Agriculture Global Practice Technical Assistance Paper Kyrgyz Republic AGRICULTURAL SECTOR RISK ASSESSMENT Sandra Broka, Åsa Giertz, Garry Christensen, Charity Hanif, Debra Rasmussen, and Rhoda Rubaiza World Bank Group Report Number 103078-KG FEBRUARY 2016 Agriculture Global Practice Technical Assistance Paper Kyrgyz Republic AGRICULTURAL SECTOR RISK ASSESSMENT Sandra Broka, Åsa Giertz, Garry Christensen, Charity Hanif, Debra Rasmussen, and Rhoda Rubaiza World Bank Group Report Number 103078-KG FEBRUARY 2016 © 2016 World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org Email: feedback@worldbank.org All rights reserved This volume is a product of the staff of the World Bank Group. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of the World Bank Group or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. World Bank Group encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone: 978-750-8400, fax: 978-750-4470, http://www.copyright.com/. All other queries on rights and licenses, including subsidiary rights, should be addressed to the O ffice of the Publisher, World Bank Group, 1818 H Street NW, Washington, DC 20433, USA, fax: 202-522-2422, e-mail: pubrights@worldbank.org. Cover image credit: Nonviolent Peaceforce Contents Abbreviations iv Acknowledgements v Executive Summary vi Introduction 1 Country Context 6 Country Risk Identification and Quantification 12 Crop Production 12 Livestock Production 17 Price Risks 22 Enabling Environment Risks 25 Agricultural Insurance 28 Costing and Prioritizing Agricultural Risk 30 Conceptual and Methodological Basis for Analysis 30 Ranking and Prioritizing Agriculture Sector Risk 40 Sector wide Risks 41 Solution Area 1. Creating Market Opportunities 46 Risk Management: Background 46 The Kyrgyz Agriculture Sector 47 Risk Management: Areas of Priority 52 Risk Management in the National Agricultural Strategy 52 Potential Interventions 53 Solution Area 2. Improve Livestock Productivity 65 Overview of the Risk Environment and Framework 65 The Agricultural Risk Environment 66 The Risk Management Framework 69 Potential Interventions 71 Recommendations and Action Plan 84 Summary and Recommendations of the Solutions Areas 86 Appendix A: Risk Assessment Methodology 88 A.2: Production: Price Derivation for Indicative Loss Analysis 90 i Appendix B Chronology of Major Economic and Adverse Events 92 Appendix C Coefficients of Variation and Adjusted Coefficients of Variation 94 References 95 List of Tables Table ES.1 Agriculture Risk Management Action Plan Summary viii Table 1 Projected Impact of Climate Change on Crop Productivity in the Kyrgyz Republic, 2005 –100 8 Table 2 Locust Infestation and Control in the Kyrgyz Republic, 2006–13 (hectares) 17 Table 3 Incidence and Impact of Livestock Disease in the Kyrgyz Republic, 1996 –2013 21 Table 4 Impact and Causes of Adverse Events for Aggregate Agricultural Output 32 Table 5 Impact and Causes of Adverse Events for Main Crop Commodities 33 Table 6 Impact and Causes of Adverse Events for Main Livestock Commodities 35 Table 7 Impact and Causes of Adverse Events for Commodity Prices 37 Table 8 Most Important Crops in Gross Agricultural Output in the Kyrgyz Republic 47 Table 9 Food Balance Sheet in the Kyrgyz Republic, 2011 48 Table 10 Trade in Agricultural Products in the Kyrgyz Republic, 2012 49 Table 11 Top Export Markets for Kyrgyz Agricultural Products, by Value, 2012 51 Table 12 Market Risks and Proposed Responses for the Aggregate Agricultural Sector in the Kyrgyz Republic 54 Table 13 Market and Price Risks and Actions to Address Them in the Kyrgyz Republic 66 Table 14 Risks and Proposed Responses for the Livestock Sector in the Kyrgyz Republic 73 Table 15 Risks and Actions Related to Community-Based Pasture Management 78 Table 16 Agriculture Risk Management Actions Plan for the Kyrgyz Republic 86 Table A.1 Data Collected and Reviewed for Each Country 88 Table B.1 Major Events in the Kyrgyz Republic, 1992–2013 92 Table C.1 Coefficients of Variation or Adjusted Coefficients of Variation 94 List of Figures Figure 1 Implications of Climate Change for Agriculture Risk Management 9 Figure 2 National and Agricultural GDP in the Kyrgyz Republic, 1993–2012 9 Figure 3 Components of Gross Agricultural Output in the Kyrgyz Republic, 1992–2012 10 Figure 4 Crop Production in the Kyrgyz Republic, 1992–2012 11 Figure 5 Wheat Production in the Kyrgyz Republic, 1992–2013 12 Figure 6 Maize Production in the Kyrgyz Republic, 1992–2013 13 Figure 7 Cotton Production in the Kyrgyz Republic, 1992–2012 14 ii Figure 8 Potato Production in the Kyrgyz Republic, 1992–2012 15 Figure 9 Tomato Production in the Kyrgyz Republic, 1992–2012 16 Figure 10 Livestock Production in the Kyrgyz Republic, 1992–2012 18 Figure 11 Cow’s Milk Production in the Kyrgyz Republic, 1992–2012 19 Figure 12 Beef and Sheep Meat Production in the Kyrgyz Republic, 1992–2012 20 Figure 13 Egg Production in the Kyrgyz Republic, 1992–2012 21 Figure 14 Cereal Prices in the Kyrgyz Republic, 1998–2012 23 Figure 15 Cotton Producer Prices in the Kyrgyz Republic, 1995 –2012 24 Figure 16 Real Vegetable Producer Prices in the Kyrgyz Republic, 1998–2012 24 Figure 17 Real Producer Prices for Livestock Commodities in the Kyrgyz Republic, 1998 –2012 25 Figure 18 Nominal Exchange Rates, 1994–2013 26 Figure 19 Real Current Budget Expenditure for Agriculture in the Kyrgyz Republic, 2003–09 27 Figure 20 Indicative Losses in Constant Prices for Agricultural, 1992–2012 39 Figure 21 Indicative Losses in Real Prices for Agricultural Products in the Kyrgyz Republic, 1992–2012 40 Figure 22 Major Shocks to Aggregate Output in the Kyrgyz Republic, 1995–2015 41 Figure 23 Shocks to Physical Output by Commodity in the Kyrgyz Republic (Constant Prices) 42 Figure 24 Shocks to Producer Prices by Commodity in the Kyrgyz Republic (Real Prices) 43 Figure 25 Shocks to Production and Prices by Commodity in the Kyrgyz Republic (Real Prices) 44 Figure 26 Risk Layering 71 List of Boxes Box 1. Market Information System to Facilitate Export Growth 57 Box 2. Challenges to Establishing a Leasing Industry for Agribusiness: Lessons from Armenia 59 Box 3. Innovation to Increase Investment in Agribusiness 61 Box 4. Stepwise Approach to Food Safety 63 Box 5 China-Canada Livestock Health Extension Project 76 Box 6 LEWS in Mongolia 80 Box 7 Canada-China Feed Industry Project 84 iii Abbreviations ADB Asian Development Bank ADG average livestock growth rates BEE business enabling environment CAREC Central Asia Regional Economic Cooperation CV coefficient of variation FAO Food and Agriculture Organization FMD foot and mouth disease GAO gross agricultural output GDP gross domestic product IFAD International Fund for Agricultural Development IFC International Finance Corporation KAMIS Kyrgyz Agricultural Market Information System LEWS livestock early warning system MAWR Ministry of Agriculture and Water Resources NSDS National Sustainable Development Strategy OIE International Office of Epizootics PES payment for environmental services PPR pestes des petits ruminants PUA pasture user association RATIN Regional Agricultural Trade Network SRM sustainable rangeland management USAID U.S. Agency for International Development WBG World Bank Group iv Acknowledgements This report was prepared by a team led by Sandra Broka (Task Team Leader, Senior Rural Finance Specialist, GFADR) and Åsa Giertz (co-Task Team Leader, Senior Agriculture Economist, GFADR), and comprising Garry Christensen (Lead Author), Charity Hanif, Debra Rasmussen, Rhoda Rubaiza, Talaibek Koshmatov, Ulan Tungatarov, Kairat Nazhmidenov, Traci Johnson, and Lidia Hvan. Jitendra Srivastava, Eugene Gurenko, Rupak Manvatkar, and Peter Wrede were also part of the team. Elisabeth Forsyth and Gunnar Larson edited this report. The team is grateful to the Government of the Kyrgyz Republic for their helpful collaboration and contributions to the works during and beyond the field mission. The team would like to thank Saroj Kumar Jha (Country Director), Dina Umali-Deininger (Practice Manager, GWADR), and Jean-Michel Happi (Country Manager) for their valuable guidance and support. Diego Arias (Senior Agriculture Economist, GFADR), Daniel Clarke (Senior Insurance Specialist, GFMDR), Heinz-Wilhelm Strubenhoff (Senior Operations Officer, GTCDR/IFC), and Adama Toure (Lead Agriculture Economist, GFADR) were peer reviewers. Comments were also provided by Amy Evans (Food Safety Specialist, GFADR). v Executive Summary Agriculture is among the most risk-prone sectors in the economies of Central Asia. Production shocks from weather, pests and diseases and adverse movements in agricultural product and input prices not only impact farmers and agri-business firms, but can also strain government finances. Some of these risks are small and localized and can be managed by producers. Others are the result of more severe, exogenous shocks outside agriculture or outside the country, which require a broader response. Failure to respond adequately to these more severe risks leads to a perpetual cycle of “shock-recovery-shock”, which reinforces poverty traps and compromises long-term growth. The agriculture sector’s exposure to production and price risk is increasing. Climate change is increasing production risks in the short to medium-term by increasing the frequency and severity of droughts and floods and in the longer-term by reducing the availability of water for irrigation due to accelerated glacial melt. The modernization and commercialization of agricultural production and processing, which is critical for sector growth, also raises the sector’s exposure to price risk at a time of high volatility on international markets for agricultural commodities. An effective response to these risks requires a broader, more integrated approach to risk management than the current system of ex-ante, public sector activity associated with crop and livestock disease and ad hoc, ex-post emergency responses to local disasters. Measures to strengthen risk mitigation need to be mainstreamed into sector development and investment programs, additional human and financial resources need to be allocated to the public institutions responsible for ex-ante and ex-post risk management, and the potential for transfer (insurance) mechanisms will need to be clarified and developed where feasible. Given the limited human and financial resources available for public sector activity, a clear sense of the priorities for agriculture risk management is also required, together with a balanced view of the respective roles of public and private sector stakeholders. In response to these issues, the World Bank Group (WBG) initiated an agricultural sector risk assessment in the Kyrgyz Republic in 2014, as part of a three-country study to improve agricultural risk management at both national and regional level (the reports for Kazakhstan and Tajikistan are also available). Based on a framework developed by the Bank's Agricultural Risk Management Team, this work consists of three phases. Phase I identifies, analyses and prioritizes the systemic risks affecting production, markets, the enabling environment, and public sector support to agriculture. The second phase focuses on solutions and strategies, and on the instruments that will be most effective in reducing major risks, including technical assistance, investments by local governments and development agencies - and how these instruments can best be scaled up. Phase III of the national agriculture sector risk assessment, which is not covered in this report, involves support for the public sector to develop a systematic agricultural risk management plan. The ultimate objective of this body of work is to reduce short and medium term volatility in the agricultural sector while improving resilience over the longer term, thereby reducing vulnerabilities among all stakeholders and increasing the potential success of agricultural investment and development strategies. For purposes of discussion and analysis, risks to agriculture are defined as an uncertain or unpredictable event with adverse consequences for the volume or value of agricultural output. Risk vi thus differs from constraints to agriculture, which are permanent impediments to sector output. Sudden shocks to production (droughts, floods, locusts), prices or the enabling environment (sudden policy changes or sharp, unexpected exchange rate movements) are thus considered risks; while factors such as low productivity, poor access to credit, lack of land and lack of information are viewed as constraints. Analysis is based on the risks that led to significant shocks to agricultural output, at both aggregate and commodity level, for the 20 year period from 1992-2012. The major shocks to agriculture in the Kyrgyz Republic are the result of economy-wide political and macro-economic events outside of agriculture. Complex shocks can also have a major impact, such as the combined impact of drought and falling prices due to economic downturn in 2012. Most of the lesser shocks are the result of market-related shocks to real prices, rather than production shocks, reflecting the country’s position as a small, open economy in a politically and economically volatile region. Irrigation and high levels of diversification minimize the impact of climatic shocks on production, with drought as the main cause of the production shocks that do occur. Crops are more vulnerable to risk than livestock, with price shocks as the major cause of commodity level crop risks. Wheat and cotton experience the highest level of price risk, followed by potatoes. These results show that public and private sector initiatives to support the current high level of diversification within the sector, and to maintain the physical and institutional infrastructure for irrigation are the foundation for agricultural risk management. At commodity level, future agricultural sector development will need to place more emphasis on responding to price risk for all commodities, as opposed to the traditional emphasis on production risk. As government is very aware of the need for diversification and irrigation, and sector investment programs already support these imperatives, Phase II of the study focused on the development of more specific recommendations for risk management grouped under two “Solution Areas”: the creation of market opportunities and the improvement of livestock production. Many of the price risks facing specific commodities can be significantly reduced by measures to create more market opportunities in both domestic and regional markets. Wider, deeper markets reduce price risk by improving the capacity for spatial and temporal arbitrage. Improving the competitiveness of agricultural commodities is the basis for deepening and stabilizing agricultural markets, however, starting with an increase in on-farm productivity. Associated market-related initiatives include continued investment to strengthen market information systems, storage capacity, transport infrastructure and supply chains. Market stability will also benefit from the expansion of export markets in Kazakhstan, Turkey and Russia, provided that Kyrgyz products are competitive on these markets. Improved compliance with phytosanitary, veterinary, and animal health requirements is also essential to improve access to export markets, particularly in Kazakhstan and Russia. Specific recommendations to increase sectoral efficiency and competitiveness are developed in three areas: (1) market knowledge and training, (2) investment promotion and business enabling environment, and (3) trade facilitation. The second “Solutions Area” focuses on improving livestock productivity by strengthening the resilience of livestock systems and rangelands in the Kyrgyz Republic. The recommended interventions include: (1) reverse degradation of water, soil, and vegetation cover; (2) safeguard the long-term viability of rangeland ecosystems, while ensuring sustainable access to grazing land; and (3) vii strengthen livestock services (veterinary, animal health, feed and fodder supply, destocking, water and grazing access, and weather and market information, among others), enabling farmers to manage their resources better, to respond to climate and market signals, and to protect their assets in times of drought. The recommendations developed under these two solution areas continue the underlying emphasis on mitigation as the foundation for risk management. They also highlight the mutually reinforcing benefits of measures to improve crop and livestock productivity, the competitiveness of agricultural commodities and the depth of agricultural markets for both risk management and sector growth. Table ES.1 summarizes the Agriculture Risk Management Action Plan for the Kyrgyz Republic, based on the Risk Identification and Proposed Solution Sections of the report. Table ES.1 Agriculture Risk Management Action Plan Summary Proposed monitoring Main program and subprogram Expected outcome indicators Market Knowledge and Training Timely regular reporting of public sector Improved market Reports complete and market information information; increased timely market efficiency Training and market development for private Increased end market Survey access and market intelligence products diversity for production utilization of market intelligence products by producers Investment Environment and Business Enabling Environment (BEE) Regular public/private consultative dialogue Increased private sector Value of downstream to promote agriculture sector investment and downstream investment; investment in Ag Sector improve BEE improved competitiveness of Kyrgyz products domestically and abroad Matching Grant Fund for Investment in Increased efficiency and Value of downstream Innovation and Technology Upgrades in Ag competitiveness of Kyrgyz investment in Ag Sector; Sector agriculture sector; Increased value addition of products (packing, grading and sorting, and/or processing) Trade Facilitation Food Safety Regulatory Reform Increased diversity of exports Value and diversity of export products Domestic Animal Health Project Improved animal health % coverage of vaccine status supports exports and programs improved rural livelihoods. Laboratory evaluations by OIE % coverage of coverage of Animal IDs Animal Health - Regional Transboundary Reduced incidence of Reported incidence Control transboundary disease Community-based Pasture Management Improved pasture # of pasture installations management and increased Bio-mass and bio- pasture productivity diversity measures Pasture Monitoring and LEWS Climate resilience; Improved Monitoring ongoing emergency preparedness LEWS Functional viii Bio-mass and bio- diversity measures Feed Sector Development Project Increased supply of high Area of feeds (ha) quality nutritionally balanced Amount of manufactured livestock feeds; improved feeds (mt) feed utilization on farm Average livestock growth rates (ADG) Average milk yields (l/lactation) Indexed-based Livestock Insurance Increased use of insurance % of producers Conditional Loans and Grants products by livestock participating (note – included in individual programs and producers # of loans summarized here) Increased investment in % producers participating productivity and risk # of grants management approaches % producers participating Conditional Loans and Grants Increased investment in # of loans (note – included in individual programs and productivity and risk % producers participating summarized here) management approaches # of grants % producers participating ix Introduction Agriculture is among the most risk-prone sectors in the economies of Central Asia. These risks lead to a perpetual cycle of “shock-recovery-shock”, which endangers the sustainability of ongoing initiatives and constitutes a major impediment to the development of agriculture. These risks can lead to and reinforce poverty traps and pose serious consequences for all stakeholders. Adverse movements in agricultural commodity and input prices, together with production-related shocks (e.g. from weather, pests and diseases) not only impact farmers and firms active in agricultural sector, but may also put severe strains on a government’s fiscal position. The prevalence and complexity of multiple risks facing agriculture systems and the failure to address them on an ex-ante and integrated basis, continues to leave countries and their agricultural sectors less competitive, at best, and more often extremely vulnerable. Risks in agricultural production have become more pressing after independence with the increased reliance on local food production for livelihoods and food security. Previously managed through redistribution systems between sectors and regions in the Former Soviet Union, such risks are now left to the individual Governments to deal with. The mainstreaming of agricultural risk management, and thereby development of medium term resilient and sustainable agricultural systems requires:  An integrated operational approach to agricultural resource management, which is embedded in country development and investment planning;  Expertise and capacity in the field of agricultural risk management;  Interaction and knowledge exchange by stakeholders and practitioners, to break down the often existing siloed approach to products, strategies and risks. In light of the above, the World Bank Group (WBG) initiated an agricultural sector risk assessment in the Kyrgyz Republic, using in part the agricultural risk management framework developed by the World Bank’s Agricultural Risk Management Team (ARMT) as described below in the Methodology Section. This study is the first step towards a comprehensive agricultural risk management dialogue in the Kyrgyz Republic and developing the investment program. The report is part of a three-country study (the reports on Kazakhstan and Tajikistan are also available at this time), and also covers the regional dimension given the proximity of the countries, which leads to sharing of some of the same risks across more than one country. Fieldwork for the study was undertaken in the three countries in early 2014. Follow-up analysis and report writing were completed in mid-2014, with separate reports for each country. The objectives of this component of the study are to (a) determine the main sources of agricultural risk in the Kyrgyz Republic and (b) to quantify the frequency and severity of those risks. The analysis draws on time-series data from FAOSTAT, the World Bank’s World Development Indicators, the national statistical agencies of each country, and other sources of secondary data. 1 Methodology The World Bank’s Agricultural Risk Management Team (ARMT) has developed an approach for a comprehensive and coherent Agricultural Sector-Wide Risk Management Framework, which covers the following: Pillar I: Risk Assessments and Management - includes a number of Technical Assistance activities to help clients evaluate agricultural risks and put in place requisite systems for improved risk management. Pillar II: Capacity Transfer - offers a range of training products on various aspects of agricultural risk management. Pillar III: Knowledge and Networks – includes production of a number of knowledge products on agricultural risk management, which, among other things, facilitates dialogue and knowledge exchange among the practitioners and stakeholders. The ultimate objective of such assessments is to reduce short and medium term volatility in the agricultural sector while improving resilience over the longer term, thereby reducing vulnerabilities among all stakeholders and increasing the potential success of agricultural investment strategies. Phase 1: Based on a holistic framework for risk analysis and management, the agricultural sector risk assessment will identify, analyze, quantify, and prioritize systemic risks (i.e., production, market, enabling environment risks) that adversely impact the current and future growth of the bulk of a country’s agricultural commodities. The study will assess aggregate trends and risks in agricultural production, but will focus on the three major crops grown in the region (wheat, cotton, potatoes,), as well as the most important high-value vegetable crop (onions) in the Kyrgyz Republic to illustrate the main risks. Together, these four crops constitute 50 percent of the country’s gross agricultural output and 42 percent of total area cultivated. The risk assessment will also evaluate existing and potential risk management strategies (i.e., mitigation, transfer, and coping) to understand if interventions are in line with the magnitude of existing risks and where gaps may exist. The ultimate objective is to optimize the use of available public resources for improved agricultural risk management and to build risk management capacity among local private and public stakeholders. Phase 2: Once the risk assessment has been conducted through desk review and in close consultation with relevant stakeholders, and the most appropriate risk management instruments have been identified, a solutions assessment will be conducted. This phase involves a mapping of: 1) prioritized risk management instruments already in place; 2) responsible institutions (including gaps and overlaps); and 3) potential needs (e.g., TA, investments, policy support) for scaling up risk management approaches to more effectively manage prioritized risks. Phase 3: A third phase involves supporting Government efforts to: 1) develop an integrated and systematic Agricultural Risk Management Plan that appropriate responds to priority risks; and 2) and to identify and allocate resources. 2 Agricultural Sector Risk Assessment Study in the Kyrgyz Republic This study is limited to Phase 1 and Phase 2 of the NASRA methodology, due to time and resource considerations. Therefore, further work is needed to develop a broader, integrated agricultural risk management framework in the country, including the recommendations proposed in the Solutions part of this study. As part of the preparation of this report, fieldwork was undertaken multiple times during the risk identification and solution identification phases of work. The analysis draws on time-series data from FAOSTAT, the World Bank’s World Development Indicators, national statistical agencies of each country, and relevant sources of secondary data. Recommendations Summary This study concludes that future agricultural sector development will need to place a much greater emphasis on responding to price risk, as well as drought and water scarcity. The recommendations in this report are targeted to encourage diversified production, create better market opportunities in response to price risks, and strengthen the resilience of the livestock sector. Action should be taken to:  Continue to support diversified agricultural production and access to irrigation. These are fundamental components of effective risk management.  Continue measures to create wider, deeper domestic markets to reduce price risks for agricultural commodities. These measures include better market information systems, more effective supply chains, better access to storage, and improved transport infrastructure.  Promote climate smart agricultural practices for livestock, pasture crops and rainfed crops. Prioritize improved watershed management, rainfed water harvesting and on farm water use efficiency to mitigate production risks.  Strengthen capacity to comply with phytosanitary, veterinary, and health requirements to reduce market instability. Border closures and barriers to transit incur high costs in terms of price instability and lost trade. While some of these problems are beyond the direct control of the Kyrgyz Republic, many constraints on trade flow are the result of inadequate compliance with conventional phytosanitary, veterinary, and health requirements on the part of Kyrgyz producers and exporters.  Strengthen regional coordination and surveillance on locust and trans-boundary livestock disease outbreaks. Border regions with Uzbekistan and Kazakhstan are highly vulnerable to locust attacks, and many highly contagious livestock diseases are impossible to control at the national level. Specific Recommendations for Creating Market Opportunities These recommendations focus on widening and deepening agricultural markets by increasing market knowledge and training, promoting agribusiness investment, and facilitating trade.  Improve market knowledge by designing and implementing a market information structure. Existing market information and forecasting tools should be inventoried, and in 3 collaboration with the private sector, a new structure should be designed to provide timely reporting of market information.  Develop and implement, with the private sector, training in the use of market information and market intelligence for producers and small- and medium-size agribusinesses and traders. These trainings may be specific to the value chain and should occur at the oblast or rayon level. Training may be leveraged to facilitate market linkages and develop business relationships.  Establish a re-occurring consultation between the Ministry of Economy and private sector stakeholders focused on promoting agribusiness investment and development, sharing the experience of other countries, and working with existing organizations. This platform could be used to raise critical issues, with the overarching goal being to improve the capacity of the sector to cope with normal risks. The Ministry of Agriculture and Melioration may be an appropriate co-chair to maintain an agribusiness focus.  Develop a business plan for, and create a matching grant fund to spur critical investment in new technology and encourage innovation to improve competitiveness and efficiency. Consider risk within the framework and governance of the fund to avoid incentivizing extremely high-risk investments.  Undertake a food safety regulatory environment reform aimed at achieving compliance with international best practices in food safety. Design and structure the project to address both public and private sector needs and work collaboratively with existing commodity and value chain groups. Specific Recommendations for Improving Livestock Productivity The interventions identified below would strengthen the resiliency of livestock systems and rangelands in the Kyrgyz Republic by i) reversing degradation of water, soil, and vegetation cover; ii) safeguarding the long-term viability of rangeland ecosystems, while ensuring sustainable access to grazing land; and iii) strengthening livestock services, enabling farmers to manage their resources more effectively.  Strengthen the country’s animal health systems. A national animal health and food safety program is needed to address various issues contributing to higher risks to human and animal health, food safety, product quality, and market access.  Refine regulations for Community-based Pasture Management and Monitoring. Clarify the role of PUAs and pasture committees to improve the use of pasture resources, relieve the pressure on nearby pastures, and increase the use of remote pastures.  Strengthen drought cycle management and community preparedness. Early warning indicators should be used to trigger community drought preparation and/or response interventions within the parameters of an effective national drought management framework.  Promote supplementary feed production and pasture rehabilitation. Encourage producers to a) grow perennial hay crops, b) grow annual fodder crops and/or c) grow feed grains to maturity and use as high-energy feed. 4  Enable private sector provision of livestock insurance products. The government should move away from compulsory insurance and focus on creating conditions for private insurers to provide crop and livestock insurance on their own or in partnership with government. Enabling action include: building a database on climate and agricultural production, removing the reinsurance constraint, and increasing the number and capacity of actuaries.  Improve access to seasonal credit. Develop season credit products that allow producers to invest in risk mitigation inputs.  Reform subsidies. Review subsidies and, where possible, convert to performance-based payments for desirable actions such as vaccination programs, pasture improvements, and forage production. These payments could fall into the category of PES, with the possibility of transferring the costs to international markets (carbon trading) or donor support.  Revitalize the research and extension system to encourage innovation and adaptation. Research into drought-resistant varieties of cereals, feed grains, and forage crops needs to be undertaken. Research into livestock feeds, feeding, and feed efficiency should be given high priority. 5 Country Context The performance of the agriculture sector in the Kyrgyz Republic during the last 15 years demonstrates both the sector’s capacity for growth and its vulnerability to internal and external shocks. Agricultural gross domestic product (GDP) grew 34 percent in real terms from 1998 to 2007 and then fell 19 percent from 2007 to 2012 in response to a series of shocks. Both of these trends had a significant impact on the country’s wider economic performance, as agriculture accounts for 20 percent of GDP and one-third of employment. The performance of the agriculture sector also has a significant impact on poverty reduction, as 67 percent of the country’s poor live in rural areas. Approximately 55 percent (10.6 million hectares) of the country’s total land area is classified as agricultural land, although only 7 percent (1.35 million hectares) is arable. The remaining agricultural area (9.24 million hectares) is grazing land. Crop production accounts for approximately 55 percent of agricultural GDP, as 74 percent (1 million hectares) of arable land is irrigated and high-value crops are an important component of production. Small-scale, mixed farms predominate, with an average of 3–5 hectares of arable land. The sector produces approximately 60 percent of the country’s wheat requirements and exports vegetables, fruits, and dairy products to Kazakhstan, Uzbekistan, and the Russian Federation. Prior to independence, the sector was dominated by livestock production, consisting largely of sheep production for fine wool. Low wool prices and the loss of Soviet-financed subsidies led to a massive reduction in the number of sheep after independence and gave rise to a more diverse base of production. Cereal crops now account for 48 percent of the total area cultivated, with wheat being the most important crop. Vegetables account for a further 16 percent, industrial crops for 8 percent, and fruit for 6 percent. Cattle, sheep, horses, and goats are now raised for milk and meat, but herds are small. Livestock are wintered on the farm and then grazed in the mountains during summer and autumn. Agro-Climatic Conditions A dry continental climate predominates, with considerable variation according to altitude and type of mountain range. At lower elevations, temperatures average 27°C in summer and -5°C in winter, with precipitation of 450 millimeters in the northwest, 520 millimeters in the southwest, and 600 millimeters at the eastern end of Lake Issyk-kul. Frost occurs everywhere, and dry summers bring the risk of drought. Above 3,000 meters, temperatures range from 10°C in summer to -40°C in winter, with precipitation up to 1,000 millimeters. Most crop production takes place in the irrigated river valleys in northern and southern Kyrgyz Republic, where the combination of climate, type of soil, and irrigation is suited to cereal, fruit, and vegetable production. Irrigation is vital given the low average rainfall. Dryland production of cereals, potatoes, and livestock is practiced in foothill areas throughout the country. Agro-Ecological Zones The Kyrgyz Republic is dominated by the Tien Shan Mountains. Most of the country is above 1,000 meters, with an average altitude of 2,750 meters. The mountains run from west to east in a series of parallel ranges, dividing the country into three main zones. 6 The northern zone includes the Talas and Chu river valleys, which mark the southern edge of the Kazakh steppe. This zone includes a huge upland basin that cradles Lake Issyk-kul. Much of this zone is irrigated, allowing high-value crop production in the lower areas. Cereal and livestock production predominate in the foothills. The central zone, which is the main body of the country, is a vast alpine area of rugged mountains, high river valleys, upland steppes, and alpine and subalpine pastures. Most of the summer grazing areas (above 2,500 meters) are in this zone. Crops are grown in the more sheltered, upland valleys, but conditions are hard and production is low. This zone is best suited to extensive livestock production, especially in areas such as Naryn, where there is good winter grazing in valleys with light winter snowfall. Production risks—in both summer and winter—are highest in this region. The southern zone is a fringe of rich agricultural lowlands around the edge of the Ferghana Valley, near Osh and Jalalabad, plus the foothills and lowland areas in Batken. The milder climate, high soil fertility, and higher precipitation in the lowland areas facilitate intensive crop production, although land pressure is very high and farms are small. Livestock production is more prevalent in the foothills above the Ferghana Valley. Shocks to production and prices can have a large impact on rural livelihoods in this zone, as farms are small and rural poverty is high. Implications of Climate Change for Agricultural Risk Recent climate projections for the Kyrgyz Republic indicate that climate change will have a profound impact on the agriculture sector (see Government of the Kyrgyz Republic 2009; World Bank 2013). The current warming trend will continue, with an increase of 2°C in average temperature by 2060 and 4–5°C by 2100. This projected rise in temperature will be higher during the summer months. Winter temperatures will change little. As rainfall is also projected to decline during the summer months, the risk of drought will increase markedly. At the same time, precipitation is projected to rise in winter, increasing the risk of floods and landslides. Rainfall is also likely to become more variable. The projected impact of these changes on crop productivity varies by crop and by region, as shown in table 1. The productivity of wheat, maize, and sugar beets will fall, while the productivity of cotton, tobacco, rice, potatoes, and melons will rise. Batken and Chui will be hurt by falling crop productivity, while Naryn, Talas, Jalalabad, and Osh will benefit from rising productivity, leading to widespread changes in the composition of crops. 7 Table 1 Projected Impact of Climate Change on Crop Productivity in the Kyrgyz Republic, 2005–100 Pota- Vege- Sugar Location Wheat Maize toes Cotton tables Fruit Rice beets Melons Barley Tobacco Grapes Batken - + - - + 0 - Jalalabad 0 - 0 + + + + + 0 Issyk-Kul 0 0 - 0 0 0 Naryn + + + + Osh 0 0 0 0 + 0 0 0 0 Talas - + + + - Chui - 0 0 0 - - + 0 - Source: Government of the Kyrgyz Republic 2009; World Bank 2013. Climate change is projected to have a favorable impact on pasture productivity in most regions. The impact of this higher productivity on livestock production will depend heavily on stocking rates, however, and the ability to balance the amount of pasture production and livestock feed required. Increased desertification is projected for the high mountain pasture areas in the Tien-Shan, Ak-Say, and Alay valleys due to the combined effects of higher temperature and lower rainfall. Water availability is projected to rise until 2025, due to glacial melt. Thereafter, it will fall, as the supply of water for irrigation declines. This combination of higher summer temperatures and less access to water for irrigation is the major long-term risk for agriculture. Climate change will have important implications for agriculture risk management in that (i) it will change the context in which the sector operates in, and (ii) it will likely change the patterns of the risks that have occurred in the past in terms of frequency and impact. A changing climate is in itself not considered a risks but rather a trend as it is a shift that occurs over a longer term and thereby is predictable. Instead, agriculture risk assessments look at risk events that takes place as a result of unpredicted and/or extreme weather events (among other risks). Globally, most climate change models, and indeed already occurring events, point however at more volatile and unpredictable weather patterns emerging as a result of this change in climate, and with them new and/or more frequent/severe pests and diseases – i.e. more risks. Important for policy makers is also that the context in which the sector operates may over time not be what it was in the past. Climate projections also indicate a shift in the average growing conditions. This means that policies have to adapt to the new context and longer-term agriculture risk management investments (e.g. in research and irrigation infrastructure) should take climate change projections into account. Nevertheless, agriculture risk assessments will remain important as a tool to prioritize and quantify current risks to the sector and to make optimal risk management decisions in the short to medium term (figure 1). 8 Figure 1 Implications of Climate Change for Agriculture Risk Management National and Agriculture Sector Growth Economic output contracted sharply after the end of central planning in 1989. The initial collapse from 1990 to 1992 was due to the abrupt termination of Soviet support and political and economic instability. The Kyrgyz Republic then began an impressive recovery, adopting its own currency (som) in 1993 and initiating a comprehensive program of macroeconomic and structural reform in 1994. The budget was stabilized, the banking sector was restructured, the privatization of small enterprises was implemented, land reform was started, key laws to establish a market-based economy were passed, and price and trade policies were liberalized. A strong economic recovery began in 1996 (figure 2), driven by the agriculture sector. Growth slowed in 1998 due to lower output from the Kumtor mine, lower agricultural output, and the Russian financial crisis. In addition to a sharp currency depreciation and increased inflation, this crisis also weakened the banking system and reduced domestic and Russian demand for Kyrgyz agricultural products. These effects were exacerbated in 1999, when Russia, Kazakhstan, and Uzbekistan increased barriers to trade to mitigate the continued impact of the crisis. Figure 2 National and Agricultural GDP in the Kyrgyz Republic, 1993–2012 350,000 0.30 Million Som (real prices 2012=100) 300,000 0.20 250,000 Annual % Change 0.10 200,000 0.00 150,000 -0.10 100,000 50,000 -0.20 0 -0.30 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Agric GDP (annual growth %) GDP Growth (annual %) Agric GDP National GDP Source: World Bank various years. 9 National economic growth then continued from 2000 to 2008, apart from a downturn in 2002 due to the combined effects of reduced output from the Kumtor mine, a fall in energy exports, and the imposition of trade barriers by Kazakhstan, which restricted exports from the Kyrgyz Republic to both Kazakhstan and Russia. A sequence of severe shocks from 2008 to 2012 affected both national and agriculture sector growth. The global food price crisis in 2008 was followed by the global financial crisis in 2009 and political instability in 2010. Following a year of respite in 2011, a major drought and a substantial fall in gold production at the Kumtor mine shocked the economy in 2012. Both crop and livestock production fell sharply during the transition, with a 28 percent fall in crop production from 1992 to 1995 (in constant prices) and a 36 percent fall in livestock numbers (measured in livestock units). Production recovered strongly in 1996, in response to land reform, market liberalization, and favorable climatic conditions. While crop and livestock production has grown steadily since 1996, the real value of output has varied markedly since 2008. Aggregate Crop and Livestock Production Analysis of gross agricultural output (GAO) in constant prices for the period 1992–2012 shows the contribution of crop and livestock production to overall GAO and to the variability of physical production (figure 3). Crop production accounts for 55–60 percent of sector output in most years. It is more variable than livestock production, with an adjusted coefficient of variation (CV)1 of 0.13* versus 0.06* for livestock. The variability of both components is low, however, due to the diversified base of crop production, access to irrigation, and the ability to move livestock to alternative pasture areas in the event of grazing shortages. Figure 3 Components of Gross Agricultural Output in the Kyrgyz Republic, 1992–2012 Million Som (constant prices) 60,000 40,000 20,000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Livestock Crops Total Agriculture Source: FAOSTAT. 1 Coefficient of variation adjusted for trend using the Cuddy Delle-Valle Index. 10 A similar pattern emerges when GAO is measured in real prices, even though such data are only available for the period 1998–2012. The adjusted CVs were 0.14* and 0.07* for real crop and real livestock GAO, respectively. The variability of total GAO is correspondingly low, with an adjusted CV of 0.07* for total real GAO since 1998 versus 0.09* for total (constant prices) GAO since 1992. The low variability of aggregate output is attributed to increased crop and livestock diversification (figure 4) following the shift away from the production of sheep for fine wool after independence. Wheat is now the major crop, although forage crops still account for around 20 percent of cropped area. More important, vegetables, industrial crops, and perennial crops account for 30 percent of total cropped area versus approximately 10 percent prior to independence. Figure 4 Crop Production in the Kyrgyz Republic, 1992–2012 1,400,000 1,200,000 1,000,000 Area (ha) 800,000 600,000 400,000 200,000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Perennial Crops Industrial Crops Vegetables Other Cereals Forage Crops Wheat 2012 Total Source: FAOSTAT. Sheep numbers are now half of what they were before independence, while poultry numbers are 31 percent and pig numbers are 15 percent of their pre-independence levels. In contrast, cattle numbers have increased 18 percent and goat numbers have increased more than 320 percent. Livestock production systems have also changed significantly in association with changes in the number and composition of livestock. Pasture- and forage-based production systems now predominate, whereas systems relying on concentrate feed prevailed before independence. Cattle are now more important than sheep with regard to overall feed requirements, and sheep are grown for meat rather than wool. The emphasis has thus shifted to meat and dairy production for domestic and regional markets and away from fine-wool production for international markets. This broader base of livestock production, lower reliance on international markets, and more rational management systems have reduced the sector’s vulnerability to risk. Moderate livestock production and marketing risks remain nevertheless. Livestock feed shortages occur due to lower production of winter forage crops, reduced use of far (summer) pastures, and overgrazing of near (village) pastures. Livestock product prices fluctuate in response to demand shocks on domestic and regional markets. 11 Part I Risk Identification Country Risk Identification and Quantification This part of the study reviews aggregate national-level trends and systemic risks for crop and livestock production, followed by a more-detailed review of key agricultural commodities which form approximately 80 percent of the Kyrgyz Republic’s total GAO: wheat, maize, cotton, potatoes, tomatoes, cow’s milk, beef, sheep meat, and eggs. Crop Production The crops analyzed were chosen because they are important to sector output and because they reflect different types of production, price, and enabling environment risk. Wheat With approximately 7 percent of GAO and 30 percent of total cultivated area, wheat is the major food staple (38 percent of total caloric input) and an important source of livestock feed (WFP 2013). It is also one of the most variable components of crop output, with a CV of 0.23 for production and 0.12 for yield. Production grew rapidly from 1995 to 1997, as producers sought to improve food supply after independence, but it has fallen gradually since, as producers have diversified into other crops (figure 5). Figure 5 Wheat Production in the Kyrgyz Republic, 1992–2013 1,400,000 3.00 1,200,000 2.50 Production (t) & Area (ha) 1,000,000 2.00 Yield (t/ha) 800,000 1.50 600,000 1.00 400,000 200,000 0.50 0 0.00 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Area(ha) Production (t) Yield (t/ha) Source: FAOSTAT. 12 Inter-annual changes in both yield and area account for the variation in wheat production. Drought affects production as approximately one-third of wheat is not irrigated. Major droughts occurred in 1994 and 2012 and a lesser drought in 2010. Production also varies in response to marked inter-annual reductions in the area planted to wheat, notably in 2003 and 2007 due to falling real prices and in 2010 due to political instability. The most severe production shock in 2012 was due to the impact of drought on both area and yield. Locusts pose an annual risk, but an effective control program has minimized losses thus far. Crop disease does not appear to be a major risk for wheat production, although officials note that disease is a major cause of storage losses. Maize Maize is grown for livestock feed, accounting for approximately 9 percent of GAO and 7 percent of total cultivated area. Output is less variable than for wheat, with an adjusted CV of 0.17* for production and 0.11* for yield. Production fell sharply during the initial years after independence, as for most crops, and then rose rapidly from 1995 to 2001, as the livestock sector recovered. Subsequent growth has been more moderate, apart from a pronounced area-driven increase in production in 2011 (figure 6). Figure 6 Maize Production in the Kyrgyz Republic, 1992–2013 700,000 7.00 600,000 6.00 Production (t) & Area (ha) 500,000 5.00 400,000 4.00 Yield (t/ha) 300,000 3.00 200,000 2.00 100,000 1.00 0 0.00 1997 1992 1993 1994 1995 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Area(ha) Production (t) Yield (t/ha) Source: FAOSTAT. The production shocks of the transition period (1992–95) were the result of falling yield and area in response to lack of fertilizer, low rainfall, and farmer decisions to reduce the area planted in line with reduced livestock numbers. Both of the production shocks since 1995 were the result of area adjustments. Producers reduced maize production in line with lower demand for livestock products, 13 in 2002 due to economic recession (Kumtor landslide and a fall in energy exports) and in 2009 due to the global food price and financial crises. Cotton Cotton is an important export crop, with 3 percent of GAO and 2–3 percent of total cultivated area. Output is variable, with a CV of 0.27 for production and an adjusted CV of 0.04* for yield. Irrigation reduces the climatic risks to production, which explains the low risk to yield (figure 7). Most of the variability in production is the result of changes in area in response to changes in producer prices and profitability relative to other crops. After independence, production rose steadily from 1993 to 2004, except for a fall in area planted in 1997 in response to a fall in producer prices. Production then fell from 2004 to 2009 as producer prices fell, with sharp area-driven falls in production in 2007 and 2009 in response to a sharp drop in prices. A short-lived recovery in world cotton prices from 2009 to 2011 then led to a recovery of production, but a further period of falling prices resulted in further area- driven falls in production in 2011 and 2012. Figure 7 Cotton Production in the Kyrgyz Republic, 1992–2012 140,000 3.50 120,000 3.00 Production (t) & Area (ha) 100,000 2.50 Yield (t/ha) 80,000 2.00 60,000 1.50 40,000 1.00 20,000 0.50 0 0.00 1994 2005 1992 1993 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011 2012 Area (ha) Production (t) Yield (t/ha) Source: FAOSTAT. Potatoes Potatoes are produced both for domestic consumption and for exports, accounting for approximately 14 percent of GAO and 7 percent of total cultivated area. Production grew rapidly from 1994 to 2004 and then stabilized at around 1.3 million tons (figure 8). Production risks are relatively low, with adjusted CVs of 0.17* for production and 0.09* for yields. Area changes account for the main observed production shocks in 2002 and 2005. In both cases, border closures by Kazakhstan, which restricted exports, apparently led producers to reduce the area harvested. The smaller area harvested in 2005 was exacerbated by a moderate fall in yield. 14 Figure 8 Potato Production in the Kyrgyz Republic, 1992–2012 1,600,000 18.00 1,400,000 16.00 14.00 1,200,000 Production (t) & Area (ha) 12.00 1,000,000 Yield (t/ha) 10.00 800,000 8.00 600,000 6.00 400,000 4.00 200,000 2.00 0 0.00 1999 1992 1993 1994 1995 1996 1997 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Area (ha) Production (t) Yield (t/ha) Source: FAOSTAT. Tomatoes Tomato production accounts for 3 percent of GAO and 6 percent of the area planted to vegetables. Like potatoes, tomatoes are also grown for domestic use and for export. Output has more than doubled since 1992, driven by steady increases in both yield and area (figure 9). Production risks are low, with adjusted CVs of 0.15* for production and 0.05* for yield. 15 Figure 9 Tomato Production in the Kyrgyz Republic, 1992–2012 250,000 25.00 200,000 20.00 Production (t) & Area (ha) 150,000 15.00 Yield (t/ha) 100,000 10.00 50,000 5.00 0 0.00 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Area (ha) Production (t) Yield (t/ha) Source: FAOSTAT. Production shocks occurred in 1993 and 1994 during the early stages of economic transition and again in 2002 due to a sharp reduction in area planted. The production shock in 2002 was also caused by a Kazakh border closure and a decision by many producers not to harvest their crop. Crop Disease and Locust Protection Crop disease and locust protection is the responsibility of the Department of Chemistry and Plant Protection in the Ministry of Agriculture and Water Resources (MAWR). Approximately 130 department specialists monitor crop production throughout the country, report on the incidence of crop diseases as they occur, and provide guidance to farmers on control measures. Farmers are responsible for obtaining agricultural chemicals and implementing control. The department also tests and authorizes agro-chemicals. This structure provides effective protection against the main crop disease risks in the region, with a low reported incidence of rust, Colorado beetle, nematodes,2 and white butterfly. Vegetable producers are vulnerable to a range of crop diseases, but losses are localized and relatively low. Department staff noted that crop protection measures are not widely used by farmers, due to poor training in disease identification and control, lack of cash, and weak impact of the low-quality Chinese agro-chemicals they prefer. Farmers also show minimal interest in rotating crops as a means to reduce crop disease. Locusts are an ever-present risk (table 2), although control measures have minimized losses thus far. The border regions with Uzbekistan and Kazakhstan are the most vulnerable, with Moroccan locusts in Chuy, Talas, Jalabad, Osh, and Batken oblasts and Italian locusts in the central mountain zone, 2Kazakhstan imposed a temporary ban on Kyrgyz exports of seed potatoes in 2008 following the identification of nematodes. 16 especially Naryn. Locust infestations occur every year, with the most recent major attacks in 2000, 2008, and 2009, but effective control means that damage is generally limited. Control relies heavily on strong donor support, however, with the European Union providing training and equipment from 1996 to 2009 and the FAO providing support from 2012 to 2014. Budget allocation procedures are the main constraint to effective control programs, as the necessary funding is often provided at the end of the budget year—after the attacks have occurred. The MAWR is thus forced to fund control programs on credit by delaying payment to the enterprises responsible for monitoring and spraying. It is imperative that public support for locust control continues. Otherwise crop losses from locust damage will increase significantly, both now and in the future. The increase in temperatures associated with climate change will improve breeding conditions for locusts – increasing both the potential costs of locust damage and the costs of control. Table 2 Locust Infestation and Control in the Kyrgyz Republic, 2006–13 (hectares) Area 2006 2007 2008 2009 2010 2011 2012 2013 Surveyed areas 156,300 154,800 217,600 194,300 124,537 100,784 41,696 84,336 Infested areas 90,700 95,800 163,200 149,500 98,722 61,436 29,023 57,353 Treated areas 74,500 85,600 157,000 126,900 90,088 58,071 27,963 53,741 Source: FAO various years. Livestock Production Livestock numbers fell dramatically after independence due to the impact of economic transition and the loss of Russian subsidies for intensive production of sheep, pigs, and poultry (figure 10). Numbers began to recover after 1997, except for pigs, for which demand is weak. Sheep production began to recover in 2005, as breeds produced for meat took over from breeds produced for fine wool. Growing domestic demand for dairy and meat products has driven this increase in livestock numbers, facilitated by continuous economic growth and higher disposable income. 17 Figure 10 Livestock Production in the Kyrgyz Republic, 1992–2012 10,000,000 Head 8,000,000 6,000,000 4,000,000 2,000,000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Chickens ('000) Beehives Pigs Horses Goats Cattle Sheep Source: FAOSTAT. Livestock production is important in all regions, providing an important source of food and cash income on the small, mixed farms that predominate in the Kyrgyz Republic. It also helps to stabilize incomes in rural households when either crop production or crop prices fall. Cattle are now the most important form of livestock production, followed by sheep and goats, but most farms own some combination of all three. Most herds are small, and productivity is low, as farmers are allocating more land and labor to crop production—except in more mountainous and upland areas. Milk Production Cow’s milk is the most important livestock commodity, with 24 percent of GAO. Figure 11 shows trends in production from 1992 to 2012 and the impact of changes in the number of cows and production per cow. Economic transition and drought in 1994 led to a fall in production, due mainly to a decline in the number of cows. However, production has increased more than 150 percent since 1996, due mainly to an increase in the number of cows. Milk yields increased until 2004, but have fallen slightly since due to reduced availability of feed. They remain low, at approximately 2,000 kilograms per cow. 18 Figure 11 Cow’s Milk Production in the Kyrgyz Republic, 1992–2012 1,600,000 10.0 1,400,000 8.0 6.0 1,200,000 4.0 Production (tonnes) Annual % Change 1,000,000 2.0 800,000 0.0 600,000 -2.0 -4.0 400,000 -6.0 200,000 -8.0 0 -10.0 1997 2012 1992 1993 1994 1995 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 % Change cows % Change milk/cow % Change production Milk production Source: FAOSTAT. Overall milk production is highly stable, with an adjusted CV of 0.04*. The number and production of cows fell slightly in 2004 (for unknown reasons), and production was stagnant in 2011 following political instability in 2010. Beef and Sheep Meat Production Beef accounts for 14 percent of total GAO and sheep meat for 6 percent. Beef production has increased since 1995 (figure 12), with limited year-to-year variation and a correspondingly low adjusted CV of 0.05*. The higher adjusted CV of 0.21* for sheep meat reflects the impact of the declining number of sheep during economic transition. Production after 1999 has been stable. 19 Figure 12 Beef and Sheep Meat Production in the Kyrgyz Republic, 1992–2012 120,000 20.0 100,000 10.0 Production (tonnes) 80,000 0.0 Annual % Change 60,000 -10.0 40,000 -20.0 20,000 -30.0 0 -40.0 2000 1992 1993 1994 1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 % Change Beef % Change Sheep meat Beef production Sheep meat production Source: FAOSTAT. Egg Production Eggs account for approximately 2.5 percent of total GAO. The trend in egg production is similar to the trend in sheep meat, with a massive decline in production associated with economic transition, followed by strong growth from 1995 to 2007 due to a significant increase in the number of laying hens and a smaller increase in egg production per hen (figure 13). Subsequent growth has been moderate. The adjusted CV for egg production for the period 1992–2012 is low, at 0.11*, reflecting the steady growth in output since transition. 20 Figure 13 Egg Production in the Kyrgyz Republic, 1992–2012 35,000 60.0 30,000 40.0 Egg Production (tonnes) 25,000 20.0 Annnual % Change 20,000 0.0 15,000 -20.0 10,000 -40.0 5,000 -60.0 0 -80.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 % Change No. hens % Change No. eggs/hen % Change Eggs produced Egg production (tons) Source: FAOSTAT. Livestock Disease In addition to production losses, livestock disease in the Kyrgyz Republic is also a risk to human health and livestock export earnings.3 The priority disease risks for livestock are brucellosis, anthrax, foot and mouth disease (FMD), pestes des petits ruminants (PPR), avian influenza, and rabies. Table 3 presents the incidence and impact of these diseases on livestock production, based on official reports to the International Office of Epizootics (OIE) for the period 1996–2013. These data probably underestimate the true incidence and impact of these diseases, however, as they are based on the level of in-country surveillance and reporting to the OIE. Table 3 Incidence and Impact of Livestock Disease in the Kyrgyz Republic, 1996–2013 Susceptible Disease Outbreaks animals Cases Deaths Destroyed Slaughtered Anthrax 34 4,235 46 42 11 — Brucellosis 4,158 15,984,473 62,954 3 8,786 53,305 FMD 98 587,865 7,313 — — — Rabies 251 326,189 324 324 — — Source: OIE. Note: — = none reported. There were no reported outbreaks of PPR or avian flu. Rabies and anthrax were reported in most years, although their impact on livestock production and human health is regarded as low. On average, FMD outbreaks occur every second year, with most outbreaks (99 percent) occurring in cattle. Losses 3 This section is drawn from a separate report by Rhoda Rubaiza, consultant. 21 are higher than reported, as the Kyrgyz Republic does not have a slaughter and destroy policy for FMD, although actual production losses are considered low. Less than 0.5 percent of cattle were reported as infected in the worst outbreak in 2011. The potential impact is much higher, however, with approximately 10 percent of cattle reported as susceptible in the outbreak in 2011. FMD outbreaks in 2007 and 2011 also resulted in a Russian ban on Kyrgyz exports of meat and live animals and a Kazakhstani ban on Kyrgyz meat and dairy products. Brucellosis poses the greatest risk, not only to production but also to human health and exports. Outbreaks were reported to the OIE in 11 of the 14 years from 1999 to 2013, for both cattle and small ruminants. No deaths were reported for these outbreaks, but an average of 2,340 cattle and 2,830 small ruminants were slaughtered or destroyed in each year of occurrence. In all cases these losses were less than 0.5 percent of total livestock, although there is good evidence that actual infection rates were much higher.4 The Kyrgyz Republic also has one of the highest incidences of human brucellosis in the world, with 362 cases per 1 million people (Bonfoh et al. 2012). The continued inability to control brucellosis in both people and livestock led Kazakhstan to ban all dairy exports from the Kyrgyz Republic in 2012–13, depriving farmers and processors of an important source of revenue and depressing milk prices on domestic markets. During a seven-month period, this ban cost the sector an estimated som 5 million per day (US$10,000), according to MAWR officials. Disease control measures are implemented with varying levels of effectiveness. Vaccinations are supposed to be carried out twice yearly, with government paying for vaccines and farmers paying veterinarians to administer the vaccines. Government is also supposed to pay for the slaughter and destruction of infected animals, for compensation for farmers (up to 75 percent of the value of the animal), and for planning and enforcement of quarantine and movement restrictions. Many of the major livestock diseases in Central Asia are highly contagious, trans-boundary diseases that are impossible to control at the national level (for example, FMD, brucellosis, PPR). In the Kyrgyz Republic, these diseases are transmitted by domestic animals, wild animals, people, and vehicles across 3,878 kilometers of border, including 2,150 kilometers with Uzbekistan and Kazakhstan. Support for regional livestock disease surveillance and control offers a means not only to reduce the risks of these diseases, but also to strengthen the capacity of weaker national veterinarian systems. Price Risks Producer price data are available for the period 1998–2012 only (1996–2012 for cotton). Wheat and Maize Prices The Kyrgyz Republic produces approximately half of its total wheat requirement (for human and animal consumption), importing the rest from Kazakhstan. Maize is grown for livestock feed, with domestic production meeting requirements. Domestic prices for both wheat and maize are largely set by the Kazakh export price for wheat, which in turn follows international prices (figure 14). Maize 4Bonfoh et al. (2012) report seroprevalence rates for brucellosis in the Kyrgyz Republic of 2.8 percent for cattle, 3.3 percent for sheep, 2.5 percent for goats, and 8.8 percent for humans. 22 prices follow wheat prices, as much of Kyrgyz wheat is of lower quality and is used for livestock feed. Trends in real prices are also influenced by trends in inflation. Figure 14 Cereal Prices in the Kyrgyz Republic, 1998–2012 25,000 350 300 20,000 250 Som/tonne $US/tonne 15,000 200 150 10,000 100 5,000 50 0 0 199819992000200120022003200420052006200720082009201020112012 Wheat Prod Price (Real) Maize Prod Price (Real) Intnl Wheat Price (SRW, $US/ton) Kazakh Wheat Price ($US) Sources: FAOSTAT; World Bank Commodity Prices; Kazakhstan Statistics Agency. Real prices are variable, with a CV of 0.23 for wheat and an adjusted CV of 0.20* for maize, compared with adjusted CVs of 0.17* for international wheat prices and 0.25* for Kazakh wheat export prices. Measured in real prices, major shocks to both wheat and maize prices occurred in 2002, 2006 and 2009 in parallel with sharp changes in wheat prices on regional and international markets. Cotton Prices Trends in world markets are the major determinant of cotton producer prices. Nominal prices have closely tracked international prices since 2001 (figure 15), although real price trends differed until 2008 due to the impact of inflation. Both real producer prices and world prices are quite variable, with a CV of 0.22 for real producer prices and an adjusted CV of 0.30* for world prices. Variation in world market prices led to major shocks in real prices from 1995 to 1999 and in 2012. High inflation magnified the impact of a small drop in world prices on real domestic prices in 2005. 23 Figure 15 Cotton Producer Prices in the Kyrgyz Republic, 1995–2012 50,000 35.0 45,000 30.0 40,000 35,000 25.0 Som/tonne 30,000 $US c/kg 20.0 25,000 20,000 15.0 15,000 10.0 10,000 5.0 5,000 0 0.0 Producer Price (nominal) Producer Price (Real) Intnl Price (Cot A Index, c/kg) Sources: FAOSTAT; World Bank Commodity Prices. Vegetable Prices Potatoes and tomatoes are grown mainly for domestic consumption. Both crops are also exported, but the volume of exports constitutes a small proportion of total production and varies widely from year to year. Real price variability is highest for potatoes, with an adjusted CV of 0.26*, compared with 0.18* for tomatoes. Both crops experienced sharp real price shocks in 2004 due to above-average harvests and in 2010 due to political instability and a fall in domestic demand. Real potato prices also fell markedly in 2008 and 2012 due to economic slowdowns and lower demand. Much of this observed instability is attributed to the weakness of domestic markets and the limited scope for export in years when marketed surplus is higher than normal. Domestic markets are easily saturated, especially for perishable crops. Figure 16 Real Vegetable Producer Prices in the Kyrgyz Republic, 1998–2012 20,000 18,000 Som/tonne(2012 = 100) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Potatoes Tomatoes Source: FAOSTAT. 24 Livestock Commodity Prices Real prices for livestock products have risen steadily since 1998 (figure 17) in response to growing domestic demand. Most observed price shocks are the result of economy-wide influences on demand, including the impact of the Russian financial crisis in 1999 and political instability in 2010. Milk prices increased markedly in 2006 due to a strong increase in milk exports. The price fall in 2010 reflects border closures with Kazakhstan, which blocked exports and reduced the price of milk on domestic markets. Overall price instability is low, however, with adjusted CVs of 0.10* for milk, 0.10* for beef, and 0.12* for sheep meat and a CV of 0.08 for eggs. Figure 17 Real Producer Prices for Livestock Commodities in the Kyrgyz Republic, 1998–2012 160,000 20,000 18,000 140,000 16,000 120,000 Meat, Eggs (som/tonne) 14,000 Milk (som/tonne) 100,000 12,000 80,000 10,000 8,000 60,000 6,000 40,000 4,000 20,000 2,000 0 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Eggs Beef Sheep Meat Cows Milk Source: FAOSTAT. Enabling Environment Risks Exchange Rates In an open economy like the Kyrgyz Republic exchange rate shifts can have a wide-ranging impact on economic activity, affecting export revenues, the price of imported agricultural commodities and the purchasing power of remittances. Government employs a managed exchange rate policy, with moderate intervention in foreign exchange markets. Sharp movements in nominal exchange rates occurred in response to the Russian ruble crisis in 1998 (figure 18). Government policy has resulted in reasonable exchange rate stability since then—particularly against the ruble and the tenge—the currencies of the Kyrgyz Republic’s main trading partners. The som appreciated against the U.S. dollar from 2000 until the global food price crisis in 2008 and was then allowed to depreciate in order to mitigate the impacts of the crisis. In light of the sharp depreciation of the tenge, the som has depreciated by more than 10 percent against the U.S. dollar in 2015. Prior to 2015, exchange rate 25 volatility had been very low since 1999, with CVs of 0.06 for the ruble, 0.04 for the Kazakh tenge, and 0.09 for the U.S. dollar and an adjusted CV of 0.09* for the euro. Figure 18 Nominal Exchange Rates, 1994–2013 70.00 6.00 60.00 5.00 50.00 4.00 $US and Euro Ruble/Tenge 40.00 3.00 30.00 2.00 20.00 10.00 1.00 0.00 0.00 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 $US Euro Tenge Ruble Sources: World Bank various years; National Bank of the Kyrgyz Republic. Agricultural Policy and Budget Support The total expenditure budget for 2014 for the MAWR was approximately som 1 billion. It has fallen in both real terms and as a percentage of the total budget since 2008 and now amounts to less than 1.5 percent of total budget expenditure. For the period 2003–09, most of this expenditure was allocated to the operation and maintenance of irrigation infrastructure (figure 19), followed by support for the public services linked to livestock and crop production. Most direct support for agricultural production is in the form of interest subsidies, which amount to approximately som 400 million per year. 26 Figure 19 Real Current Budget Expenditure for Agriculture in the Kyrgyz Republic, 2003–09 Thousand som (2012=100) 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2003 2004 2005 2006 2007 2008 2009 Other Research and Extension Subsidies and Credit Administration and Policy Crops and Seed Livestock Irrigation Total Source: World Bank 2010. A highly interventionist policy stance was adopted from 2008 to 2010 based on market intervention activities by the state-owned Agro-Food Corporation, which tried to stabilize both consumer and producer prices. Agro-Food has now been dissolved, although the government continues to play a limited role in price stabilization based on the acquisition and disposal of public stocks. The variable level of expenditure on interest subsidies creates a further element of policy instability. Public officials also note that continuous political change is a major source of uncertainty. The frequent changes to the MAWR’s organization and funding make it difficult to program, implement, and coordinate essential public service activities. This difficulty is accentuated by the rigid budget allocation procedures of the Ministry of Finance. Initial budget allocations are restricted to the minimum amount needed for salaries and operation, with the funds needed for program implementation not released until toward the end of the budget cycle. Hence departments such as Crop Protection and Veterinary Services often lack the resources they need to respond to outbreaks of crop and livestock pests and diseases—even when they are officially covered in the ministry budget. This practice further stretches the resources of a ministry that operates with very low levels of funding. Emergency response to major catastrophes (earthquakes, floods, mudslides) is coordinated and funded by the Ministry of Emergencies. It receives an annual budget allocation of approximately som 140 million for emergency response plus a further som 2 billion for reconstruction of physical infrastructure (roads, bridges, communications, water supply, schools, and hospitals). The Ministry of Emergencies also has access to a contingency fund of approximately som 100 million. During the harsh winter of 2010–11, this fund was used to purchase and distribute animal feed to farmers in severely affected areas. 27 Agricultural Insurance The Kyrgyz insurance industry is small, with a penetration rate of 0.36 percent in 2012.5 Non-life insurance accounts for 97 percent of gross written premium. The industry is growing relatively rapidly, with gross written premiums increasing from som 276.9 million (US$7.6 million) in 2008 to som 1.1 billion (US$23.2 million) in 2012. To further this growth, government initiated the establishment of a reinsurance company in 2012. It will own 10 percent of this company, and a privately held British company will own the remaining 90 percent (Timetrics 2014). Officially, agricultural insurance is compulsory, although few insurance companies offer it and even fewer farmers buy it. Of the 17 private insurance companies in operation, 5 are licensed to provide crop insurance and 3 are licensed to provide crop and livestock insurance. Only one of these companies is providing agricultural insurance—to one client (a poultry farmer).6 The government is trying to increase the use of agricultural insurance. Legislation was enacted in 2009 to set up a compulsory weather-index crop insurance program, with 50 percent of insurance premiums to be financed by the state. This public contribution was to come from a government insurance fund financed with 5 percent of premiums, plus annual contributions from the Treasury. The law was not accepted by the insurance industry, which claimed that it had not been adequately consulted, and the scheme has yet to become operational. In 2011 the Ministry of Agriculture drafted a law on livestock insurance, but this law has yet to be passed. As for weather-index crop insurance, this proposal was also based on a public-private partnership between government and the insurance sector, with government to pay 50 percent of premiums from a government insurance fund. The continued emphasis on state control of premiums, blanket coverage of all risks and terms and conditions for the industry constitutes a significant disincentive. Private insurance companies have little interest to insure agricultural production when they cannot properly underwrite the risk and are unable to adjust premiums and terms and conditions to reflect the level of expected loss or the costs of doing business. Farmers are also reluctant to participate in a heavily state controlled program redolent of central planning, especially when they doubt the capacity of insurance companies and government to meet their obligations in the event of a production shock. Further barriers to the development of agricultural insurance include a limited database on climate and agricultural production, weak access to reinsurance, and a lack of trained actuaries in the Kyrgyz Republic. There could be opportunities for commercial agricultural insurance in the Kyrgyz Republic, beginning with the insurance of high-value crops against frost and hail. The expected losses from these risks are moderate, increasing the incentives for private insurance companies to offer suitable products and for farmers to buy them. Beyond this, any expansion to broad-based insurance for cereal and industrial crops and for livestock or livestock production will require a major investment in the development of a market-based program of agricultural insurance with considerable government financial participation. Inter alia, such a national program will have to rely on commercial reinsurance, adequate pricing and underwriting of risks and professional claims management. In addition, the government 5 Ratio of total insurance premiums (in U.S. dollars) to GDP. 6 Information from the Kyrgyz State Insurance Agency. 28 will have to clearly demonstrate its commitment to the program through budgeting for the cost of program subsidies in the annual national budget. Therefore, a comprehensive feasibility study is required to consider any agricultural insurance. In the meantime, there is a need to focus on animal health, improving crop yields, knowledge transfer to farmers and other measures to reduce production risks and thus, the cost of insurance in the future. 29 Costing and Prioritizing Agricultural Risk This section analyzes the frequency, severity, and costs of adverse events to provide an empirical basis for prioritizing different sources of risk. Official information on losses due to adverse events is usually calculated in different ways and is invariably approximate. Analysis is thus based on estimates of the “indicative” value of losses (defined below) to provide a more consistent basis for comparison. While these estimates draw on actual data as much as possible, they represent indicative, not actual, losses. Conceptual and Methodological Basis for Analysis Risk is defined as exposure to a significant financial loss or other adverse outcome whose occurrence and severity are unpredictable. It thus implies exposure to substantial losses over and above the normal costs of doing business. Agriculture is inherently variable, as producers incur losses every year due to suboptimal climatic conditions at different times in the production cycle or departures from expected prices. For the purposes of this study, risk refers to the more severe and unpredictable adverse events that occur beyond these smaller events, measured as the inter-annual variation in the value of agricultural output. A loss threshold was set to distinguish major adverse events from smaller, inter- annual variations in output. Drawing on the results of agricultural risk analysis in other countries, this threshold was set at 10 percent. This definition also distinguishes between risks, which are unpredictable, and constraints, which are known and so predictable. Sudden shocks to production (droughts, floods, locusts), prices or the enabling environment (sudden policy changes or sharp, unexpected exchange rate movements) are thus considered risks; while factors such as low productivity, poor access to credit, lack of land and lack of information are viewed as known, predictable constraints to sector output. Indicative losses were calculated as follows. For production risks, the value of gross agricultural output “lost” for each adverse event was first calculated in soms as the difference between the actual change in output and the threshold change in output, using constant producer prices (2004–06). The resultant value was converted into U.S. dollars at 2012 exchange rates and also expressed as a percentage of the value of GAO. The same methodology was used to derive the combined impact of production and price shocks, based on actual production and real prices. This captures the joint impact of price and production shocks, which is the reality that the sector faces. As shown in appendix A, losses due to the joint impact of production and price shocks (as derived above) can be disaggregated into production impacts and price impacts. These identities were used to calculate the indicative losses associated with price shocks alone, for individual commodities.7 Application of this methodology requires a consistent set of data on both production and prices for an extended time period. Of the various sources of data available, FAOSTAT’s data series (1992– 7 Measuring the impact of producer price risks on the economy poses several challenges. Producer prices and retail prices or international prices do not always move together. Seasonal price movements (not measured) may be a greater risk than annual price changes. Finally, lower commodity prices will, all things being equal, be beneficial for consumers and thus may have a positive impact on the overall economy. Nevertheless, estimating the severity of commodity price risks indicates sector volatility that stems from price risk and identifies the commodities that are most vulnerable to price risk. 30 2012) on the value of gross agricultural production and producer prices is considered the most suitable. These data allow the analysis of risk for a 19–20-year period for all products in constant prices and for 1998–2012 in real prices. The various shocks derived from this analysis are attributed to specific events on the basis of interviews with officials in national and regional government, farmers, and traders, plus information from published reports and Internet sites. A chronology of these adverse events is presented in appendix B. Aggregate Production Risks The impact and causes of the major shocks to aggregate output since 1992 for constant prices and since 1998 for real prices are summarized in table 4, first for total GAO and then for livestock and crop GAO. Results in both constant and real prices are presented to show the impact on production alone (constant prices)8 and the joint impact of shocks to production and prices. The main conclusions from these results are as follows:  Adverse, economy-wide political and economic events are the major cause of shocks to aggregate agricultural production. The indicative costs associated with these shocks can be substantial, as occurred during the political unrest in 2010.  In general, market-related shocks to real prices have a bigger impact than production shocks. This reflects the Kyrgyz Republic’s status as a small open economy trading in a politically and economically volatile region.  Irrigation and high levels of diversification minimize the impact of climatic shocks on aggregate production. Drought was the major cause of the sector-wide shock in 2012, but its impact was amplified by a concurrent fall in real prices for some commodities.  Crops are more vulnerable to production, market, and enabling environment risks than livestock. 8 FAOSTAT; constant producer prices are calculated as average for 2004 –06. 31 Table 4 Impact and Causes of Adverse Events for Aggregate Agricultural Output Indicative loss value (2012)a Som US$ Item Year (million) (million) % of GAO Causes Aggregate GAO Constant prices 1994 -3,155 -67.1 -6.2 Economic transition; drought Real prices 2010 -5,368 -114.2 -6.6 Political instability; border closures; fall in production, domestic demand, and prices Crop GAO Constant prices 1994 -2,854 -60.7 -5.6 Economic transition; drought Real prices 2002 -822 -17.5 -1.2 Economic slowdown; trade restrictions 2010 -7,076 -150.6 -8.6 Political instability; border closures; fall in production, domestic demand, and prices 2012 -3,375 -71.8 -3.4 Drought; fall in wheat production; fall in international cotton prices Livestock GAO Constant prices 1994 -301 -6.4 -0.6 Economic transition; drought Real prices 1999 -1,090 -23.2 -1.9 Russian financial crisis; fall in domestic demand and prices Source: FAOSTAT. a. Calculated as the inter-annual change in GAO minus the threshold change in GAO. 2012 values are based on real som prices (2012 = 100) and US$-som exchange rates for 2012. Crop Commodity Risks Indicative losses for the main crops are presented in table 5. Shocks for the constant price (production) analysis cover the period 1992–2012, while shocks for the real price analysis cover the period 1998– 2012 (1996–2012 for cotton). 32 Table 5 Impact and Causes of Adverse Events for Main Crop Commodities Indicative loss value (2012)a Som US$ Item Year (million) (million) % of GAO Causes Wheat Constant prices 1994 -1,640 -34.9 -3.2 Drought (yield -26%) 2006 -175 -3.7 -0.2 Reduced area and yield (low rainfall) 2010 -1,622 -34.5 -2.0 Reduced input supply; drought (reduced yield) 2012 -2,112 -44.9 -2.6 Drought Real prices 2000 -121 -2.6 -0.2 Moderate reduction in production (area) and real price 2002 -2,083 -44.3 -3.1 Fall in real prices (-21%) 2003 -2,491 -53.0 -3.6 Area reduction; 20% fall in real prices 2006 -2,012 -42.8 -2.3 Yield reduction; 17% fall in real prices 2009 -1,389 -29.6 -1.4 Fall in real prices (-43%); fall in world prices 2010 -3,688 -78.5 -4.5 Drought; 24% fall in real prices (political instability) 2012 -2,602 -55.4 -2.6 Drought Maize Constant prices 1993 -725 -15.4 -1.2 Economic transition; fall in livestock numbers 1994 -381 -8.1 -0.8 Economic transition and drought; fall in livestock numbers Real prices 2002 -1,588 -33.8 -2.4 Area reduction; fall in real prices 2005 -249 -5.3 -0.3 Fall in real prices 2009 -762 -16.2 -0.8 Fall in real prices 2010 -1,257 -26.7 -1.5 Political instability and drought; fall in production (area) and real prices Cotton Constant prices — — — — — Real prices 1996 -219 -4.7 n.a. Fall in world and domestic prices (cotton market) 1997 -721 -15.3 n.a. Area reduction and fall in world and domestic prices 1999 -424 -9.0 -0.8 Fall in world and domestic prices (financial crisis) 33 2005 -954 -20.3 -1.3 Fall in world and domestic prices (cotton market) 2007 -594 -12.6 -0.6 Area reduction and fall in world and domestic prices 2008 -69 -1.5 -0.1 Fall in real domestic prices 2009 -832 -17.7 -0.9 Area reduction and fall in world and domestic prices 2012 -1,046 -22.3 -1.0 Area reduction and fall in world and domestic prices Potatoes Constant prices 1993 -203 -4.3 -0.3 Economic transition Real prices 2004 -6,076 -129.3 -8.9 50% fall in real prices; market volatility (oversupply) 2008 -3,959 -84.2 -4.0 24% fall in real prices; market volatility (food price crisis) 2010 -2,889 -61.5 -3.5 21% fall in real prices; market volatility (political instability) 2012 -3,876 -82.5 -3.9 24% fall in real prices; market volatility (economic downturn) Tomatoes Constant prices 1993 -195 -4.1 -0.3 Economic transition 2002 -468 -10.0 -0.6 Reduced production (area); economic slowdown; Kazakh trade and transport restrictions Real prices 2002 -166 -3.5 -0.2 Reduced production (area); economic slowdown; Kazakh trade and transport restrictions 2004 -63 -1.3 -0.1 27% fall in real prices; market volatility 2009 -36 -0.8 ** 15% fall in real prices; market volatility (financial crisis) 2010 -259 -5.5 -0.3 17% fall in real prices; market volatility (political instability) Source: FAOSTAT. Note: — = no indicative losses; n.a. = not available. a.Calculated as the actual inter-annual change in GAO minus the threshold change in GAO. 2012 values are based on real som prices (2012 = 100) and US$-som exchange rates for 2012. ** Less than 0.1% of GAO. The results reflect the impact of the shocks identified in table 5, plus further commodity-specific shocks due to market volatility and adverse climatic, political and economic events. The following summarizes the main results: 34  Crops are subject to frequent changes in production and prices. The indicative cost of these changes is generally proportional to their contribution to GAO, with wheat and potatoes incurring the highest indicative losses.  Many inter-annual changes in production are due to area reductions in response to a change in relative prices. These were not considered production shocks, as yields did not fall, land was reallocated to other crops, and there was no substantive reduction in aggregate crop output.  The main production shocks were the result of economic transition (1993, 1994) and drought (2010, 2012).  Market volatility is the main cause of crop-specific shocks. In addition to price volatility on international and domestic markets, price shocks occur as a result of exogenous economic shocks and national and regional political uncertainty. Cotton and wheat prices are the most volatile, as these commodities are vulnerable to all of these risks. Potatoes are also highly vulnerable to price risk. Livestock Commodity Risks Indicative losses for the main livestock commodities are presented in table 6. As for crops, the shocks identified for the constant price (production) analysis cover the period 1992–2012, while shocks for the real price analysis cover 1998–2012. Table 6 Impact and Causes of Adverse Events for Main Livestock Commodities Indicative loss value (2012)a Som US$ % of Item Year (million) (million) GAO Causes Cow’s milk Constant prices — — — — — Real prices 1999 -350 -7.4 -0.6 Russian financial crisis; lower domestic demand and prices Beef Constant prices — — — — Real prices 1999 -531 -11.3 -0.9 Russian financial crisis; lower domestic demand and prices Sheep meat Constant prices 1995 -1,567 -33.3 -3.3 Economic transition 1997 -534 -11.4 -0.9 Economic transition (continued fall in sheep numbers) Real prices 1999 -237 -5.0 -0.4 Russian financial crisis; lower domestic demand and prices Eggs Constant prices 1993 -884 -18.8 -1.5 Economic transition 1994 -911 -19.4 -1.8 Economic transition 35 1995 -208 -4.4 -0.4 Economic transition Real prices 1999 -62 -1.3 -0.1 Russian financial crisis; lower domestic demand and prices 2010 -127 -2.7 -0.2 Political instability; lower domestic demand and prices Source: FAOSTAT. Note: – = no indicative losses. a. Calculated as the actual inter-annual change in GAO minus the threshold change in GAO. 2012 values based on real som prices (2012 = 100) and US$-som exchange rates for 2012. Livestock production is much less vulnerable to adverse events, with a lower consequent frequency of production and price shocks. The main observed shocks were the result of exogenous, economy- wide shocks. Economic transition resulted in sharp production shocks from 1993 to 1995 due to the rapid destocking of sheep, pigs, and poultry in response to the termination of Soviet subsidies. The Russian financial crisis raised inflation and depressed domestic demand for livestock products in 1999, reducing real prices. Political instability in 2010 had a similar impact. Commodity Price Risks Price shocks were analyzed for the livestock and crop commodities examined above, using real prices as the basis for analysis (table 7). The analysis focused solely on price shocks associated with an overall loss above the threshold for the period 1998–2012 (1996–2012 for cotton). Price falls offset by production increases were not included. 36 Table 7 Impact and Causes of Adverse Events for Commodity Prices Indicative loss value (2012) a Commodity Som US$ % of Price loss as % of and year (million) (million) GAO total loss Cause Wheat 2000 -121 -2.6 -0.2 100 High inflation 2002 -2,083 -44.3 -3.1 100 Trade restrictions 2003 -2,491 -53.0 -3.6 86 Domestic market volatility 2006 -2,012 -42.8 -2.3 91 Domestic market volatility 2009 -1,389 -29.6 -1.4 100 International markets 2010 -3,688 -78.5 -4.5 58 Political uncertainty Maize 2002 -1,588 -33.8 -2.4 81 Trade restrictions 2005 -249 -5.3 -0.3 100 Domestic market 2009 -762 -16.2 -0.8 100 International markets 2010 -1,257 -26.7 -1.5 100 Political uncertainty Cotton 1996 -219 -4.7 n.a. 100 International markets 1997 -721 -15.3 n.a. 85 International markets 1999 -424 -9.0 -0.8 100 International markets 2005 -954 -20.3 -1.3 100 International markets 2007 -594 -12.6 -0.6 100 International markets 2008 -69 -1.5 -0.1 100 Domestic market 2012 -1,046 -22.3 -1.0 73 International markets Potatoes 2004 -6,076 -129.3 -8.9 100 Domestic market 2008 -3,959 -84.2 -4.0 100 Economic downturn 2010 -2,889 -61.5 -3.5 100 Political uncertainty 2012 -3,876 -82.5 -3.9 100 Economic downturn Tomatoes 2004 -63 -1.3 -0.1 100 Domestic market 2009 -36 -0.8 ** 100 Post–food price crisis adjustment 37 2010 -259 -5.5 -0.3 100 Political uncertainty Cow’s milk 1999 -350 -7.4 -0.6 100 Economic downturn Beef 1999 -531 -11.3 -0.9 100 Economic downturn Sheep meat 1999 -237 -5.0 -0.4 100 Economic downturn Eggs 1999 -62 -1.3 -0.1 100 Economic downturn 2010 -127 -2.7 -0.2 100 Political uncertainty Source: FAOSTAT. Note: n.a. = not available. a. Calculated using the identities in appendix A. 2012 values based on real som prices (2012 = 100) and US$- som exchange rates for 2012. Table 7 confirms the high exposure of crop commodities to price risk and the numerous sources of this exposure. Wheat, potatoes, and cotton are the most vulnerable, with potatoes exhibiting the highest levels of indicative loss. Price risk is low for livestock commodities, occurring in all cases in response to an economy-wide reduction in domestic demand due to exogenous political and economic shocks. A Timeline of Agriculture Sector Shocks: 1992–2012 Figures 20 and 21 provide further insight into the incidence and magnitude of agriculture sector shocks during the last 20 years. The two figures are drawn to the same scale to allow comparison of the magnitude of production shocks alone versus joint production and price shocks. The short-lived impact of economic transition is apparent in figure 20. Production shocks since transition have been few in number and small in magnitude, with the largest occurring in 2010 (political uncertainty) and 2012 (drought). Although the analysis of real price shocks only covers the period 1998–2012, the greater impact of price versus production shocks on the value of agricultural output is evident. Price shocks occur more often than production shocks, affect more commodities, and incur much higher indicative losses. The high joint impact of price and production shocks is also evident in 2010 and 2012, when economy- wide downturns coincided with drought. 38 Figure 20 Indicative Losses in Constant Prices for Agricultural, 1992–2012 160 140 120 $US million (2012) 100 80 60 40 20 0 GAO All GAO Crop GAO Lstk Milk Beef Sheep Meat Eggs Wheat Maize Cotton Potatoes Tomatoes Source: FAOSTAT. 39 Figure 21 Indicative Losses in Real Prices for Agricultural Products in the Kyrgyz Republic, 1992–2012 160 140 $US million real prices (2012=100) 120 100 80 60 40 20 0 GAO All GAO Crop GAO Lstk Milk Beef Sheep Meat Eggs Wheat Maize Cotton Potatoes Tomatoes Source: FAOSTAT. Comparison of figures 20 and 21 also shows the need to measure the impact of shocks on both production and prices. The impact of many production shocks on GAO is often offset by a corresponding increase in producer prices, which tend to rise when production falls. As observed in 2010 and 2012, the worst shocks typically occur when production shocks coincide with an exogenously driven fall in real prices. Ranking and Prioritizing Agriculture Sector Risk The preceding analysis shows that the agriculture sector faces two main types of risk: high-cost, low- frequency shocks to aggregate output associated with exogenous, economy-wide events such as the political instability of 2010 and lower-cost, medium-frequency, commodity-specific risks associated with price volatility. These two sets of risks are examined in this section to elucidate approaches to risk management. Each category of risk is quantified according to two parameters: (a) the average indicative cost of the observed shocks above the loss threshold during the relevant time period and (b) the frequency of these shocks, expressed as the number of events during the relevant time period (for example, 3 events in 21 years: frequency = 0.14). Results are presented for both production shocks (in constant prices) and joint production-price shocks (in real prices). Due to lack of price data, production shocks are analyzed for the period 1992–2012 and joint production-price shocks are analyzed for the period 1998–2012. While this limits the number of data points for analyzing joint production-price shocks, the economic and political conditions since 1998 are more representative of future agriculture sector conditions, particularly the growing importance of price risk. 40 Sector wide Risks Major shocks to aggregate agricultural output are less likely to occur in a diversified agriculture sector with reasonable access to irrigation, as in the Kyrgyz Republic. Losses can be high when they do occur, however, as such shocks are usually caused by extreme events that affect the price and production of a range of commodities. Figure 22 shows the incidence, cause, and impact of sector-wide shocks from 1998 to 2012.9 The indicative costs incurred represent the combined impact of these shocks on production and prices, measured in real (2012) prices. (The size of the bubble represents the size of the indicative loss). Figure 22 Major Shocks to Aggregate Output in the Kyrgyz Republic, 1995–2015 180 160 140 Indicative Costs $US million (2012) Political Unrest - Crop GAO 120 100 Political Unrest - Total GAO 80 60 Drought - Crop GAO 40 Russian Financial Crisis - Lstk GAO 20 Economic Recession - Crop GAO 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: FAOSTAT. The Russian financial crisis of 1998–99 and the economic recession of 2002 depressed domestic demand, raised inflation, and depressed real prices for agricultural commodities, with a consequent fall in the value of aggregate agricultural output. Real prices fell for livestock commodities and cotton in 1999 and for cereal prices in 2002, all of which are major components of sector output. In both years, aggregate losses were low in relative terms, however, at approximately 2 percent of GAO. The political unrest of 2010 had a more severe impact, with indicative losses estimated at 6.6 percent of GAO. Both production and prices fell, particularly in the south, where border closures reduced input supply and political unrest disrupted cropping and markets. Localized droughts and a severe winter accentuated the fall in production. The impact of these adverse events was highest for the value of crop production. Drought was the major cause of reduced output in 2012, with wheat and cotton production most severely affected. A concomitant fall in international cotton prices exacerbated the underlying production shock. Despite their magnitude, neither of these two shocks had a major impact 9 The adverse impact of economic transition in 1994 was not included, as it is not relevant for future risk management. 41 on the value of aggregate livestock production. Drought was the least frequent cause of aggregate shocks to agricultural output for the period 1998–2012. Exogenous political and economic shocks were both more frequent and more damaging to agriculture. Commodity-Level Risks Analysis by commodity provides further insight into production risk, (real) price risk, and the impact of joint production and price risks. Production shocks (measured in constant prices for 1992 –2012) were observed for wheat, mutton, eggs, maize, potatoes, and tomatoes (figure 23). Economic transition in 1992–95 caused production shocks for mutton, eggs, potatoes, and tomatoes. Drought- related shocks for wheat were the only production risk since the mid-1990s. Wheat’s susceptibility to drought is due to the reliance on upland (unirrigated) production in some areas. The large area sown to wheat also means that indicative losses can be high. Access to irrigation appears to mitigate drought risk for the other crop commodities, and the ability to move livestock to better grazing areas reduces production shocks for livestock commodities. Figure 23 Shocks to Physical Output by Commodity in the Kyrgyz Republic (Constant Prices) 50 40 Indicative Loss $US (million) 30 Wheat Mutton 20 Eggs Maize 10 Potatoes Tomatoes 0 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 Probability of Shock Source: FAOSTAT. Analysis of the frequency and cost of (real) price shocks was based on adverse events caused partly or solely by a decline in real prices, using the identity in appendix A. Price shocks that were offset by increased production were not included in the analysis. The results are shown in figure 24. Price volatility is a much greater source of risk than drought. All of the main commodities experienced (real) price shocks during the period 1998–2012 in response to both economy-wide and market- specific adverse events. Wheat and cotton price shocks occurred with the greatest frequency, although the indicative cost of these shocks was moderate. In both cases, this risk was heavily influenced by price variability in international markets. Price risk also was high for potatoes, with a pattern of 42 medium-frequency, high-cost shocks. Potato price shocks were the result of instability in both regional and domestic markets, due to border closures and trade disputes and to short-term imbalances in domestic supply and demand. Of the other crop commodities, maize and tomatoes exhibited medium- frequency, low-cost price risk. Economy-wide shocks had the biggest impact on livestock commodity prices, although in general price shocks for livestock commodities were low-frequency, low-cost events. Figure 24 Shocks to Producer Prices by Commodity in the Kyrgyz Republic (Real Prices) 120 100 Indicative Loss $US (million) 80 Potatoes 60 40 Wheat 20 Beef Maize Milk Cotton Mutton Eggs Tomatoes 0 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 Probability of Shock Source: FAOSTAT. The pattern of joint production-price shocks by commodity for 1998–2012 follows an identical pattern to that observed for price risk (figure 25). This is to be expected, given that price risks are larger and more prevalent than production (drought) risks. 43 Figure 25 Shocks to Production and Prices by Commodity in the Kyrgyz Republic (Real Prices) 120.0 100.0 Indicative Loss ($US million) Potatoes 80.0 60.0 Wheat 40.0 Maize 20.0 Beef Milk Cotton Mutton Eggs Tomatoes 0.0 0.00 0.10 0.20 0.30 0.40 0.50 Probability of Shock Source: FAOSTAT. Conclusions and Recommendations for Risk Management The preceding analysis confirms that agricultural risk is low at aggregate level due to the sector’s highly diversified production base and access to irrigation. Public and private sector initiatives to sustain this diversity and maintain the physical and institutional infrastructure for irrigation are thus the foundation for agricultural risk management. At commodity level the analysis shows that future agricultural sector development will need to place a much greater emphasis on responding to price risk, compared to the traditional focus on production risk. Drought is the major source of production risk, but its impact is limited to wheat – due probably to the reliance on non-irrigated, upland wheat production in some areas. Wheat also emerges as the commodity most vulnerable to risk due to its exposure to both production and price risk. Wheat, cotton and potatoes are the commodities most vulnerable to price risk, although most crop commodities are vulnerable to one degree or another. Price shocks to major commodities such as wheat and potatoes can also incur the highest indicative costs. Livestock commodities are much less vulnerable to price risk, with low frequency-low cost shocks observed. The aggregate impact of commodity level price shocks tends to be small, however, as shocks/losses for one commodity are typically offset by increased prices for others. Occasional, economy-wide price shocks can result in high, sector-wide losses, as occurred in response to the political unrest in 2010. These conclusions highlight the implications of the continued shift towards commercial agriculture – and the increasing consequent vulnerability to market shocks. Improved management of price and market risks will require deeper, stronger markets, a better understanding of market behavior by 44 producers and market agents and better access to market information. The free flow of exports and imports with Kazakhstan and Uzbekistan is also critical. A much greater emphasis on product quality and compliance with phytosanitary, veterinary, and health requirements is essential in this context. The main recommendations of this report are as follows:  Continued support for a diversified agricultural production base and assured access to irrigation will remain fundamental to effective risk management;  For livestock, pasture crops and rainfed crops, climate smart agricultural practices, watershed management, rainfed water harvesting and on farm water use efficiency will help mitigate production risks;  Similarly, continued measures to deepen domestic markets are needed to address many of the price risks for agricultural commodities. These measures include better market information systems, more effective supply chains, better access to storage and improved transport infrastructure;  Reliable access to traditional export markets in Kazakhstan, Uzbekistan and Russia is also critical – for both agricultural imports and exports. Border closures and barriers to transit incur high costs in terms of both price instability and lost trade. While some of these problems are beyond the direct control of Kyrgyzstan, many trade flow constraints are the result of inadequate compliance with conventional phytosanitary, veterinary and health requirements by Kyrgyz producers and exporters. Improved compliance with these requirements will help to reduce market instability – particularly for livestock commodities;  Stronger regional coordination of measures to mitigate locust attacks and outbreaks of trans- boundary livestock disease would reduce the high current exposure to these risks. The following risk management recommendations were selected for in-depth review and form the Solutions part of the report: Solutions Area 1: Creating market opportunities Solutions Area 2: Improving livestock productivity. 45 Part II Solutions Solution Area 1. Creating Market Opportunities Different layers of risk in agriculture are based largely on the frequency and magnitude of risk events (OECD 2011). The interconnected nature of supply chains and agriculture sector actors and stakeholders requires a holistic systems approach that emphasizes transparency and predictability from the public sector. Aggregate sector efficiency, diversity, and competitiveness underpin any strong risk management strategy. Part I of the risk assessment concluded that agricultural risk at an aggregate level is low in the Kyrgyz Republic due to the country’s highly diversified production base, which has emerged over the past 20 years. The Kyrgyz agriculture sector is fairly resilient as a result of its strong diversification and access to irrigation. Normal risks, which are high-frequency, low-magnitude events that affect only a single commodity or a handful of value chains at a time, have a minimal effect at the national level. The sector is generally responsive to market signals at all levels, with an active trade in which Kyrgyz and foreign traders pursue producers’ products and producers respond by specializing in certain products or shifting their mix of crops. With diversity of production already contributing to resilience, the risk management solutions presented here prioritize practical policies, programs, and investments to increase efficiency and competitiveness across the agriculture sector, without focusing on any one commodity. This section offers recommendations to increase sectoral efficiency and competitiveness in three areas: (1) market knowledge and training, (2) investment promotion and business enabling environment, and (3) trade facilitation. While each value chain or commodity may have fairly unique constraints on efficiency or competitiveness related to technology, seasonality, handling and perishability, or markets, overemphasis or investment in a particular subset of crops or products may increase the aggregate risk profile by decreasing diversity. A balance between efficiency, diversity, and competitiveness must underpin all policies and interventions. Risk Management: Background Normal agricultural market risks, including high-frequency, low-magnitude (or low-cost) events, market-based shifts in production, prices, and markets, and weather, do not typically require any specific policy response and are managed directly by farmers and other stakeholders as a part of their everyday business strategy. Catastrophic risks, which are infrequent low-frequency, high-magnitude extreme events that affect many or all producers and sector stakeholders, are usually beyond the capacity of producers or markets to cope. 46 Between the extremes of normal and catastrophic risks are marketable or transferable risks. Government policy can ensure a predictable and equitable operating environment by encouraging the development of market-based risk management tools, such as investment and financing, insurance, and marketing contracts. In this risk assessment, aggregate risks at a national level have been considered instead of at a supply chain level or from the perspective of a particular set of actors, such as producers. A systemic approach considers both the long-term and short-term effects of adverse events across the entire sector. A systemic approach empowers agriculture sector actors to manage normal risks by formulating strategies and policies that balance sector efficiency, diversity, and competitiveness with sector growth. The risk assessment presented in phase I of this report concludes that the Kyrgyz agriculture sector is exposed mostly to normal market risks, including price volatility and the country’s position as a small open economy located within a politically and economically volatile region. Government can help supply chains and key stakeholders, including producers, to cope with these normal risks by strengthening agricultural services, creating an enabling environment that encourages private investment and competition, and satisfying specific infrastructure requirements. The Kyrgyz Agriculture Sector Despite the diversity of crops grown, a handful of crops dominate the country’s gross agricultural output. Of the eight products making up roughly 80 percent of GAO, livestock products represent roughly 45 percent (table 8). These livestock products are sold almost exclusively within the domestic market.10 Two cereals (maize and wheat) make up roughly 16 percent of GAO and occupy 37 percent of cultivated area. Table 8 Most Important Crops in Gross Agricultural Output in the Kyrgyz Republic Product % of GAO % of cultivated area Milk 24 Beef and mutton 20 Potatoes 14 7 Maize 9 7 Wheat 7 30 Cotton 3 2.50 Tomatoes 3 6a Egg production 2.50 Source: Based on FAOSTAT. a. % of vegetable cultivation. 10Export market opportunities for livestock products are constrained largely by nontariff barriers, including animal health and sanitary standards and labs and certifications. These barriers are discussed in the trade facilitation section of this report. 47 Potatoes, cotton, and tomatoes are 14, 3, and 3 percent of GAO, respectively, and are also among the country’s 10 most important agricultural exports. Even milk and meat, the two largest contributors to GAO, do not constitute half of the aggregate sector’s value. The diversity within the most significant eight crops and the limited share of each in the total contribute to the diversity within the Kyrgyz agriculture sector. While the Kyrgyz production base has become more diverse, the country remains a net importer of food, as shown in the food balance sheet in table 9. Imports are dominated by wheat, sugar, and vegetable oils. Agricultural exports equaled only 7 percent of total production by volume, but 17 percent by value. Export crops are higher-value products, including dry beans, cotton, fresh apricots, apples, potatoes, and tomatoes. Table 9 Food Balance Sheet in the Kyrgyz Republic, 2011 Kyrgyzstan 2011 Food Balance Sheets Domestic Supply Domestic Utilization 1000 Metric tons Single Items Stock Trade Food Oth. Prod. Impo. Exp. Total Food Feed Seed Waste Var. Balance Manu Uses Grand Total 6,131 922 21 451 6,622 (471) 4,095 295 1,603 338 170 125 Cereals - Excluding Beer 1,498 525 1 6 2,017 (519) 920 71 916 73 35 3 Starchy Roots 1,379 2 - 90 1,291 88 545 2 416 260 67 1 Sugar Crops 159 - - - 159 - 158 1 Sugar & Sweeteners 18 111 4 5 128 (106) 127 - 1 - Pulses 76 1 8 76 8 75 7 1 Treenuts 15 1 (1) 6 10 5 10 Oilcrops 118 6 (10) 1 112 (5) - 61 45 5 2 - Vegetable Oils 15 40 1 - 57 (40) 44 - 13 Vegetables 973 10 - 135 848 125 797 12 40 Fruits - Excluding Wine 222 48 - 86 183 38 167 3 3 10 Stimulants 19 2 16 (17) 16 Spices 1 - - 1 - 1 Alcoholic Beverages 49 39 1 88 (38) 78 10 Meat 190 87 - - 276 (87) 199 1 78 Offals 25 - - 26 - 19 - 7 Animal fats 13 5 - 1 17 (4) 5 - 12 Eggs 22 4 - - 26 (4) 25 - 1 Milk - Excluding Butter 1,358 13 18 42 1,347 29 1,125 - 209 13 Fish, Seafood - 11 - - 12 (11) 10 1 - Aquatic Products, Other - - - - - Miscellaneous Source: FAOSTAT. Agricultural products accounted for roughly 14 percent of total exports in 2012, with agricultural exports valued at US$1,687 million (table 10). Dry beans represented the largest-value food product export, with 61,000 metric tons exported worth US$48 million (79 percent of total dry beans produced). Cotton exports were worth US$33 million, and fresh apricots and apples together 48 accounted for US$23 million (about 10 percent of the apples appear to have been re-exports). Potato exports, equal to 62,000 metric tons, were worth US$10.5 million, with exports representing only about 5 percent of total Kyrgyz potato production. Wheat, sugar, and cocoa were the highest-value imported food crops. Vegetable oils may represent the most interesting import substitution opportunity, with a total import value of US$53 million. Table 10 Trade in Agricultural Products in the Kyrgyz Republic, 2012 Exports Imports Total Quantity production (metric % of total Value Quantity Value Trade balance Product (metric tons) tons) production (US$) (metric tons) (US$) (US$) Dry beans 77,800 61,519 79 48,342,051 2,207 851,880 47,490,171 Cotton 28,000 26,910 96 33,850,157 2 17,309 33,832,848 Apricots, fresh 22,000 18,469 84 12,178,336 — — 12,178,336 Apples, fresh 137,000 30,815 22 10,791,366 3,894 2,335,805 8,455,561 Potatoes 1,312,699 62,025 5 10,541,455 157 58,921 10,482,534 Milk 1,350,150 17,918 1 10,493,616 875 1,371,205 9,122,411 Raw hides 36,461 10,216,514 21,309 4,489,062 5,727,452 Other rootsa 128,887 45,379 35 6,468,552 12 2,031 6,466,521 Walnuts 5,800 3,418 59 6,272,525 — — 6,272,525 Tomatoes 191,735 5,896 3 5,672,982 390 149,305 5,523,677 Cocoa — — — 2,854,937 — 84,401,817 (81,546,880) Sugar 13,000 — — 1,069,968 — 85,689,146 (84,619,178) Wheat 540,531 — — — 440,094 88,100,188 (88,100,188) Vegetable oilb 13,463 — — — 38,276 53,538,423 (53,538,423) Margarine — — — — 9,444 14,725,321 (14,725,321) Rice 23,069 — — — 25,844 12,357,405 (12,357,405) Sources: UN Comtrade; FAOSTAT. Note: – = not available. a. Includes carrots, beets, turnips, and others. b. Includes sunflower seed, safflower, and cottonseed oil. While diversity of production underpins the current risk profile, diversity of export products indicates the resilience of the sector. While exports represent only 17 percent of total GAO, roughly 55 percent of those exports are spread across 10 crops. Even though dry beans are the most significant agricultural crop exported by value, they contribute only 18 percent of the total value of Kyrgyz agricultural exports. 49 The diversity of crops exported is important for risk mitigation. The larger market risk is where there is little or no diversity in destination export markets. Kazakhstan and Russia are the largest destination markets for Kyrgyz agricultural exports. Many crops are exported to each of these principal markets, but trade is dominated by these destinations. In 2012, those two markets accounted for US$166 million in export value and for 61 percent of total agricultural exports. Adding in the third most important market, Turkey, concentrates total agricultural exports in these three markets, with 74 percent of total exports. Table 11 lists the top export markets for the Kyrgyz Republic in 2012 by value and indicates the export product with the largest share of the trade. 50 Table 11 Top Export Markets for Kyrgyz Agricultural Products, by Value, 2012 Total % of total % of total agricultural agricultural Highest-value export Value of exports with Trade partner exports exports product with that partner product that partner Kazakhstan 120,027,461 41 Apricots and apples, fresh 22,199,256 18 Russian Federation 46,340,682 16 Cotton 29,013,492 63 Turkey 35,107,501 12 Dry beans 25,073,830 71 China 11,073,471 4 Raw hides and skins 4,690,821 42 Tajikistan 7,682,489 3 Live cattle 1,685,387 22 Bulgaria 7,622,741 3 Dry beans 7,310,052 96 United Arab Emirates 6,191,257 2 Processed meat products 4,329,716 70 Uzbekistan 5,282,361 2 Chocolate and prepared 1,066,203 20 food Macedonia, FYR 5,081,870 2 Dry beans 5,081,870 100 Iran, Islamic Rep. 2,068,368 1 Shelled walnuts 1,746,472 84 Georgia 2,059,794 1 Dry beans 2,024,494 98 Source: UN Comtrade. Fresh apricots and apples are the largest single commodity by value exported to Kazakhstan, but account for only 18 percent of the total Kyrgyz agricultural trade with that country. The Russian market is the second most important market for Kyrgyz agriculture. It is dominated by cotton, although dry beans are also significant. Dry beans are sold to, among other buyers, Russian canning companies. Dry bean exports to Russia in 2012 were worth US$5.3 million and accounted for 12 percent of the total export value of agricultural products into the Russian market. Dry bean exports also accounted for 71 percent of total agricultural exports to Turkey. Hides and skins accounted for 42 percent of agricultural exports to China. Market risk improves with diversity—diversity of products, diversity of markets, and diversity of products in the target markets. Kazakhstan represents 41 percent of agricultural exports, but that 41 percent represents a very diverse basket of products. The Russian market is less significant, at 16 percent, but 75 percent of the export value is locked into cotton and dry beans. Of the exports to Turkey, 71 percent are dry beans. Improving the risk profile of agricultural exports means not only increasing the share of export value in additional markets, but also increasing the diversity of exports to existing markets. Both of these can be achieved by increasing the efficiency of the supply chains into these markets (including improvements in logistical infrastructure, marketing information, quality and standards capability and capacity, and trade facilitation) and by improving the competiveness of supply chains and products (including investments in upgrading technology along the supply chain, access to affordable finance, and business enabling environment). 51 Risk Management: Areas of Priority The Kyrgyz agriculture sector has a low risk profile and generally faces normal market risks, including price volatility and market shifts that affect individual or groups of commodities rather than the entire sector. While various livestock products represent roughly 45 percent of total GAO, no single crop dominates. The domestic market is the most important market, as the destination for just over 80 percent of GAO by value, but the Kyrgyz Republic is a small, open economy, and the sector must compete even domestically with regional and global production. The potential significant market risk is the country’s economic reliance on Russia and Kazakhstan, both because they serve as destination markets for the majority of food exports and because economic problems in those markets have a significant impact on Kyrgyz domestic markets (including financial crises abroad that reduce the amount of labor remittances and thus the purchasing power of Kyrgyz consumers). Risk management policies should support the capacity of the sector’s producers and key stakeholders to manage and respond to market shifts and events, without overemphasizing any particular crop or set of crops. Various donor projects and government programs are investing in increasing the efficiency and competitiveness of specific agriculture value chains and in increasing private sector investment across agricultural industries. They are also supporting services, including financial and information services. These programs strengthen the capacity of stakeholders to manage and respond to normal agricultural risks. It is important to balance agriculture sector investments and development efforts across the three risk management pillars of efficiency, diversity, and competitiveness. Diversity of production is the strongest aggregate risk mitigation characteristic of the Kyrgyz agriculture sector. Practical programs and investments to increase efficiency and competitiveness of specific value chains are important to unlock the particular constraints on those value chains. But an overarching risk management strategy has to balance the need to address narrow constraints with the need to pursue specific opportunities to diversify production and markets. Without such balance, the sector may become too dependent on a smaller set of products, value chains, and end markets. Government interventions related to normal risk, such as establishing supported floor prices or subsidizing insurance, may encourage producers and sector stakeholders to pursue risky activities. Unintentionally incentivizing risky behavior should be avoided. Moreover, government needs to ensure that all policies and activities are predictable and transparent. Uncertainty of regulations and interventions, including responses to both normal and catastrophic risks, can disincentivize private investment, savings, and an active commodity trade. Risk Management in the National Agricultural Strategy The Kyrgyz Republic’s National Sustainable Development Strategy (NSDS) highlights a few key challenges and risks relevant to the agriculture sector and, more specifically, to the market risks identified in phase I of this assessment. While the section on risk does not discuss the domestic market or specific market access issues, the NSDS does highlight the market-related difficulties of the country’s relatively isolated, landlocked geographic location, which inhibits access to ocean ports and 52 to international trade and transport corridors. The NSDS identifies the need to implement measures to diversify the economy and exports and to foster the competitiveness of domestic industries. Membership and participation in key international alliances are specifically named, including the Commonwealth of Independent States, the Collective Treaty Organization, and the Shanghai Cooperation Organization. Although not specifically mentioned, accession to the Eurasian Economic Union is aligned with the intention to prioritize strategic international alliances and export orientation. The NSDS recognizes the relatively low ranking of the Kyrgyz Republic in many of the international ratings for investment climate and business enabling environment, including the Global Competitiveness Index and the Doing Business Index. The private sector has continued to invest in the agriculture and agricultural processing sectors, but has been hindered by the country’s weak investment climate and by corruption. Addressing these constraints is a key component of the NSDS. Agriculture’s ability to manage and respond to risks requires investment in transport corridors and logistical infrastructure as well as in efforts to improve the efficiency, diversity, and competitiveness of the sector and the general investment climate. The National Export Strategy of the Kyrgyz Republic summarizes previous development plans for the sector, which prioritized the availability of market information, quality control and standards, access to finance, customs procedures, and trade support institutions. The current strategy focuses on market diversification (including fostering trade with Uzbekistan, Turkey, United Arab Emirates, and China and strengthening trade with Russia and Kazakhstan), access to finance, trade information and promotion, quality management, and trade facilitation. The strategy identifies ways to strengthen the efficiency and competitiveness of the agriculture sector. Increased efficiency and competitiveness in traditional domestic and export markets should open up alternative markets for Kyrgyz production. For example, modernization of quality testing and standards necessary to access and compete in the Russian market will also be relevant to trade with the United Arab Emirates or Chinese markets. Disseminating trade information as well as promoting and facilitating trade in less traditional destination markets will decrease the reliance on Russian and Kazakh markets, reducing the sector’s exposure to risk. Individual commodities and products will likely continue to be exposed to a narrower set of risks, but the aggregate sector will be cushioned through increased diversification of both production and destination markets. Potential Interventions Recommendations to increase sectoral efficiency and competitiveness fall into three broad areas: (1) market knowledge and training, (2) investment promotion and business enabling environment, and (3) trade facilitation. An aggregate, systemic sectoral approach can support actors and stakeholders across diverse products and value chains. Table 12 provides an overview of identified market risks and proposed interventions to respond to each of these risks. 53 Table 12 Market Risks and Proposed Responses for the Aggregate Agricultural Sector in the Kyrgyz Republic Risk level and response strategy Micro (idiosyncratic): Meso (covariant): Macro (systemic): General risk area and specific targets for risk affects individuals and households; reducing and affects groups or communities; affects regions or nations; management mitigating risks sharing, transferring, and pooling risks coping with risks and recovering from disaster Market Information and Intelligence Reliable, consistent market datasets for Training in utilization and market Inventory available market information sets and correlation and trend analysis development for market intelligence coordinate across Agencies through a single products responsible body Relevant international market intelligence Access available market information via Associations and industry groups Collate and publish market information in a timely on end markets and competing global publication, internet, or cell phone/SMS facilitate access market information and consistent reporting schedule production datasets to relevant international markets Business Operating Climate and Private Sector Investment Predictable and Transparent Legal and Changes and implementation in local policy Changes and implementation in local Changes and implementation in regional or Regulatory Framework or regulations policy or regulations national policy and regulation, environmental law, agricultural payments Consultative Legal and Regulatory Local and Regional Public/Private Sector National consultative public/private dialogue Framework consultations regarding agricultural sector investment Tax regime Predictable, evenly applied tax Comprehensive quantitative assessment of the implementation financial impact of taxes for ag stakeholders Changes and implementation of tax regime Access to finance for sector upgrades and More consistent demand from value Increased efficiency and competitiveness Matching Grant fund innovation; including storage and addition and downstream operating capacity through new technology and business processing ventures Market Access and Trade Facilitation 54 Trade Agreements Pursue trade agreements with diverse trade partners Non-tariff trade barriers Capacity to meet new market opportunities Adopt globally competitive processes and Upgrade capacity and infrastructure to meet and that offer market premiums innovative technologies through certify global standards upgrading downstream investment Food Safety Regulatory Reform Diversify end markets to reduce dependence on markets which may impose valid or suspect technical barriers to trade Transport Cost and Capacity Upgrade key transport corridors Upgrade transport equipment to improve Legal and regulatory framework for equipment efficiency of product transport and leasing logistics Customs and Border Formalization Technology, capacity, procedures, and infrastructure improvements to reduce time and cost Exchange Rate Risk Diversify end markets Note: — = not available 55 Market Knowledge and Training Asymmetrical availability of and access to market information result in significant sector inefficiencies. Basic market information includes accurate data on historical market prices and timely data on indicative market prices, volume of trade through critical markets, and production. Market intelligence is the analysis of basic market information for use in decision making. It includes trend and correlation analysis, forecasting, and analysis of relevant external business environment information, including political and macroeconomic factors. Basic market information is typically a public good and is necessary for developing proper market intelligence. Market intelligence is often a private sector product that sector stakeholders may develop and analyze themselves or may purchase as a service from a third-party specialist. Active market actors, including producers, traders, and processors, track trends in prices and trades across seasons and regions to predict market movement for the current season. Publicly available and accurate data sets allow stakeholders, including not only market actors but also financial institutions, to conduct trend and correlation analysis. Many larger actors are active in their local markets on a daily basis and are extremely well informed, while remaining tangentially aware of the usual and expected correlations between their markets and large regional markets. However, they do not monitor those markets with the same depth or focus. Smaller producers and actors are often only active in their usual, local markets as harvest approaches and into the storage season. They likely do not have access to or resources to obtain market information or to generate their own market intelligence outside of the main marketing season. Under the NSDS, the Kyrgyz government has set a goal of establishing a modern market infrastructure for the agricultural complex. This goal includes developing an annual forecast of supply and demand in regional and local markets for agricultural products and forming official sources of the information needed by rural producers. At present, the public sector seems to have a reasonably strong network for forecasting production through the oblast and rayon administrations, but information moves largely in one direction, with no timely reporting to the sector at-large. The oblast and rayon administrations conduct a detailed survey of producers at various points in the production season, starting in the planning phases. The information is collated at the national level, but oblast and rayon officials do not appear to have timely access to national data to share with market actors, including the producers who are surveyed. These forecasts are in addition to the annual production statistics collected and documented by the National Statistics Bureau. Previous donor programs supported the development of KAMIS, the Kyrgyz Agriculture Market Information System. Now an independent and private organization, KAMIS produces some limited market intelligence reports and maintains a data set of basic market price information. It used to produce an agricultural markets magazine funded by donors, but once donor funding ended, the private market did not sustain the activity. In addition, several private agriculture-focused consulting firms provide market intelligence and strategy services to the largest investors and actors in the agriculture sector. During the consultation, many producers, traders, and processors cited the Internet and personal contacts as additional sources of market information and market intelligence. 56 Box 1. Market Information System to Facilitate Export Growth Market information systems (MIS) provide market monitoring indicators and decision-making support to agricultural stakeholders. The goal of MIS is to correct for information asymmetry between market actors and to improve market efficiency by increasing transparency. Price data alone is not sufficient for MIS to be effective; the data must be comprehensive, timely, and commercially useful. Agricultural stakeholders, particularly smallholders, should also be empowered to use the information to facilitate decision-making and to negotiate with trade partners. Thus, successful MIS are typically linked to support services, such as: business opportunities, market analyses, climate forecasts, and training. Ideally, MIS are integrated into value chain and enterprise development activities. The case of the Agricultural Market Information Service (SIMA) in Bolivia is a successful example of a MIS designed to support export growth with regional trading partners. Donors provided long-term funding for the creation of a private, non-profit organization to operate and maintain SIMA. Today, SIMA collects daily price data on over 180 agricultural products in key markets in Bolivia, Peru, and Argentina, providing access to annual historical data dating back to 2002. Fundación Valles, the non- profit created to operate SIMA, disseminates price data via radio and provides value-added services to farmers, including improving marketing channels and training on new technologies and practices. Source: World Bank 2009. Equal and predictable access to reliable market information, accurate data sets, and market intelligence allows sector stakeholders, including producers, to make critical decisions related to mitigating risk and coping with normal market risks. A complementary set of market information, market intelligence, and training services and support could be developed between the public and private sectors. For example, the public sector could strengthen its timely collection and reporting of production forecasts, market prices, and end-of- season commodity data. CAMIB in Moldova is an example of an NGO Agriculture Market Information and Intelligence Service. It was launched within the Ministry of Agriculture and Processing Industry under an EU TACIS program in 1997. In 1999, it was transitioned to a non- profit NGO. A principle mission is to provide domestic food operators with information and marketing services fundamental to create and maintain market transparency - which is an indispensable prerequisite of market economy. They have continued to receive donor funding which have helped to fund their publically available public good market information, as well as underwrite market intelligence reports both on Moldovan and target international markets.11 Similarly, in Bolivia, a non- profit organization collects and disseminates daily price data on agricultural products in key regional markets in Bolivia, Peru and Argentina, improving transparency and helping stakeholders make more informed trade decisions (box 1). Private market intelligence services and commodity groups, such as the Association of Fruit and Vegetable Enterprises, can use the publicly available data sets and political and economic analysis to 11 http://www.camib.com/eng/about_us.php 57 provide useful market intelligence through a variety of fee-for-service mechanisms, including agricultural magazines and regular commodity- or market-specific subscription-based newsletters.12 As noted, some private capacity already exists within the Kyrgyz Republic, but it focuses on larger, individually developed market intelligence clients, such as financial institutions involved in agribusiness lending or larger processors. This is due, in part, to a significant capacity constraint on the part of farmers and small and medium actors who have limited exposure to reliable market intelligence or training in how to apply the information to business decision making, including risk mitigation. The commodity groups have not pursued strategic market intelligence products for their constituents. Both the trade promotion agencies in the public sector and the specific export-focused commodity groups are well situated to contribute to meaningful market intelligence to support market diversification and trade in the most relevant foreign markets. Training is needed to help key market actors, particularly producers and smaller traders and agribusinesses, to use publicly available data sets and to build capacity for using and interest in developing market intelligence services and products. To improve market knowledge, the following could be implemented:  Inventory existing forecasting and market information processes and reports within the relevant ministries and agencies, including the Ministry of Agriculture, Fishing, and Processing, the Ministry of Economy, and the National Statistical Committee. A wealth of information is collected, but it has not been collated or made available in a useful and timely format. The information is collected and maintained in different ministries and agencies. Assigning clear responsibility to one agency or team is recommended to drive the process and ensure progress.  Design and implement, with the private sector, a structure to provide timely reporting of market information. Consider the use of appropriate information technology to facilitate access. Review other country experiences.  Develop and implement, with the private sector, training in the use of market information and market intelligence for producers and small- and medium-size agribusinesses and traders. The objectives are to inform stakeholders of the public information that is available to increase the use and effectiveness of information and reporting mechanisms and to build a market for privately developed, high-quality market intelligence. These trainings may be specific to the value chain and should occur at the oblast or rayon level. They may be leveraged to facilitate market linkages and develop additional business relationships. Investment Promotion and Business Enabling Environment The Kyrgyz Republic has limited investment in the postharvest, downstream end of the various commodity value chains. As highlighted in World Bank (2014), the Kyrgyz Republic has a generally low level of investment in formal agribusiness. In addition, agri-food logistics and marketing is still relatively poorly developed. 12 For an example of a private, market intelligence, subscription-based newsletter, see http://www.ciafrica.co.za/images/WeeklyReportExample.pdf. 58 Despite the low level of investment in formal agribusiness, the consultations indicated that trade is very active, with Kyrgyz, Kazakh, and Turkish traders regularly sourcing products from farmers. This robust trade links producers with end markets within the Kyrgyz Republic and key export markets for diverse crops, including potatoes, dry beans, fresh fruit, and tomatoes. Farmers receive market signals from their interaction with this trade and respond to them. Dry beans were hardly produced 20 years ago but have become the most significant cash crop for producers in the Talas region. In other areas, it is common to find a village or cluster of villages specializing in carrots, cabbages, potatoes, or other products. These crops are not the only crops produced, but after the early movers try new crops with the encouragement of traders, others move into production as well. This clustering of production encourages more traders, as the volume of products able to be procured from an area increases. However, Kyrgyz trade focuses on primary crops, with little or no significant capital investment in postharvest handling, storage, or processing technology. As an example, cabbages are stored in traditional on-farm clamps,13 with a single extended family or trader storing up to 600 or 700 metric tons in clamps and losing between 20 and 40 percent before marketing the final load in late winter or early spring. Traders are actively engaged with buyers as far away as Moscow, but market uncertainty, the burden of formalizing business operations (including taxation, corruption, and uneven regulatory implementation), lack of affordable finance (and the additional risk that capital finance entails), and unfamiliarity with the range of technologies available (and their costs and benefits) all inhibit entrepreneurs from upgrading their capacity and efficiency through the acquisition of technology and development of modern logistics infrastructure, transportation, and handling. A leasing industry can help logistics companies to refleet and expand transport fleets (box 2). The Kyrgyz Republic can collaborate with the financial sector to ensure that a supportive regulatory framework is in place for banks to develop and offer leasing mechanisms. Box 2. Challenges to Establishing a Leasing Industry for Agribusiness: Lessons from Armenia Leasing is a mechanism that can provide Small and Medium Enterprises (SME) with the ability to invest in productive and logistics equipment. In credit-constrained environments, a lease provides access to finance, where the borrower (lessee) makes a monthly payment in exchange for use of a productive asset and the lender (lessor) retains legal ownership. This helps SMEs establish a credit history and gain access to the formal financial system. In the agricultural sector, a leasing industry can provide much needed access to term financing, allowing agribusinesses to use leased equipment as collateral. The case of the ACBA Leasing Company in Armenia provides lessons in overcoming challenges to establishing a leasing industry. After starting up in 2006, ACBA encountered problems with the availability of equipment for import, lack of consumer understanding of how leasing works, and regulatory issues in the enabling environment. Since the type of equipment ACBA typically offers for lease was not previously imported in large quantities, ACBA hired a manager to analyze the lifespan, local capacity for operations and maintenance, and resale value of equipment being leased. 13A clamp is a traditional, roughly insulated, compact heap used as temporary field storage for hardy crops, particularly root crops. 59 To disseminate knowledge on leasing, ACBA provided training for staff and paid commissions to each of its branches for every new lease deal. Finally, ACBA successfully advocated for equipment imported for lease to be exempt from a value-added tax, if the equipment was already on the government’s list of equipment exempt from VAT when imported for use. Source: USAID 2007. Similar experiences are present with other crops. Potatoes are stored almost exclusively on-farm in basic excavated root cellars. Even in food processing and dairy processing, Soviet-era or outdated technology is often still used, and logistics systems and marketing are often outdated. This lack of investment in postharvest storage and upgraded technology weakens the competitiveness of Kyrgyz products both in competition with imports on the domestic market as well as in international markets. The lack of innovation is relevant with respect not only to physical technology but also to processes, standards, and marketing such as the adoption and implementation of hazard analysis and critical control points and other food safety and processing best practices, as well as packaging, labelling and branding. Extensive study and planning have taken place around large-scale, public-private investment and development of logistics centers, particularly for fruits and vegetables. These large-scale investments would provide a consolidation center for packing and storage as well as a transport hub. The studies have considered some successes and learnings from these large-scale centers in other locations, but may not have completely considered the many examples where these investments have operated either significantly under capacity or stood idle or been abandoned. Therefore, establishment of smaller- scale, completely privately driven logistics centers using the most appropriate technology and design chosen through a competitive matching grant fund, as outlined below, may be preferred at this time. Increasing investment in agribusiness along the supply chain would improve the competitiveness of the Kyrgyz agriculture sector. This would reduce exposure to some market risks, including displacement by competing producers and processors, and would improve market linkages to reduce unpredictability. Improving the business enabling environment and promoting investment are cross- cutting activities within many donor projects. However, these projects focus mostly on particular value chains, including dairy, fruit, and horticulture. Promoting investment and improving the business operating enabling environment have several key components.14 First, private sector consultation should underpin all efforts to improve the enabling environment. Several ministries of commerce and industry have established quarterly public-private forums to discuss key issues. At the Presidential level, the Kyrgyz Republic has a Council on Development of Business and Investment that meets quarterly for consultation on regulatory reform and investment promotion. Agriculture and agribusiness investment needs to be a central focus, as it risks being sidelined in a more general public-private dialogue. 14 These recommendations are drawn from World Bank (2014). 60 Second, a comprehensive quantitative assessment is needed of the financial impact of the current tax regime on all participants in the agriculture sector, including farmers, processors, and traders. A tax regime that is vague in certain specifics and administration can be clarified, improved, and implemented efficiently and evenly, including consideration of the fiscal impact of alternative tax regimes. Third, technology needs to be upgraded and innovations adopted across the agriculture sector in order to improve competitiveness and efficiency. Existing finance has not been sufficient to encourage investment and implementation of new technologies and innovations. A competitive matching grant fund could be used to encourage the sector to upgrade innovation and technology, particularly in postharvest marketing, handling, and processing. Existing enterprises could upgrade equipment, processes, and technology to improve the competitiveness of their existing portfolio of products and develop and produce new products. Producers, traders, and transportation companies could upgrade their handling capacity and reduce losses by upgrading their storage, handling, transportation, and packing facilities. A complementary activity could include commodity value chain groups and chambers of commerce to facilitate information and exposure to international best practices and technological advances. To promote investment and improve the business operating environment, the following steps are recommended:  Establish a twice annual or quarterly consultation between the Ministry of Economy and the private sector focused on promoting agribusiness investment and development, sharing the experience of other countries, and working with existing organizations. This platform could be used to raise critical issues, with the overarching goal being to improve the capacity of the sector to cope with normal risks. The Ministry of Agriculture and Melioration may be an appropriate co-chair to maintain an agribusiness focus. A consultative process for considering changes to the Tax Code and overseeing a comprehensive quantitative assessment of the financial impact of taxes for stakeholders across the agriculture sector is an area of shared interest that would help to build practical momentum and achieve buy-in to the consultative process.  Define, develop a business plan for, and create a matching grant fund to spur critical investment in new technology and encourage innovation to improve competitiveness and efficiency. Consider the example of Fundación Chile and others (box 3). It is important to consider risk within the framework and governance of the fund to avoid incentivizing extremely high-risk investments. Assess the feasibility of the fund in terms of scale and potential impact. Box 3. Innovation to Increase Investment in Agribusiness In 1976, the Chilean government created Fundación Chile to add economic value to the country’s products and services through innovation. As a private, non-profit corporation with funding from the state and an American conglomerate, Fundación Chile played a crucial role in technology transfer and incubation in target industries, including agribusiness, investing in research and development to overcome market failures. In the 1970s and 1980s, Fundación Chile supported innovation to encourage export diversification, initiating quality-improvement programs for 61 salmon, aquaculture, meat, vegetables, and fruit. As a result, exports of salmon and trout increased from 300 tons per year to 24,000 tons a year in the 1990s. The “Boxed Beef” initiative introduced vacuum packing to the meat supply chain, creating new jobs and bringing more hygienic, better- quality packaged meat products to the market. Similar successes occurred in the oyster, berries, and asparagus subsectors. Business Model Fundación Chile identifies investment opportunities with high potential, based on technology innovation that is appropriate for local conditions. Once a new technology is developed (or acquired and adapted), private sector partners are brought in to create a company for the technology. Today, Fundación Chile is self-financing; it leverages competitive funds from Chile’s Economic Development Agency, revenues from the sale of its products, and minority partnerships in each new company it creates. Key Features of Fundación Chile • Public-private alliance • Private control • Market orientation • Use of networks for value creation and project scale-up • Creation of companies that will spread innovations • Self-financing Source: World Bank 2014 Trade Facilitation Trade facilitation focuses on helping trade across borders to occur faster, more cheaply, and more predictably. Trade facilitation would directly strengthen the competitiveness of Kyrgyz exports in foreign markets. Predictable, lower-cost trade procedures would encourage private investment, including foreign direct investment, in the agriculture sector, particularly in postharvest handling and processing ventures. The four pillars of trade facilitation are transparency, simplification, harmonization, and standardization. The World Bank’s Doing Business Index ranks countries according to factors important for the business investment and enabling environment. The Trading Across Border factor considers the bureaucratic and logistical challenges of international trade, including both imports and exports. It considers the financial and time costs of procedures and transport. Central Asian countries rank among the lowest in the world, reflecting both their geographic location and regional trade issues, as transport and access to ocean ports are critical. The Kyrgyz Republic ranks 183 out of 189 in the Trade Across Borders factor. The required documents to export do not appear to be onerous in comparison with Europe, Central Asia, and Organisation for Economic Co-Operation and Development (OECD) countries. However, exports take 63 days in the Kyrgyz Republic, compared to 23 days in Europe and 62 Central Asia or 10.5 days in OECD countries. Moreover, transaction costs are high, representing between 1 and as much as 15 percent of the value of traded goods.15 In 2009 the Kyrgyz Republic sought to improve trade facilitation by implementing a single window. In 2010 border infrastructure and modernization improved at the Kazakh or Kyrgyz borders after the border became an external border of the Eurasian Economic Union.16 The same improvements did not occur at border points shared with other countries. The accession of the Kyrgyz Republic to the Eurasian Economic Union in May 2015 includes important activities and outlines investment for facilitating trade, particularly in the areas of trade technology, infrastructure, processes, procedures, and capacity building of public sector trade institutions. Nontariff barriers are among the most important trade-related concerns, and agriculture, in particular, can be affected by domestic subsidies, uneven implementation of sanitary and phytosanitary requirements, technical barriers to trade, export or import restrictions, and import or export licenses (ITC 2011). While some nontariff barriers are expected to be lowered for trade with the markets of Russia and Kazakhstan, these nontariff barriers are not significant for the primary crops exported. However, they are important for animal products exported to traditional markets. Improving the infrastructure for animal health and performance as well as upgrading the ability to meet, test for, and certify international sanitary, phytosanitary, and food safety standards will improve the Kyrgyz Republic’s ability to negotiate and overcome some of those barriers. The IFC has supported successful food safety projects in transition countries, including the Ukraine and Belarus. Its extensive experience could be replicated and adapted to the Kyrgyz Republic (box 4). Box 4. Stepwise Approach to Food Safety For Indian agribusinesses, compliance with food safety standards is one of the key barriers to entering new markets. The upfront investment cost required for standard certification is too high for most smallholder farmers, and this limits their ability to market horticulture crops to supermarkets and regional exporters. To overcome this barrier, the Indian agribusiness Jain Irrigation System Ltd. partnered with the IFC to develop and pilot a “JAIN GAP” standard to apply to farmers within its supply chain. JAIN GAP – a simplified version of GLOBALGAP – introduces basic standards for pesticide use and worker safety without significantly increasing production costs for farmers. GLOBALGAP recognizes the JAIN GAP standard as a “Primary Farm Assurance” Standard, providing a stepping stone for certifying small farmers to a higher standard in the future. Source: IFC 2011. Geographically the Kyrgyz Republic is situated between the Chinese, Russian, and European markets and the Middle East. It is a mountainous country with 95 percent of transport by road (ADB 2009). It is one of nine countries within CAREC, the Central Asia Regional Economic Cooperation. With funding from the Asian Development Bank, CAREC is using transit trade through Central Asia to develop links between Western China and Europe. The CAREC transport area has identified six 15This figure is quoted in multiple overviews of trade facilitation, including ADB and UNESCAP (2013). 16The information system supporting a single window was launched in 2011. Despite the investment and implementation so far, the Kyrgyz Republic’s ranking for Trading Across Borders remains low. 63 transport corridors for investment and development to improve competitiveness of trade in, out, and through the Central Asian countries. Four of the six corridors include the Kyrgyz Republic. CAREC has identified a significant need to upgrade and invest in its road system along these key corridors. Continued investment and upgrading of roads themselves as well as the trucks and transit equipment used across the industry would help to lower transport costs and increase sectoral efficiency. Improving trade facilitation will require a regular platform for private sector consultation (for example, the public-private consultation dialogue outlined in the section on investment promotion). The Kyrgyz Republic, under the NSDS, has prioritized negotiating and implementing strategic trade and economic alliances with diverse partners. This includes accession to the Eurasian Economic Union but should include other partners as well, including China, Uzbekistan, Tajikistan, and, further southwest, the Islamic Republic of Iran, Turkey, and the Middle East. Consultation with the private sector can align these trade facilitation activities with specific market opportunities and investment promotion objectives. The capability to control quality within both the public and the private sectors constrains access to certain markets and weakens the competitiveness of Kyrgyz products with foreign products.17 This has been particularly evident with regard to animal product exports. A collaborative approach between government and the private sector should be pursued. The International Finance Corporation (IFC) has supported successful food safety projects in transition countries, including Ukraine and Belarus. Its extensive experience could be replicated and adapted to the Kyrgyz Republic. The IFC Food Safety Toolkit provides extensive coverage of core building blocks and examples of food safety regulatory reform. Some of the issues related to technical capacity are being addressed under implementation of the Eurasian Economic Union accession. Upgrades to capacity within both the public and the private sectors will be important for and relevant to nontraditional markets and help to increase the diversity of products exported to and competitiveness with traditional markets. To facilitate trade, the following next step is recommended:  Undertake a food safety regulatory environment reform aimed at achieving compliance with international best practices with regard to food safety. Design and structure the project to address both public and private sector needs and work collaboratively with existing commodity and value chain groups. 17 This recommendation is from World Bank (2014). The next step is influenced by the policy note as well. 64 Solution Area 2. Improve Livestock Productivity This section builds on the Phase I recommendations for the livestock sector to identify and assess strategies to strengthen the resiliency of livestock systems and rangelands in the Kyrgyz Republic. Interventions are identified that could (1) reverse degradation of water, soil, and vegetation cover; (2) safeguard the long-term viability of rangeland ecosystems, while ensuring sustainable access to grazing land; and (3) strengthen livestock services (veterinary, animal health, feed and fodder supply, destocking, water and grazing access, and weather and market information, among others), enabling farmers to manage their resources better, to respond to climate and market signals, and to protect their assets in times of drought. Overview of the Risk Environment and Framework The government’s overarching strategy document is the National Development Program to 2017. All sectoral programs must fit into this program. At this time, there is no strategy document for agriculture, but the Food Security and Nutrition Program is expected to be approved in the coming months. The U.S. Agency for International Development (USAID) has been approached to assist in restructuring the MOA. The timing of restructuring could be influenced by the national elections in the fall of 2015. The World Bank and the International Fund for Agricultural Development (IFAD) are supporting implementation of the 2009 Pasture Law through three major projects that focus on the law and other interventions to improve forage supply, animal health, veterinary services, and dairy marketing. The World Bank has supported the Agriculture and Services Project and, since 2014, the Pasture Management Improvement Project, which addresses pasture management, health of livestock (veterinary training and kits, brucellosis control), and value added (dairy, cooling points). Together the IFC and the World Bank are working to support dairy processing by building the capacity of private processing companies and their supply chains. The U.K. Department for International Development, the FAO, the German Development Agency, the Global Environment Fund, IFAD, Australia International Development Agency, and USAID are all active in the agriculture sector. A scoping mission has been completed for nationally appropriate mitigation actions that could reduce greenhouse gas emissions with the help of developed-country partners. The objective is to catalyze a green economy and to support livestock producers and processors to access export markets and, by doing so, to adopt more resource-efficient production. Specific help would be provided for sanitary and animal health measures and improved productivity of animals in order to reduce the total herd size and increase the offtake of younger animals to reduce grazing pressure. Productivity would be improved as a result of improved feeding programs and other livestock management practices and a higher proportion of livestock fattened in feedlots, from the current 9 percent to 20 or 30 percent. The Japan International Cooperation Agency has conducted several projects in the Kyrgyz Republic, including the Data Collection Survey on the Dairy Industry (May–November 2013) and various trainings in Japan related to the dairy industry and to milk and dairy products safety and policy. The Project for the Support of Joint Forest Management in the Kyrgyz Republic (2009–14) sought to 65 improve forest co-management. The Community Empowerment Project through Small Business Promotion by the One Village One Product Approach in Issyk-Kul Region, known as the One Village One Product Project, was initiated in 2007 and is currently in its second phase. The project is working with 74 local communities to develop local products and support local economic development. In 2015 it will initiate the Project for a Master Plan on the Inspection of Quality and Safety of Milk and Dairy Products (August 2015 to April 2016), followed by the Project for Improvement in Technology for the Sanitary Management of Milk in Chuy Province (2016–21). An FAO-supported pilot project on animal identification will provide one oblast with physical ear tags, a database, and scanning equipment for inputting information. Tagging will begin in the dairy industry and at breeding farms. It is expected that 50 percent or more of all households in the village will be active in the pilot. For the purpose of ear tagging and trace back, herds will be co-mingled into groups of 500 head. The Agricultural Risk Environment Risks and their management approaches are multifaceted. The high-priority risks and proposed management approaches identified in Phase I were investigated in more detail to identify their component parts and related weaknesses or gaps in risk management. Phase I recommended addressing the volatility and price risks that are accompanying the increased commercialization of the agriculture sector. This includes improving market information and building effective supply chains as well as improving storage and transportation infrastructure. For the livestock sector specifically, greater emphasis should be placed on product quality and compliance with phytosanitary, veterinary, and health requirements. Regional coordination on trans-boundary livestock disease and locust attacks is also recommended. The analysis here looks at the various types of risks facing livestock producers, including market risk, price risk, production risk, business risk, financial risk, and policy risk. Issues with any single risk or production problem will lead to suboptimal performance and profitability and ultimately decrease resilience to risk. This section draws heavily on stakeholder interviews conducted in April 2015. Market and Price Risk The stakeholders interviewed for this phase of the project identified numerous market and price issues and risks (Table 13). Most centered on issues related to market access caused by poor animal health, poorly enforced sanitary and phytosanitary regulations, and inadequate labeling and certification. Table 13 Market and Price Risks and Actions to Address Them in the Kyrgyz Republic Risk element and Issues Actions Market access related to animal Negotiate and enforce trade agreements; provide proper health, politics, and product certification and labeling; strengthen animal health programs quality and veterinary services Market access and Productivity and quality improvement: on-farm food safety, competitiveness stemming from herd health, and bio-security programs; genetic improvement; 66 production practices, low feeding programs; farm management training productivity, and high costs of production Processing plant food safety and quality control: International Organization for Standardization program for hazard analysis and critical control point, slaughter, and meat-cutting methods; packaging and labeling; management training Feed price risks, including rapid Irrigation; improved and expanded crops and varieties; price spikes during dry years or improved harvest and storage methods; equipment; silage winter emergencies making Access to inputs and finance Seasonal finance for purchasing inputs; contract farming; microfranchise arrangement with input suppliers or processors Product price risks Extended production periods for year-round sales; improved storage for improved timing of sales They also raised issues related to poor market information systems and lack of transparent pricing systems. There is a functioning market for livestock feed, primarily forages (lucerne, native hay, straw), but price spikes occur. In the poultry feed market, a “micro-franchise” system helps smallholders to enter into commercial production and to attain production indicators similar to those of larger-scale commercial operations by providing a complete package of chicks, feeds, technical advice, and troubleshooting. Animal Health Risk The greatest health risk is the outbreak of infectious disease. For example, outbreaks of FMD occur every second year, creating a major risk to exports. An outbreak of brucellosis caused Kazakhstan to ban Kyrgyz dairy exports for seven months in 2012–13, depressing milk prices and costing the industry an estimated US$10,000 a day. Brucellosis poses the greatest risk to production and human health and exports, having been reported to the OIE in 11 out of 14 years between 1999 and 2013. The Kyrgyz Republic has one of the highest incidences of human brucellosis in the world. Brucellosis occurs in both cattle and small ruminants. A program exists for destroying infected animals and compensating farmers for 75 percent of the market value of their loss. Vaccination is supposed to be conducted twice a year. However, the total budget (som 61 million) is estimated to be half of actual need (som 126 million), and budget constraints limit the number of diseases addressed and the number of animals covered. Only 9 of the 22 infectious diseases are controlled. Among these are FMD, brucellosis, tuberculosis, pox, rabies, and anthrax. The vaccines for these 9 diseases are provided free of charge, and farmers are expected to pay the veterinary service fee. However, farmers reported that herds often have been comingled and taken to remote pastures by the time vaccines are made available. The condition of slaughterhouses constrains export development and poses a daily risk to public health. Backyard slaughter is the norm, and rural slaughterhouses are little more than central locations 67 for informal slaughter. Hygiene is inadequate, bio-security is lacking, and animal welfare standards are not applied. Farms and processing units have limited bio-security. Small farms are not able to take a comprehensive approach to animal health and disease control. The Law on Veterinary Services was passed on December 12, 2014, increasing the responsibility of farmers for vaccination by making them responsible for timely vaccinations and reporting their compliance in a timely manner. Herd health and on-farm food safety practices are issues. Parasites are common and have significant negative impacts on feed utilization and productivity. In one pilot program on parasite control, 90 percent of animals were infected at the beginning of the project. Treatment eliminated nearly all parasites, increasing slaughter weights by 10 to 15 kilograms and improving profitability nearly 30 percent. Stakeholders reported the following issues related to animal health:  The vaccination program is weak, making it difficult to control infectious diseases.  Producers do not pay adequate attention to vaccination, with indifference being a larger problem than lack of funding.  Veterinary services are not available at the farm level.  Farm production is very small scale and uses poor-quality raw materials.  Farmers have limited knowledge of disease prevention and control.  The meat produced is poor quality and productivity is low, with carcass yields half those in Kazakhstan and Russia.  Smuggling and neighboring-country issues are common.  The capacity to test animals for disease is inadequate.  Labeling certification and processing are inadequate.  Testing facilities at markets are slow and narrow in their diagnosis.  Responsibility for food safety and security is not clear.  Transport and distribution are expensive and poorly organized.  Quality control and inspection at slaughterhouses are weak.  Lab facilities need to be upgraded, and staff need to be trained.  Gaps in surveillance include the lack of right to inspect private facilities.  Knowledge regarding food safety is weak throughout the supply chain, and training is needed. Feed Risks Adequate livestock nutrition is essential for productivity and resilience. Feed resources include pasture, forages, feed grains, and manufactured feeds. Access to vitamins, minerals, and additives and supplements can ensure balanced rations and optimal productivity. For extensive and semi-intensive livestock production, pasture is the main source of feed. The use of pasture is regulated under the Pasture Law (2009), which takes a community-based approach to sustainable rangeland management (SRM). Stakeholders identified the following feed risks:  Forage production (pasture and other) varies year to year because drought and other weather conditions lead to feed shortages. 68  Price shocks occur during drought or severe winter weather.  Price shocks affect imported feed and ingredients due to currency fluctuations.  Permanent degradation of pastures reduces productivity. Pastures are in poor condition because of overgrazing, with up to 70 percent of pasture reportedly overgrazed and 40 percent degraded.  Water is scarce and expected to get even scarcer as a result of climate change.  The quality and variability of supplementary feed are compounded by lack of standards for feed processing and feed safety and inadequate capacity to analyze feed.  Knowledge and skills are inadequate with regard to least-cost formulation of feed and the development of livestock rations.  Farmers cannot afford to purchase feed at current levels of livestock productivity.  Producing forage on small, fractured plots of land is difficult.  Good-quality seeds are not always available. Producers also lack fertilizer and irrigation and are prone to weather risks. The Risk Management Framework Animal Health and Veterinary Services The State Inspectorate on Veterinary and Phytosanitary Security is responsible for all livestock inspection services. It has 67 staff in administration and another 906 veterinarians and phytosanitary inspectors. The Kyrgyz Republic joined the OIE in 1992 and is slowly implementing several of its animal health guidelines. A professional veterinary association was established in 2010 and made a legal statutory body in 2014. The government’s Veterinary Service extends to the rayon level. At the village level, private veterinarians provide services to farmers. The Law on Animal Identification was passed in June 2014 and is being piloted. There are 26 veterinary labs in the country. The National Reference Lab passed its certification to be internationally recognized in March 2015. This will help to increase export capacity. The government is now working to upgrade two labs in the south. Veterinary training is out of date, with few upgrades having been made since the mid-1990s. The government is working to upgrade the curriculum to prepare for OIE compliance, Eurasian Economic Union requirements, and changes in livestock markets. A majority (60–70 percent) of working veterinarians are more than 60 years old. Young veterinarians do not want to work in rural service, as the pay is very low. Pasture Management Systems and Oversight The Kyrgyz Republic established the Pasture Law in 2009 after months of consultations with stakeholders at the local, regional, and national level. Harmonization of other legislation to comply with the Pasture Law has been completed. State ownership of pastures has been written into the constitution. The law has been well accepted because it serves the needs of the majority of pasture users and is based on local tradition. Pasture management is decentralized to the local level and provides user rights to all villagers, not just livestock owners. Pasture management is based on the principle of SRM conducted by groups: 354 69 pasture user associations (PUAs) and pasture committees have been created to manage pastures together with the aiyl okmotu (local government), aiyl kenesh (local council), village health committees, and council of elders. Community pasture management plans are drawn up and approved at the local level. A national Association of Pasture Committees has the role of strengthening local institutions and transferring information and knowledge to local pasture associations. At the national level, the Pasture Department of the Ministry of Agriculture is responsible for pasture management. However, issues in the institutional framework and legislation impede the pasture management system at the community level. The role and function of pasture committees need to be clarified within the existing regulation. Stakeholders reported the following issues with regard to pasture management:  It is difficult to collect fees and enforce other actions because committees lack power in relation to local government.  Both the PUAs and their members are taxed, giving rise to double taxation.  The Pasture Department has insufficient budget, personnel, and reach to be able to carry out pasture reforms effectively.  The PUAs lack collateral, which weakens their ability to finance pasture improvements and other services and investments.  The sustainable, high-quality grasses that could improve pasture productivity are expensive and beyond the reach of PUAs.  Fencing is needed for reserve pastures and hay fields, but fences are expensive and beyond the reach of most farmers. Pasture Monitoring and Remote Sensing Pasture management plans are a mandatory part of pasture management. They are prepared by the pasture committees and approved by the local parliament. Violations of the plan can result in sanctions and are considered on a case-by-case basis by local parliament. Despite initial resistance to the use of sanctions, some PUAs have been successful in demonstrating the value of improved pasture management and of the investments made possible by the collection of user fees and sanctions. Monitoring efforts are focused on improving pastures. Monitoring is included in pasture plans, and regulations are in place, but they are poorly implemented. No strict directives or parameters are given regarding the carrying capacity of individual plots and pasture areas. The Department of Pastures has drafted materials on how to prepare a pasture plan that includes monitoring. A new project from IFAD will support implementation of the plan. It is envisioned that pasture monitoring should be centralized, with input from individual pasture committees. An updated national pasture database is needed and is being done in bits and pieces by projects. This work could be scaled up. Insurance The Kyrgyz insurance industry is small, with a penetration rate of only 0.36 percent in 2012. The government established a reinsurance company in 2012 in partnership with a British firm that has a 10 percent ownership. Agricultural insurance is compulsory, but of eight licensed firms, only one provides agricultural insurance. Three firms are licensed to provide livestock insurance. To promote the use of agricultural insurance, legislation was enacted in 2009 for a compulsory weather-index crop 70 insurance that would establish a government insurance fund using a 5 percent share of all premiums paid and a top-up from the Treasury. Industry has not supported this approach, and the program has not been operationalized. A law on livestock insurance was drafted in 2011 but has not been passed. Emergency Response and Disaster Relief The Ministry of Emergencies is responsible for responding quickly to major catastrophes such as earthquakes, floods, and landslides. Its annual budget is approximately som 140 million plus an additional som 2 billion for infrastructure repair. In addition, a contingency fund of som 100 million was used in 2010–11 to purchase emergency feed for remote areas. Potential Interventions The recommendations offered here are based on a holistic, layered approach to addressing agricultural risk in the Kyrgyz Republic. They are based on an in-depth look at the nuanced sources of risk within the broad areas of feed production, animal health, and finance. Successful programs and pilot projects that could be scaled up and the relevant institutions for action are identified. Where possible, good regional and global examples are provided. Figure 26 illustrates the concept of risk layering. The first layer includes high-frequency, low-loss risks. These events are addressed through mitigation, usually by the producer. The second layer includes low-frequency, medium-loss events. These are dealt with using risk mitigation and risk transfer. Risk transfer can include, among other things, insurance programs, risk sharing through contracting, and risk pooling through collaborative producer actions. These second-layer responses are generally managed through markets, but they also may entail government involvement either directly or through public-private partnerships. The third layer deals with very low-frequency, very high-loss disasters. Here risk mitigation and risk transfer are accompanied by risk-coping (disaster recovery) responses. Government has an important role to play in preventing nonsystemic risk from becoming chronic, systemic risk. Where markets fail, government has a role to play in providing public goods during epidemics (vaccination), infestations (pest control), and natural disasters (droughts, floods). In all cases, program designers should address efficiency and equity issues. Figure 26 Risk Layering Source: World Bank ARMT. 71 Table 14 summarizes the key livestock risks and the proposed responses in the areas of market and price risks, production and ecological risks, and policy, business, and financial risks. These have been broken into their component parts and addressed to produce a targeted, holistic approach to risk management. Potential regional systems include a livestock early warning system (LEWS), an index- based livestock insurance project, and control of infectious diseases such as FMD. 72 Table 14 Risks and Proposed Responses for the Livestock Sector in the Kyrgyz Republic Risk level and response strategy Meso (covariant): Macro (systemic): Micro (idiosyncratic): affects groups or communities; affects regions or nations; General risk area and specific targets affects individuals and households; sharing, transferring, and pooling coping with risks and recovering from for risk management reducing and mitigating risks risks disaster Markets and prices — Changes in price of land, new Changes in input or output prices due to requirements from food industry shocks, trade policy, and new markets, among others Access to market due to animal Vaccination; on-farm herd health or — — health and sanitary constraints food safety Feed price shocks due to drought, On-farm feed production and storage Public-private partnership income Finance program for feed production, exchange rate shocks (improved haying, storing, and silaging) stabilization schemes (modeled after purchases, and storage Canada, for example); forward contracting Access to feed due to market failure Online platform for feed markets; feed Public-private partnership on feed Emergency feed finance program to allow (information gaps, storage, transport, standards and testing; market storage producers to purchase supplementary feed market structure) infrastructure and pricing Production and ecological risks Hail, frost, noncontagious diseases, and Rainfall, landslides, pollution Floods, droughts, pests, contagious diseases, personal and asset risks technology Animal health risks Trans-border disease risk On-farm bio-security programs; Index-based livestock insurance Animal destruction and producer improved border inspection compensation (already exists) Production disease risk On-farm herd health programs; Animal health circles for veterinary — training for farmers and veterinarians; advisory services diagnostic labs 73 Natural disasters Droughts and storms that affect feed Drought-resistant crops; crop Index-based livestock insurance; Livestock early warning system (LEWS); supplies or cause the death of diversification; reserve pastures; on- community feed storage; income emergency programs for physical response, animals farm feed storage and silaging stabilization programs feed purchases; emergency credit and investment programs for rebuilding; disaster Natural disasters that destroy On-farm investment for slope Insurance; emergency funding for insurance top-ups; exit strategies agricultural infrastructure (landslides, strengthening, reforestation and other community infrastructure earthquakes) preventative measures rehabilitation Feed risks Annual variability in pasture forage Improved pasture management by Pasture management plans; Capacity building in the Pasture Department production individual producers; encouragement community-level organization; for monitoring and managing pastures and of quality over quantity in livestock community-based monitoring; for monitoring and managing a LEWS production; improved feed efficiency; infrastructure (wells, roads); supplementary forage production reseeding; reserve pastures Pasture degradation and permanent Extended rest periods; reseeding Extended rest periods; reseed and loss of productivity rehabilitate idle land Annual variability in supply of Improved processing, handling, and Crop insurance; insurance law; Seasonal finance; collateral; access to program feedstuffs storage on-farm; drought-resistant irrigation infrastructure credit crops, rotations, intercropping, diversification; irrigation Variability in forage and feed quality Improved processing, handling, and Commercial processing quality Feed laws and regulations storage, including silage assurance and control; feed testing facilities Loss of feed in storage and handling On-farm storage, handling Community storage (cooperatives) — Policy, business, and financial risks Liability risk Changes in local policy or regulations Changes in regional or national policy and regulation, environmental law, agricultural payments 74 Risk communication, regulatory — — — environment, leverage of risk Human resources: quantity and Training programs; information systems — — quality of labor management and specialists Cross-cutting responses Research and extension Feeds, breeds, seeds, and soil and water conservation; farm productivity and profitability Finance Income stabilization programs, tax programs; stable and transparent financing Organizational development Cooperatives and associations; monitoring systems Note: — = not available. 75 Animal Health and Food Safety Program The top priority for risk management is strengthening the country’s animal health systems. A national animal health and food safety program is needed in the Kyrgyz Republic to address various issues contributing to higher risks to human and animal health, food safety, product quality, and market access (see box 5 for one approach). The core components of the program would strengthen the following:  Infectious disease control, including a stronger vaccination program with better vaccine procurement systems, quality control of vaccines, cold chain and handling of vaccines, creation of incentives for farmers to carry out vaccine programs (access to credit and other support services), and farmer training  Surveillance systems, including better laboratories for food safety and disease detection (infections and production), with upgraded facilities and equipment, upgraded processes and protocols, and training of management and staff  On-farm herd health and food safety programs, including, among other things, farm bio- security, hygiene, product handling (new milking and handling equipment), storage (milk tanks and coolers), proper drug withdrawal protocols, and diagnosis and treatment of production diseases (especially parasites and mastitis). This could include creating animal health circles where a group of farmers would hire the services of a veterinarian to help them to set up herd health programs to improve productivity and profitability  National rollout of the animal identification program and capacity building for handling information and disease response (identification, trace back, containment, treatment, destruction)  Food safety in processing, including plant and equipment and hazard analysis and critical control point systems  Policy development, including completion of supporting regulations for the new Veterinary Service Law  Capacity development aimed at improving practical knowledge and skills regarding animal health and food safety among veterinarians, para-veterinarians, extension personnel, and farmers. Box 5 China-Canada Livestock Health Extension Project The China-Canada Livestock Health Extension Services Project supported capacity building in animal health policy, epidemiology, laboratory training, veterinary associations, on-farm bio- security, and herd health programs and the development of livestock health extension services. Work was carried out in seven provinces and at the national level. More than 13,000 people received training. The total budget was US$19 million over five years, with matching contributions from the government of China. 76 Russia has committed to providing US$150 million assisting the Kyrgyz Republics’ entry to the Economic Union of which US$9 million is designated for upgrading the animal health system. This program may focus on inspection services. More information about Russia’s support is needed so that additional programs will be complementary. Community-Based Pasture Management and Monitoring The Kyrgyz Republic has made great strides in developing a community-based pasture management system. The legislative and organizational work that remains to be done is in refining the regulations to clarify the role and authority of PUAs and pasture committees and in building the capacity of these local organizations. The larger and more serious issue is the need to improve the use of pasture resources to relieve the pressure on nearby pastures and increase the use of remote pastures. For this, a combination of incentives and disincentives is required. Some of these are already conceptualized in the legal framework, but they are not well implemented because of inherent weaknesses in the PUAs and pasture committees and lack of financing. The first Practitioners Conference on Sustainable Pasture Management in Central Asia was held in Bishkek in November 2014. Actions were identified that could strengthen community-based SRM (table 15). Most of these items could be incorporated into the technical actions and capacity development programs of two recommendations: 3.4, Drought Cycle Management and Livestock Early Warning System (LEWS) and 3.5, Supplementary Feed Production and Pasture Rehabilitation. 77 Table 15 Risks and Actions Related to Community-Based Pasture Management Risk element and issues Action Pasture committees lack authority Resituate them within the village government system to provide to collect fees, lack capacity to adequate authority; provide capacity development for management fulfill their duties, have and basic facilities and equipment; provide training and assistance to insufficient information expand sources of funds (other services and fees); complete the regulatory framework to implement the Pasture Law Pastures are poorly used, with Pasture committees use fees and other funds to pay for infrastructure pastures near villages being investment; provide matching grants or loans through programs or overgrazed and remote pastures pay for environmental services (PES) arrangements; improve being underused telecommunications in remote areas; introduce incentives in pasture fees to change behavior (charge higher fees for near pastures); build awareness; provide training to shepherds Pastures need to be rehabilitated, Ensure rest in pasture rotations and extended rest where needed; especially near villages, where they reseed; provide training in SRM; create incentives (payment for are heavily degraded environmental services, access to credit and other services) and disincentives (taxes, fees, fines) to stimulate behavioral change With regard to the legal framework:  Revise by-laws to clarify the role and authority of PUAs and pasture committees with regard to local government and its ability to enforce the implementation of pasture management plans and to deal with unauthorized “poaching” of pastures  Improve access to pastures for secondary users (forestry, honey producers) and clarify the legislation and processes, including urban users (at much higher fees)  Ensure transparency and fairness in the allocation of pasture use rights to individuals  Review land zoning and enforcement to prevent encroachment of settlements and cropping on pasture. With regard to capacity building for PUAs and pasture committees:  Strengthen the capacity of PUAs and pasture committees to hold capital and assets and to create pasture management plans and strengthen governance (executive roles, conflicts of interest, transparency and accountability, and roles and responsibilities), leadership, participation of women, business planning, management, and fund raising  Protect the productivity of pastures by sharing information with members on the reasons for lost productivity, building capacity on sustainable pasture management and pasture improvement, and enforcing pasture rotations in pasture plans  Improve public awareness of pasture management institutions and their functions by improving the amount of information available locally and strengthening the capacity of PUAs and pasture committees to share information and create vertical linkages to central bodies. 78 With regard to investment in pasture improvements and access:  Establish a fund for pasture development (savings or insurance)  Improve the use of remote pastures through differential payment systems, infrastructure development, and support for social programs in remote areas and consider the use of transportation subsidies, yurts, and generators  Introduce benefit packages for poor and disadvantaged families to ensure access to pastures (waive fees, provide assistance in pooling animals, provide transportation support)  Provide support to fodder production. With regard to institutional development:  Develop the state system of monitoring, including common standards and protocols. Drought Cycle Management and Livestock Early Warning System The appropriate response to a localized, recurring drought should be community preparedness and response carried out within the parameters of an effective national framework of fully funded policies, agencies, and programs for protection, preparedness, early warning, response, and recovery. Specifically, these approaches are defined as follows:  Drought cycle management. Drought is an expected, normal event. Specific indicators can be used to trigger preparation or response interventions either alone or in combination, depending on the nature of the drought conditions. Early, timely response is important and preferable in terms of cost-benefit analysis. For example, destocking allows households to decrease the grazing or feeding pressure, while freeing up cash to procure additional feed and medicines or to fund household food purchases.  Community preparedness. Communities should be capable of planning and preparing for both slow- and rapid-onset emergencies. This planning can include the provision of shelter, feedstocks, water points, and livestock vaccination, market development, pasture distribution, and organization of livestock movement to emergency pastures within the local area or provided through reciprocity arrangements with other jurisdictions. Local monitoring systems for developing pasture management plans need to be established to support SRM. Local information needs to be shared with the national level to establish a database of forage information. Participatory monitoring systems can help to build local knowledge of pasture conditions, but the processes used need to be simple and cost-effective. The GreenGold Project in Mongolia has used combinations of clipping programs and photographic sampling. Most livestock emergencies involve drought. Animals weakened by malnutrition lack the body condition to survive harsh conditions without sufficient supplementary feed and adequate winter shelter. These are considered slow-onset emergencies, and good disaster management systems integrate the information from drought and humanitarian early warning systems into early decision making. Early warning systems for drought, weather (including severe weather watches), and humanitarian crises can be useful in determining the extent of an emergency and supporting sound 79 decision making for emergency response. Drought forecasting systems, which integrate information about forage quantity and quality, can provide livestock producers with information necessary to adapt their grazing patterns and make decisions regarding the production and purchase of fodder. These systems also allow policy makers and agencies to anticipate the location and extent of emergencies, the population affected, and potential needs and give them time to prepare an adequate, coordinated response. A regional LEWS should be established to monitor pasture conditions in Kazakhstan, the Kyrgyz Republic, and Tajikistan. This would be similar to the regional systems in Africa and the system established in Mongolia (box 6). As climate change creates the potential for more frequent and severe droughts, a regional system for drought warning and early response could provide policy makers and producers with the time required to conduct advanced planning and take mitigating measures. The information generated through the system (satellite imaging ground-proofed with local sampling) could also provide the scope and detail of information required to support indexed-based livestock insurance programs. Box 6 LEWS in Mongolia Mongolia has established a LEWS with the assistance of the World Bank, Mercy Corp, and Texas A&M University. LEWS integrates satellite monitoring and physical sampling to provide reports and forecasts on forage and carrying capacity. This system will provide nationwide data. It is institutionalized in the National Agency of Meteorology, Hydrology, and Environmental Monitoring, which conducts regular forage sampling that LEWS has used to verify its forecasting system to a high degree of reliability. Supplementary Feed Production and Pasture Rehabilitation Supplementary feed in the form of forage crops and feed grains are important to sustaining livestock through winter and providing the reserve feed necessary to keep livestock off early spring pastures, when grass needs to attain a minimum level of growth prior to grazing. The three main approaches to providing supplemental feed are to (1) grow perennial hay crops (either native or seeded grasses and legumes) and use either cut and baled or left as standing hay crops, (2) grow annual fodder crops (such as oats and barley) and harvest and bale them before maturity to use as “greenfeed” or preserve as silage, and (3) grow feed grains (oats, barley) to maturity and use as high-energy feed. Additional sources of feed include crop by-products (distillers mash, canola, and soybean meal). The introduction of more feed crops into the crop sector can significantly increase the supply of supplementary feedstuffs, provided there is suitable market incentive for crop producers to do so. Crop rotations can include feed grains and legumes (alfalfa, field peas), which provide the added benefit of nitrogen fixing. Integrating perennial pasture or forages and grain crops in long rotations can have beneficial impacts on soil quality and crop yields. The introduction of alfalfa or other nitrogen-fixing legumes in a four-year rotation can improve soil fertility and disrupt weed and disease 80 cycles, thus decreasing input costs. Additional benefits include control of soil erosion and improved wildlife habitat. Switching from a primary cash crop such as wheat to feed grains may not provide sufficient economic return to the farm business. In Canada, with a similar cold climate and short growing season, research has shown that intercropping spring and winter cereals (spring wheat with winter wheat or fall rye) can extend the grazing season into the late fall without removing the main economic crop. Another form of intercropping involves seeding annual crops such as barley into living mulch, an established legume cover crop. Promoting forage production by livestock producers requires supporting activities. Hay-making areas need to be allocated and, in most cases, fenced to ensure that livestock do not consume the crop before it is harvested. Fencing is a major long-term investment that requires materials and finance. Improving the stand of forage requires top seeding or reseeding and fertilization. Seed must be purchased, and suitable equipment for seeding has to be purchased or rented. In many semi-arid locations, forage establishment is not possible without supplementary irrigation. The conservation and storage of feed need to be improved. Hay cut late and stored loose or in loose bales is prone to high losses from breakage, sun, and water. As a result, little can be stored into subsequent years. Proper conservation and storage can allow hay to be stored with good nutritional quality for multiple years. This is important for the ability to hold reserve supplies for use during droughts and their aftermath. Methods of conservation range from the simple to the complex and can include dense baling (large or small), round bales, bagging, and silaging. Improved storage ranges from simple tarping to roofs or buildings. Silaging can be done in pits or silos, but pits are economical and easy to construct. All of these approaches require some level of investment supported by information and training for producers. Research into feed efficiency and economic returns should underpin the introduction of any improved conservation and storage system. Pasture rehabilitation should be part of a national program to preserve pasture area and potential. A program could be developed to enable pasture committees and individual farmers to apply for government matching grants or loans for the purpose of pasture rehabilitation or reestablishment. To support this program, farmers and herders would need to receive technical assistance and training. Equipment and seed would need to be made available. Equipment could be on a lease or rental basis. Research should be conducted into varieties and establishment methods. In the Kyrgyz Republic, optimizing available feed supplies could be improved by developing geographic specialization in the type and stage of livestock production. Supplementary feeds and high- quality forages suitable for dairy production are found in the irrigated plains of the north and elsewhere, while the higher mountain areas tend to be semi-arid and more limited in the production of forage and feedstuffs. Given the high feed conversion ratio in livestock production (6 to 9 kilograms of feed to produce 1 kilogram of beef), it is always more economical to move livestock to the feed than to move feed to the livestock. An efficient approach would be to concentrate dairy and cattle fattening where supplementary feeds are grown in conjunction with other crops. This points to the development of efficient markets and transportation for livestock and feed. This approach would 81 increase the annual offtake of animals, reduce grazing pressure on pastures, and accelerate cash flow for livestock producers. A Livestock Feed Program should be developed that would promote the production of feed by livestock and crop producers and facilitate the improvement and rehabilitation of degraded pastures. This program could be structured along a payment for environmental services (PES) approach, whereby producers would be eligible for incentive payments based on their verifiable work on identified activities, such as completed pasture management plans, forage production, pasture rehabilitation, and even animal health programs (on the assumption that healthy animals are more productive and less of a burden on limited pasture and feed resources). The incentives to undertake these environmental improvements could include the following:  Direct payments or access to subsidized seasonal credit for PUAs and pasture committees for the completion of pasture management plans, monitoring activities, or animal health programs (vaccinations, parasite control)  Access to a mixture of seasonal (seeds, fuel, equipment rental) and long-term credit or grants (equipment purchase, fencing) for the establishment of perennial forage stands or pasture rehabilitation Access to long-term subsidized credit programs for long-term investments in pasture infrastructure, such as wells, bridges, roads, and social services infrastructure, including communications. The program should be supported with applied research and development that would involve variety trials, demonstrations, and research into intercropping and rotations that are technically feasible and economically viable in the Kyrgyz Republic’s environment and market. Practical, hands-on training should be provided to livestock and crop producers on how to manage forage production and livestock feed. Forage cooperatives could facilitate the aggregation of land and cost-sharing of equipment and other inputs. Cooperatives are still weak and require capacity-building support. Livestock Insurance Compulsory insurance has had a negative impact on growth of the insurance sector by making private insurers reluctant to enter the market. This precludes the possibility of public-private partnerships in the insurance sector. The government should move away from compulsory insurance and instead focus on creating the conditions for private insurers to provide crop and livestock insurance on their own or in partnership with government. One necessary action is for government to build a database on climate and agricultural production. The reinsurance constraint needs to be removed. The number and skills of trained actuaries need to be increased. The Kyrgyz Republic may consider introducing, on the basis of a solid feasibility analysis, livestock and/or pasture, insurance. Following the feasibility study, if the results are promising, a pilot project involving the Ministry of Finance, the Ministry of Agriculture, and private insurance companies could be implemented. Another option to consider could be regional indexed-based livestock insurance. This would provide a much broader pool for sharing risk. 82 Investment and Seasonal Credit Access to credit is necessary for producers to invest in risk mitigation. This includes longer-term investment into assets for feed production, conservation, and storage as well as on-farm infrastructure for water and other environmental assets (retaining walls, berms). Seasonal credit is required to plant forage and fodder crops and to purchase feed prior to winter. Given the relatively thin margins typical in agriculture, the long growing and storage periods, and the large amount of funds required for inputs or feed, operating credit needs to be available at low rates or there is no economic return. The reverse argument is that the productivity of crops and livestock must be high enough to generate a positive return over interest carrying charges. Developing seasonal credit products would accomplish the following:  Allow producers to obtain financing using the expected sale of crops or livestock as collateral  Link access to credit to the use of crop or livestock insurance to safeguard the loan in case of crop failure or livestock loss  Support good risk analysis and planning by including productivity and profitability assessments and collecting those assessments into a database of agricultural performance data to support farm management, investment, and lending decision making; the IFC has developed a tool for conducting this type of analysis  Promote contract farming or micro-franchise models of relationships between farmers and processors or input suppliers. Subsidy Reform and Disaster Relief The Ministry of Emergencies is responsible for responding to major catastrophes such as earthquakes, floods, and landslides. Its annual budget is approximately som 140 million plus an additional som 2 billion for infrastructure repair. In addition, there is a contingency fund of som 100 million, which was used in 2010–11 to purchase emergency feed for remote areas. Subsidies should be reviewed and, where possible, converted to performance-based payments for desirable actions such as vaccination programs, pasture improvements, and forage production. These payments could fall into the category of PES, with the possibility of transferring the costs to international markets (carbon trading) or donor support. Innovation and Adaptation The research and extension system needs to be revitalized to serve the needs of the agriculture sector as it modernizes to compete in global markets and survive in the shifting environment caused by climate change. Improving productivity is necessary to accomplish the following:  Make efficient use of available feed supplies, both traditional and nontraditional (crop and processing by-products)  Improve competitiveness within an open economy  Adapt to climate change. 83 Research into drought-resistant varieties of cereals, feed grains, and forage crops needs to be undertaken. Research into livestock feeds, feeding, and feed efficiency should be given high priority. The strengthening of artificial insemination (AI) stations is being supported through a Turkish loan, but supporting research into breeding systems and improved breeds should be undertaken. The feed sector needs to be supported with research, testing, and extension. A testing laboratory capable of testing feed and feed ingredients and screening for contamination and adulteration is needed. Building local capacity to develop least-cost feed rations is required (box 7). Box 7 Canada-China Feed Industry Project The Canada-China Feed Industry Project established a national feed testing laboratory in Beijing. The program worked with feed millers across the country to improve feed milling facilities and quality control processes. Formulation of least-cost rations was introduced. The project helped to modernize the Chinese livestock feed industry and contributed to the use of improved feed in China. The development of human resources underpins an innovation system. The Kyrgyz Republic has knowledge and skills gaps in a number of technical areas. These gaps exist in terms of specialists supporting the sector and at the farm level. The veterinary service is characterized by older veterinarians trained during the Soviet era. As these veterinarians retire, younger veterinarians are unwilling to take rural positions and those that do have limited practical training. There is a shortage of pasture specialists at both the national or local level. While the World Bank has initiated a training program within the past year, only 25 individuals are involved. Livestock nutritionists are also lacking as are agronomists with the knowledge and skills to identify crop pests and diseases. Farmer and herder knowledge and skills also need to be strengthened. Producer understanding of livestock nutrition, feeds and feeding is fundamental to creating the motivation to invest in improved pasture management and supplementary feed production. Likewise, farmer knowledge and skills are needed in other areas of farm management, breeding, and animal health. Supporting an effective extension system is important for transmitting information, creating motivation for change, and helping communities to solve the problems they face. Extension is now subcontracted out from the Ministry of Agriculture to nongovernmental organizations. Successful models of private advisory services that could be replicated include the private system in Tajikistan and the technical assistance provided to small-scale poultry producers by a commercial poultry feed company in Bishkek. Developing a robust, pluralistic extension system that incorporates various extension agents as well as more traditional government and research institutes is important to supporting adaptation and innovation. Recommendations and Action Plan Agricultural risk in the Kyrgyz Republic is low at the aggregate level due to the sector’s highly diversified production base and access to irrigation. Public and private sector initiatives to sustain this 84 diversity and maintain the physical and institutional infrastructure for irrigation are thus the foundation for agricultural risk management. At the commodity level, future development of the agriculture sector will need to place much greater emphasis on responding to price risk, whereas the traditional focus has been on production risk. Drought is the major source of production risk, but its impact is limited to wheat, due probably to the reliance on unirrigated, upland production of wheat in some areas. Wheat also is the commodity most vulnerable to risk due to its exposure to both production and price risks. Wheat, cotton, and potatoes are the commodities most vulnerable to price risk, although most crops are vulnerable to one degree or another. Price shocks to major commodities such as wheat and potatoes also incur the highest indicative costs. Livestock commodities are much less vulnerable to price risk, experiencing low-frequency, low-cost shocks. The aggregate impact of commodity-level price shocks tends to be small, however, as shocks and losses for one commodity are typically offset by higher prices for others. Occasional, economy-wide price shocks can result in high, sector-wide losses, as occurred in response to the political unrest in 2010. These conclusions highlight the implications of the continued shift toward commercial agriculture and the increasing vulnerability to market shocks. Improved management of price and market risks will require deeper, stronger markets, a better understanding of market behavior by producers and market agents, and better access to market information. The free flow of exports and imports with Kazakhstan and Uzbekistan is also critical. A much greater emphasis on product quality and compliance with phytosanitary, veterinary, and health requirements is essential in this context. The main recommendations of this report are as follows:  Continued support for a diversified base of agricultural production and assured access to irrigation are fundamental to effective risk management.  Continued measures to deepen domestic markets are needed to address many of the price risks for agricultural commodities. These measures include better market information systems, more effective supply chains, better access to storage, and improved transport infrastructure.  Reliable access to traditional export markets in Kazakhstan, Uzbekistan, and Russia is also critical—for both agricultural imports and exports. Border closures and barriers to transit incur high costs in terms of both price instability and lost trade. While some of these problems are beyond the direct control of the Kyrgyz Republic, many constraints on trade flow are the result of inadequate compliance with conventional phytosanitary, veterinary, and health requirements on the part of Kyrgyz producers and exporters. Improved compliance with these requirements would help to reduce market instability, particularly for livestock commodities.  Stronger regional coordination of measures to mitigate locust attacks and outbreaks of trans- boundary livestock disease would reduce the high exposure to these risks. 85 Summary and Recommendations of the Solutions Areas Table 16 Agriculture Risk Management Actions Plan for the Kyrgyz Republic Estimated Estimated cost (total time for and per beneficiary Proposed monitoring Main program and subprogram implementation per hectare, etc.) Expected outcome indicators Market Knowledge and Training 2015–20 Timely regular reporting of public Improved market Reports complete sector market information information; and timely increased market efficiency Training and market development Increased end market Survey access and for private market intelligence diversity for utilization of market products production intelligence products by producers Investment Environment and Business 2015–2020 Enabling Environment Regular public/private Increased private Value of consultative dialogue to promote sector downstream downstream ag sector investment and improve investment; investment in Ag BEE improved Sector competitiveness of Kyrgyz products domestically and abroad Matching Grant Fund for Increased efficiency Value of Investment in Innovation and and competitiveness downstream Technology Upgrades in Ag Sector of Kyrgyz ag sector; investment in Ag Increased value Sector; addition of products (packing, grading and sorting, and/or processing) Trade Facilitation 2015–2025 Food Safety Regulatory Reform Increased diversity of Value and diversity exports of export products Domestic Animal Health Project 2016-2020 USD 23,521,763 Improved animal % coverage of health status vaccine programs supports exports and Laboratory improved rural evaluations by OIE livelihoods. % coverage of coverage of Animal IDs 86 Animal Health - Regional 2015-2019 USD 2,800,000 Reduced incidence of Reported incidence Transboundary Control transboundary disease Community-based Pasture 2017-2022 USD 29,120,000 Improved pasture # of pasture Management management and installations increased pasture Bio-mass and bio- productivity diversity measures Pasture Monitoring and LEWS 2016-2020 USD 5,600,000 Climate resilience; Monitoring ongoing Improved emergency LEWS Functional preparedness Bio-mass and bio- diversity measures Feed Sector Development Project 2017-2021 USD 17,040,000 Increased supply of Area of feeds (ha) high quality Amount of nutritionally balanced manufactured feeds livestock feeds; (MT) improved feed utilization on farm Average livestock growth rates (ADG) Average milk yields (l/lactation) Indexed-based Livestock 2016–2020 USD 23,000,000 Increased use of % of producers Insurance insurance products participating by livestock Conditional Loans and Grants # of loans producers (note – included in individual % producers Increased investment programs and summarized here) participating in productivity and risk management # of grants approaches % producers participating Conditional Loans and Grants 2016-2025 USD 30,501,574 Increased investment # of loans in productivity and (note – included in individual % producers risk management programs and summarized here) participating approaches # of grants % producers participating 87 Appendix A: Risk Assessment Methodology Table A.1 Data Collected and Reviewed for Each Country Task Data Source Description of the main agro-ecological zones in each country, Country level data including the characteristics and areas of these zones and the main farming systems and crops and livestock produced in each zone. Data series on average annual rainfall for the period 1980- Country level data, for the 2012for the main agro-ecological zones. period 1980-2012/3 Respective contributions to crop and livestock production made Country level data, for period by household plots, small-scale private (dekhan) farms, large- 2000-2012. scale private corporate farms, and state-owned agricultural enterprises. Major crop and livestock production shocks observed from Country level data, for period 1980-2012 and describe the causes of these shocks and the level 1980-2012/3. of loss incurred (area of crop damaged, yield losses, number of livestock lost etc., reduction in livestock productivity etc.) Description of the incidence of livestock disease outbreaks and Country level data, for period the associated livestock losses. 1995-2012/3. Description of government policy for intervention in agricultural Country level data, for period markets from 1995-2012 for wheat, cotton, potatoes and the 1995-2012/3. most important high-value vegetable crop, including the form of intervention and the dates of any significant changes to these policies. Government exchange rate policy from 1995-2012 and the dates Country level data, for period of any significant changes to these policies. 1995-2012/3. Government interest rate policy from 1995-2012 and the dates Country level data, for period of any significant changes to these policies. 1995-2012/3. Government trade policy for the three major crops for the period Country level data, for period 1995-2012, including the level of import tariffs or export duties 1995-2012/3. and taxes imposed, and the dates of any significant changes to these policies – including the imposition of trade embargoes. 88 Information on country membership of any trade agreements or customs unions. Data series on Gross Value of Production (crops, livestock, total) FAOSTAT data, for the period from FAOSTAT for the period from 1995-2011. 1995-2011. Data series on production, area and yield of the three major Country level data, for the crops (wheat, cotton, potatoes) grown in the region, plus the period 1980-2012/3. most important high-value, vegetable crop in each country (see above). Data series on livestock numbers for the period 1980-2012 for: Country level data, for the total cattle, milking cows, sheep, goats, pigs and horses. period 1980-2012/3. Data series on average annual producer prices for the three major Country level data, for the crops (wheat, potatoes, cotton) plus the most important period 1995-2012/3. If vegetable crop, for the period 1995-2012/3. producer price data are not available then market level price data can be used. If monthly price data are available for all or part of this time period, they should also be collected and compiled. Data series of international prices for wheat and cotton for the Data for the period 1980- period 1980-2012. 2012/3. Data series on the exports and imports of cotton, wheat, and Data for the period 1995- wheat flour – volume and value - for the period 1995-2012. For 2012/3. For wheat and wheat wheat and wheat flour these data should also include a break- flour these data should also down of the trade flows among Central Asian countries. This will include a break-down of the be important for analysis of the regional implications of wheat trade flows among Central price and/or production shocks in Kazakhstan. Asian countries. Data series on total public expenditure and expenditure on Data for the period 1995- agriculture and irrigation (in nominal national currency) for the 2012/3. period 1995-2012. Data series on government and donor expenditure in response Data for the period 2000- to any agricultural shocks or emergencies for the period 2000- 2012/3. 2012. 89 A.2: Production: Price Derivation for Indicative Loss Analysis Base Case: Derivation without Loss Threshold Let total output be Y1 = P1Q1, change in output be Y2 - Y1 = P2Q2 - P1Q1, and decompose this change into a production impact and a price impact. Consider production impact alone by holding prices constant at P1. Let production impact be P1(Q2 – Q1). Then price impact is total impact – production impact: = (P2Q2 - P1Q1) – [P1(Q2 – Q1)] = P2Q2 - P1Q1 – P1Q2 + P1Q1 = Q2(P2 – P1). Hence Y2 - Y1= P1(Q2 – Q1) + Q2(P2 – P1). (1) Total impact is production impact + price impact. This construct allows full decomposition of the production and price impact on the total value of output for each of the following scenarios:  Both production and price increase  Production increases and price decreases  Production decreases and price increases  Both production and price decrease. The methodology is only useful for individual commodities. It is technically possible to use it at the aggregate level if all of the relevant price and production data for the aggregate are available. But this would be very difficult and time-consuming to do. The methodology cannot be used to disaggregate production and price impacts at the aggregate level by using the results of constant price and real price analysis. At the aggregate level, the following are the relevant parameters for analysis:  P1Q1  P2Q2  P1Q2. The first two parameters are available from real price analysis. In principle, the third parameter is available from the constant price analysis. In fact, the P1 variable available from the constant price analysis is not the same as the P1 variable from the real price analysis. 90 Derivation with Loss Threshold Derivation varies according to whether the threshold applies to production (Q), price (P), or total output (Y). Where the loss threshold applies to production alone (Q), threshold = wQ1, where w = loss threshold in percentage (for example, 0.1). Substitute Q1* for Q1, where Q1* = Q1 – wQ1. Then indicative loss = Y2 - Y1 = P1(Q2 – Q*1) + Q2(P2 – P1). Price impact is unchanged in this scenario. Production impact falls by the amount equivalent to the threshold. Where the loss threshold applies to price alone (P), threshold = wP1, where w = loss threshold in percentage (for example, 0.1). Substitute P1* for P1 where P1* = P1 – wP1. Then indicative loss = Y2 - Y1 = P*1(Q2 – Q1) + Q2(P2 – P*1). Price threshold affects both production and price impacts. Where the loss threshold applies to total output (Y), threshold = wP1Q1, where w = loss threshold in percentage (for example, 0.1). Let Y1* = Y1 - wP1Q1. Then indicative loss = Y2 – Y1* = Y2 – (Y1 - wP1Q1) = (Y2 – Y1) + wP1Q1 = P1(Q2 – Q1) + Q2(P2 – P1) + wP1Q1. Rearranging = P1Q2 – P1Q1 + wP1Q1 + Q2(P2 – P1) = P1(Q2 – Q1 + wQ1) + Q2(P2 – P1) = P1[Q2 + Q1(w – 1)] + Q2(P2 – P1). 91 Appendix B Chronology of Major Economic and Adverse Events Table B.1 Major Events in the Kyrgyz Republic, 1992–2013 Year Event 1992 Economic transition; earthquake. 1993 Economic transition; hyperinflation; new currency introduced; shortages of seed and fertilizer. Vegetable production falls 36%. Livestock numbers fall (pigs, 31%, poultry, 23%, sheep, 8%). 1994 Economic transition, hyperinflation; floods, landslides; shortages of seed and fertilizer. Cereal production falls 33% (lower yields); livestock numbers continue to fall (pigs, 31%, poultry, 34%, sheep, 16%). 1995 Presidential elections. Farm ownership titles are issued for 50% of land. Further transition-related fall in livestock numbers (poultry, 68%, pigs, 31%, sheep, 31%, cattle, 13%). 1996 Economic recovery; favorable conditions for agriculture. Government promotes increased wheat production to improve self-sufficiency. Cotton price falls on international and domestic markets. Agroprom Bank is closed down. Sheep numbers fall 17%, cattle, 6%. 1997 Kumtor mine gold production begins. Kyrgyz Agro-Finance Corporation opens. Sheep numbers fall 13%. Real cotton prices fall (-31%) as international cotton prices continue to fall. Cotton production falls 15% due to 21% reduction in cotton area. 1998 Russian financial crisis (August). Exchange rate depreciates 11%, bank assets impaired, economy slows down, inflation rises. Kumtor/Lake Issyk-kul disaster. The Kyrgyz Republic joins World Trade Organization. Floods, mudslides. Livestock commodity prices begin to rise due to impact of declining supply. 1999 Growing impact of Russian financial crisis: high inflation, reduced credit, barriers to trade imposed by Russia, Kazakhstan, and Uzbekistan reduce the demand for Kyrgyz exports. Sharp fall (-20%) in real prices for livestock products (milk, beef, sheep meat, eggs). Real cotton prices fall 37% due to falling prices on international markets. 2000 Unfavorable production conditions (extreme temperature, low rainfall); major locust outbreak, but no discernible impact on aggregate crop or livestock production. 2001 Good production conditions for agriculture. 2002 Economic slowdown due to Kumtor landslide and fall in energy production and exports. Kazakhstan limits transport and transit, reducing exports. Floods, hail storms. Crop production falls to trend following high production in 2001. Fall in real prices for maize (-28%) and wheat (-21%). Real crop GAO falls 12%. 92 2003 Floods, landslides. Real wheat price falls (21%) together with production (due to 15% reduction in area) due to continued fall in domestic price. 2004 Improved trade conditions (Kazakhstan removes extra rail tariffs); floods, landslides, delayed harvest; sharp fall in real prices for potatoes and tomatoes due to volatility on domestic markets. 2005 Political instability (March), presidential election. Gold production falls. Improved trade conditions with Kazakhstan; floods. Potato production falls in response to low prices in 2004. Real cotton prices fall 28%, and real maize prices fall 15%, both in response to modest falls in international prices. 2006 Earthquake in Naryn and Issyk-kul; low rainfall. Wheat production and real wheat price fall. 2007 FMD outbreak. Russia bans meat exports due to FMD. Cotton area falls 24% in response to falling real prices, as farmers switch to other crops. 2008 Combination of regional and domestic shocks. Global food price crisis drives up consumer (and producer) prices. Inflation surges. Global financial crisis results in reduced access to finance. Severe winter in 2007–08; spring frosts and hail storms; major locust infestation. Real prices fall for cotton (13%) and potatoes (-24%). 2009 Continued impact of global financial crisis on economic growth. Kazakhstan and the Kyrgyz Republic ban wheat exports. Major drought; major locust infestation. Sharp fall in real producer prices in aftermath of global food price crisis; wheat (-43%), maize (-24%), tomatoes (-15%). Cotton production falls 48% due to switch to other crops following lower prices. 2010 Political instability (April); border closures with Kazakhstan and Uzbekistan; political disturbances in Osh (June). Political uncertainty disrupts input supply (fuel, fertilizer) with reduced crop area and yields, especially for wheat; market activity restricted in the south. Drought in Chui, Issyk-kul, Naryn; spring floods and mudslides; real prices fall for cereals, potatoes, and vegetables; sharp contraction of aggregate crop, livestock, and total GAO. 2011 Severe winter (2010–11); FMD outbreak. 2012 Economic slowdown: Kumtor gold production drops 40%. Kazakhstan bans milk exports. Drought. Wheat production falls 32%. Cotton production down 16% due to 16% fall in real prices. Real potato prices fall 16%. Crop GAO falls 16%. 2013 Kazakhstan allows milk exports for qualified dairy processors; favorable conditions for agriculture; record wheat harvest. Note: GAO = gross agricultural output; FMD = foot and mouth disease. 93 Appendix C Coefficients of Variation and Adjusted Coefficients of Variation Table C.1 Coefficients of Variation or Adjusted Coefficients of Variation* Indicator Constant pricesa Productiona Yielda Real pricesb Aggregate output Total GAO 0.07* 0.09* Crop GAO 0.13* 0.14* Livestock GAO 0.06* 0.07* Individual commodities Wheat 0.23 0.12 0.23 International wheat — — 0.17* price Cotton 0.27 0.04* 0.22 International cotton — — 0.30* price Potatoes 0.17* 0.09* 0.26* Maize 0.17* 0.11* 0.20* Tomatoes 0.15* 0.05* 0.18* Fresh cow’s milk 0.04* — 0.10* Beef 0.05* — 0.10* Sheep meat 0.21* — 0.12* Eggs 0.11* — 0.08 Source: FAOSTAT. Note: * = adjusted for trend using the Cuddy Delle-Valle Index; — = not available. a. 1992–2012. b. 1998–2012. 94 References ADB (Asian Development Bank). 2009. “The Kyrgyz Republic: Trade Facilitation and Logistics Development Strategy Report.” ADB, Manila. ADB and UNESCAP (United Nations Economic and Social Commission for Asia and the Pacific). 2013. “Trade Facilitation in Asia and the Pacific: 2013 Update.” ADB and UNESCAP, Bangkok. Bonfoh, B., et al. 2012. “Representative Seroprevalences of Brucellosis in Humans and Livestock in Kyrgyzstan.” Ecohealth 9 (June, 2): 132–38. Fitzherbert, Anthony. 2000. “Country Pasture/Forage Profiles.” FAO, Rome. Akramov, Kamiljon T. and Nurbek Omuraliev. Institutional Change, Rural Services, and Agricultural Performance in Kyrgyzstan. October 2009. IFPRI. Balooch, Mahmood. Iran and India’s Cooperation in Central Asia. China and Eurasia Forum Quarterly, Volume 7, No 3. 2009. Central Asia – Caucasus Institute Silk Road Studies Program. Bonfoh, B., et al. 2012. “Representative Seroprevalences of Brucellosis in Humans and Livestock in Kyrgyzstan.” Ecohealth 9 (June, 2): 132–38. Dreyer, Iana and Nicu Popescu. The Eurasian Customs Union: the Economics and Politics. The European Union Institute of Security Studies. March 2014. Fitzherbert, Anthony. 2000. “Country Pasture/Forage Profiles.” FAO, Rome. FAO (Food and Agriculture Organization). 2011. “The Status and Challenges of Food Security in Central Asia.” FAO, Budapest, April. ———. 2012. “Kyrgyzstan: Assistance for Capacity Development in Locust Control.” Project Document TCP/KYR/3305. FAO, Rome. ---------. 2012. Kyrgyz Republic, Eastern Europe and Central Asia Agro-Industry Development Country Brief. FAO. 2012. ———. Various years. Locust Watch. Monthly updates. FAO (Food and Agriculture Organization of the United Nations) and WFP (World Food Programme). 2010. “Crop and Food Security Assessment Mission to Kyrgyzstan.” FAO and WFP, Rome, December. FAOSTAT (Statistics Division of FAO). http://faostat3.fao.org/home/E IFC (International Finance Corporation). 2011. Working with Smallholders: A Handbook for Firms Building Sustainable Supply Chains. IMF (International Monetary Fund). Various Years. Country Reports for 1998, 1999, 2000, 2003, 2005, 2008, 2011, 2012, 2014. Washington, DC: IMF. 95 ITU (International Telecommunication Union). 2011. “National Trade Policy for Export Success.” Geneva. Jaffe, Steven, Paul Siegel, and Colin Andrews. 2010. Rapid Agricultural Supply Chain Risk Assessment: A Conceptual Framework. Agriculture and Rural Development. Washington, D.C.: World Bank. JICA (Japan International Cooperation Agency). 2012. Export of Agricultural Products from the Kyrgyz Republic, a Basic Study. Aliev Management Consultants Research & Consultancy Services. July 2012. JICA. 2010. Study of Production and Export of Kidney-Beans in Talas Oblast. JICA in cooperation with Public Foundation “Peace Building Center.” 2010. JICA. 2013. Report of Study on setting up Trade Logistic Center (TLC) for distribution of fruit and vegetable products in Kyrgyzstan. Finance and Consulting Company Niet-Aaraket. 2013. JICA. JICA. 2013. Basic Study for Program Formulation in the Field of Export of Agriculture Products from Kygyzstan. MVector Research and Consulting. July 2013. JICA. JICA. 2013. Basic Study for Program Formulation in Dairy Development and Milk Industry. MVector Research and Consulting. August 2013. JICA. Kyrgyz Republic, Government of. 2009. “The Kyrgyz Republic’s Second National Communication to the United Nations Framework Convention on Climate Change.” Bishkek. Kyrgyz Republic, Government of. 2013. The Kyrgyz Republic Sustainable Development Program 2013- 2017. Kyrgyz Republic. Approved by Decree December 2013. Kyrgyz Republic, Government of. 2013. Master Plan Survey for Export-oriented Foodstuffs Logistics Improvement. Application Form for Japan’s Technical Cooperation. The Kyrgyz Republic. 2013. Mogilevskii, Roman. Trends and Patterns of Foreign Trade in Central Asian Countries. Working Paper No. 1 2012. University of Central Asia. OECD (Organisation for Economic Co-Operation and Development). 2011. “Risk Management in Agriculture: What Role for Governments?” OECD, Paris, November. OECD. 2010. How can policy underpin farmers’ risk management strategies? Policy Adjustment Note. Rastogi, Cordula, and Jean-François Arvis. 2014. The Eurasian Connection: Supply-Chain Efficiency along the Modern Silk Route through Central Asia. Directions in Development. Washington, DC: World Bank. Stratfor. March 2015. The Tumultuous Birth of the Eurasian Customs Union. Stratfor. https://www.stratfor.com/analysis/tumultuous-birth-eurasian-economic-union. 3/25/2015 Tilekeyev, Kanat. Productivity Implications of Participation in Export Activities: The Case of Farmers in Talas Oblast of Kyrgyzstan. Working Paper No. 17. 2013. University of Central Asia. Timetrics. 2014. “The Insurance Industry in Kyrgyzstan: Key Trends and Opportunities to 2017.” January. 96 Transparency International Corruption Perception Index. 2014. http://www.transparency.org/research/cpi/overview UN COMTRADE 2014. http://comtrade.un.org USAID (U.S. Agency for International Development) Country Development Cooperation Strategy FY 2015-FY 2019, The Kyrgyz Republic. ———. 2007. “Coping with the ‘Unexpected’ — The Experience of ACBA Leasing in Armenia.” https://www.microlinks.org/sites/microlinks/files/resource/files/ML4505_basis_micronote_exper ience_of_acba_leasing_in_armenia.pdf ———. 2013. Kyrgyz Republic: An Assessment of the Agriculture Sector. USAID. July 2013. World Bank. 2009. “Developing a Market Information System to Support Poverty Reduction through Export Growth.” Policy Note. ———. 2010. “Kyrgyzstan: Public Expenditure Review for the Agriculture Sector.” World Bank, Washington, DC. ———. 2011. “Kyrgyzstan Agriculture Policy Update.” World Bank, Washington, DC. ———. 2013. “Kyrgyz Bank: Overview of Climate Change Activities.” World Bank, Washington, DC, October. ———. 2014. Migration and Development Brief 22, Migration and Remittances Team, Development Prospects Group. April 2014. World Bank. ———. 2014. “Improving the Agribusiness Investment Environment in Kyrgyz Republic.” Policy Note, World Bank, Washington, DC. ———. 2014. “Fundacion Chile incubator: Chile case study.” Washington, DC. http://documents.worldbank.org/curated/en/2014/01/20144094/fundacion-chile-incubator-chile- case-study ———. Various years. World Development Indicators. Washington, DC: World Bank. World Bank Doing Business. 2014. http://www.doingbusiness.org WFP (World Food Programme). 2008. “Food Security Assessment in the Kyrgyzstan Republic.” Rome, November. ———. 2012. “Follow-up Emergency Food Security Assessment.” Rome, March. ———. 2013. “Household Food Security Assessment.” Rome, September. ———. 2015. Kyrgyz Republic Monthly Update on Food Security and Prices in Rural and Urban Areas. Bulletin January 2015. Issue 30. 97 Ag r i c u l t u r e g l o b a l p r a c t i c e t e c h n i c a l a s s i s t a n c e P a p e r World Bank G RO U P R e p o r t Nu m b e R 103078-KG 1818 H Street, NW Washington, D.C. 20433 USA Telephone: 202-473-1000 Internet: www.worldbank.org/agriculture Twitter: @wb_agriculture