COMMUNITY AGRICULTURAL RESOURCE MANAGEMENT AND COMPETITIVENESS SECOND PROJECT DESCRIPTION AND RATIONALE

Agriculture remains vital to the Armenian economy. In 2012, together with the associated agro-processing, it accounted for about 23% of GDP, 17% of export earnings, and about 44% of employment.  The fast economic growth over the last decade has generated new opportunities for the agriculture sector, which has grown at a robust rate averaging more than 6% annually since 1997 despite the downturn in 2009-10. Exports of agricultural products have doubled since 2005, mostly beverages and to a lesser extent fruit and vegetable products, although there was a significant but proportionally small increase in the export of live animals in 2011. However, the sector has not been able to fully take advantage of opportunities, with expanding consumer demand partly met by a substantial increase in imported products, which has outweighed exports and resulted in a steadily increasing gap between imports and exports and a widening of the agro-food deficit. Overall, Armenia is a net importer of agricultural products with imports of US$700 million in 2011 compared with exports of about US$230 million.

Productivity has grown substantially in the agriculture sector in the last decade.  The Crop Production Index more than doubled from 2002 to 2009 although there was a substantial drop in 2010 due to inclement weather conditions. During the same period the Livestock Production Index increased by about 60%. Crop production typically accounts for about two-thirds of the Gross Agricultural Output (GAO), while livestock accounts for one-third.  However, about 60% of the agricultural land in Armenia is pasture and grassland in the country’s mountainous areas, where livestock production is the most important economic activity.  Productivity increases have been supported by increases in availability of inputs, improved availability of finance, some foreign investment, improved market linkages, and an increase in farmers’ knowledge and skills. Nevertheless, yields are far from their potential, with cereals averaging only 2.5 tons per hectare (t/ha) and cow milk yields around 2,000 liters per head based on official statistics, although these figures are substantial improvements over the 1990s figures of 2 t/ha and 1,400 liters/head, respectively. Livestock productivity is constrained mainly by unmanaged and unsustainable use of pasture resources, with severe overgrazing and degeneration of nearby pasture areas and under-utilization of remote pasture areas, poor quality and shortage of winter fodder, animal health problems, and poor genetic resources. Livestock productivity could be increased by 40% with improved animal husbandry, feeding and veterinary care, while crop yield increases of 60% would be feasible in the medium term, with better varieties and improved management including soil fertility.

The sector is dominated by smallholders, with some 335,000 households with an average land-holding of around 1.4 hectares and a generally diversified production system involving both crops and livestock. Only a relatively small proportion can be considered truly commercial, and many farmers, especially those in more remote areas, are among the most vulnerable with about one-third still living in poverty and in some of the regions reaching as high as 46%[1]. A shift towards increased commercialization in the sector has been taking place in recent years.  Some farmers (around 15%) now cultivate leased land, although a third of farmers do not cultivate all their land, mainly due to poor land quality, lack of water or distance from the farm. New agro-processors and small rural businesses are appearing, an increasing number of contractual arrangements between processors and producers are in place, and producer associations and cooperatives are helping to consolidate production and markets. Nevertheless, the links between the food processing industry and agricultural producers remain weak, and many rural enterprises lack technology and know-how that could improve their competitiveness.

Some of the key constraints limiting the sector’s full potential could be overcome by improving market access, supporting the commercialization process, and enhancing employment opportunities in rural areas while protecting the natural environment. Further development of rural enterprises, including cooperatives and associations, and strengthening the links between agricultural producers and the food processing industry are critical. This is especially true for those products where Armenia has a comparative advantage, such as fodder-based dairy and meat production, fruits and vegetables, and niche products such as honey. Food safety and food quality standards are becoming increasingly relevant to the competitiveness of Armenia’s agro-food industry and, along with inconsistent supply, are major barriers for increasing exports and offsetting imports to meet domestic demand for fresh and processed products.

Accordingly, the proposed project will: a) extend the coverage of the pasture-based livestock system component under the Bank-funded Community Agricultural Resource Management and Competitiveness (CARMAC) project; b) support the development of selected value chains important to Armenia by providing targeted sub-project investments to help strengthen links between producers and processors, promote food safety, and support processing and marketing; and c) increase the capacity of public sector institutions that can support improved market access and selected value chain development.  Overall, the project extends and improves the successful CARMAC pasture-based livestock component, but also widens its scope to include a new value chain component linking livestock production as well as other Armenian produce to markets.

The second project is a livelihood as well as an environmental project. As such, it is embedded in the context of global environmental changes. Pasture-based livestock production systems are affected by climate changes, but are also considered as major contributors of global warming through their potential degradation of vegetative cover (see text box 1) and the emissions of methane gases from the digestive systems of ruminant animals.

The proposed project consists of four components with World Bank funding of US$32.67 million.  First, the project will develop and support the implementation of participatory management plans to improve productivity and sustainability of pasture and livestock systems in targeted communities in upland areas.  This will extend the coverage of the pasture-based livestock system component under CARMAC, by including more communities, particularly those adjacent to the villages already included in the ongoing project.  Second, the project will support the development of selected value chains important to Armenia by providing targeted sub-project investments to help strengthen links between producers and processors, promote food safety, and support processing and marketing. Third, the project will provide investments to increase the capacity of public sector institutions that can support improved market access and selected value chain development.  Accordingly, the project extends and improves the CARMAC pasture-based livestock component but also widens its scope to include a new value chain component linking livestock production as well as other Armenian produce to markets.