KEY

If one would pick one farmer randomly from the left side of the horizontal axis and compares them to one from the right side, the most striking knowledge and skill differences would be in terms of farm management. 

Farm management knowledge and skills do not only increase the output per hectare but also affect the prices that were achieved for goods. This correlation does not exist for staple commodities like wheat, where most producers are just price-takers, but for primarily locally sold goods like tomatoes, niche products like tropical fruits, and speculative goods like walnuts.

The importance of entrepreneurial knowledge is also illustrated by the fact that all but one of the skills and knowledge areas that were included in our questionnaire had an impact only on the yields per hectare of particular outputs (e.g. skills in soil analysis had an impact on the yield of wheat and maize, but not on the yield of tomatoes). The only knowledge/skill area which we found to be important for the income that was generated with any arbitrary product was “trading and selling”. 

The most promising step in moving Georgian farmers from the very left side of the horizontal axis towards the right side is therefore to bring some of them to the point where they sell (parts of) their products and those who are incapable of doing so to step out of agriculture. Afterward, it is about enlarging the market to which they deliver. Based on this development model, the stages of entrepreneurship of a Georgian farmer are the following: (1) production only for self-consumption (subsistence farming), (2) production for local (village) markets and side-of-the-road sales, (3) production for intermediate traders, possibly on a contractual basis, and finally (4) integration in international markets. However, as arable land is limited in every country, at some point farmers cannot increase production further – or utilize economies of scale – if others are not handing over their land. Hence, a transformation from the non-performing landowner to the agricultural performer is called for.

These four stages mentioned above provide an orientation for the agenda of agricultural extension, and more generally, agricultural development in Georgia. Those farmers who are just self-consuming have to be taught how to produce for the local markets. For example, instead of producing the whole range of agricultural goods, which they produce for their own kitchen, they have to specialize in those products that enable them to make the highest incomes. Similarly, those who are already at that stage where they sell on local markets are to be brought to a level where they can become partners of intermediate traders or cooperatives. This requires the skills to plan harvest and deliveries in time with required quality and, of course, to be capable of reading and understanding contracts. Moreover, calculations skills have to be conveyed which allows for cost-covering pricing. Once farmers are already producing for intermediate traders, the next step is to go international.

LET GEORGIAN FARMERS GO INTERNATIONAL

Our data show a clear pattern: for those goods which are in Georgia primarily produced for the local market (often without competitive pressure from abroad), farmers tend to not understand their knowledge gaps but usually fall victim to the Dunning-Kruger effect (see last week’s article for a discussion of this problem). For goods that have a world market price which is the benchmark for local farmers, which lets them “feel” the competition of foreign producers, farmers are more realistic in their self-assessment and there is no Dunning-Kruger effect. One way to move Georgian agriculture ahead is therefore to foster the integration of the Georgian producers in the regional and global market. This will lead Georgian farmers almost automatically to understand their own skill deficits and become more productive by closing them.

Government policies should foster a development where, at least in principle, Georgian farmers could keep up with international competitors. While this may sound overly ambitious, it is important to see that the movement towards world market integration can be sequential. It is not necessary, and for technical reasons also not likely, that Georgian producers will compete with countries at the current productivity boundary like France and the USA. Rather, the international orientation of Georgian producers could start with Armenia, Azerbaijan, Russia, and Turkey. 

The role of the agricultural knowledge system (education and extension) in this internationalization process is central, as it entails endowing Georgian farmers with necessary management knowledge, enabling them to deal with export companies, bureaucratic requirements, calculate their necessary margins, and understand the preferences and conditions that prevail in foreign markets. All of this will make Georgian farmers much more entrepreneurial, which requires a set of skills that can be explicitly featured in the extension agenda.

As most of the preliminaries needed for such a development agenda depend on managerial skills, this is the one area on which education reform and agricultural extension activities should initially focus. Later, specialized agricultural skills for particular groupS of farmers can be added.