On the back of a sharp y/y decline in the price of Imeretian cheese (down by about 10 and 18% in July and August 2016, respectively), the Khachapuri Index took a big hit in August 2016. Having reached the seasonal bottom in May, the Index increased in June due to regular seasonal factors (tourism-related increase in demand and a gradual slowdown in domestic milk production). Yet, its behavior in July and August represents a major departure from the multi-year pattern we have been observing since 2008. In July, instead of going up, the Index dropped 3 tetri (to 3.01 GEL). The modest monthly increase of 14 tetri in August left the Index well below its last year value: 3.15 compared to 3.49 GEL in August 2015, representing annual Kh-Index deflation of 9.6%.

What may be behind such a major shift in cheese price dynamics? The answer must be sought on the supply side. If anything, this summer must have seen a sharp increase in the demand for Georgia’s traditional foods, including cheese and khachapuri, as a result of continued expansion in international and internal tourism (the latter was triggered by a series of concerts held in Batumi and Kutaisi as part of the “Check-In Georgia” program).

One reason for the increased supply of Imeretian cheese is favorable weather conditions (precipitation causing greater production of green grass and, consequently, milk supply). Additionally, Georgian cheese producers may be learning to substitute (cheaper) milk powder for fresh milk, making them less dependent on weather and domestic milk production cycles. A quick analysis of imports data suggests that this may be indeed the case. In the first 7 months of 2016, Georgia imported some 140 tons more of milk powder (a 40% increase) compared to the same 7 months of 2015.