Feasibility analysis to trade boneless beef from Botswana to the Middle East: A system dynamics approach
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Presented by Kanar Hamza (UNE) and Hikuepi Katjiuongua at the Conference on Policies for Competitive Smallholder Livestock Production, Gaborone, Botswana, 4-6 March 2015
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Feasibility analysis to trade boneless beef from Botswana to the Middle East: A system dynamics approach
- 1. Feasibility analysis to trade boneless beef from Botswana to the Middle East: A system dynamics approach Kanar Hamza (PhD candidate at UNE) Hikuepi Katjiuongua Conference on Policies for Competitive Smallholder Livestock Production Gaborone, Botswana, 4-6 March 2015 1
- 2. Purpose In this study, we analyze the feasibility to export beef from Botswana to the Middle Eastern markets. To do such analysis: 1- We look at prices of Botswana beef in its 2013 market channels. 2- Then we look at prices of beef of major exporters to the Middle East (Brazil, Australia, and India) 3- Then we analyze economic feasibility to export beef from Botswana to the Middle East.
- 3. Research questions • Is it feasible (profitable) to export Botswana beef to the Middle Eastern markets? • How does the Middle East export trade channel affect value chain actor’s profitability?
- 4. The importance of this research • Botswana is already one of Africa’s largest beef exporters; • According to UN COMTRADE database, the export value of Botswana’s beef was approximately $116 million in 2013; • By contrast, beef exports value from both Namibia and South Africa were about $77 million and $61 million, respectively. However, maintaining Botswana’s access to the EEA markets is challenging. For example, FMD outbreak in 2011 caused significant lost in export value 0 60 120 180 2010 2011 2012 2013 Million USD Year Botswana Beef Export Value (Source: UN COMTRADE)
- 5. The importance of this research • Botswana’s beef exports heavily dependent on the EEA and South Africa (von Engelen et al. 2012) • Reforms for market diversification are urgently needed.
- 6. Market shares and prices of Botswana beef in its current market channels and those of major beef exporters (Brazil, Australia, and Beef) to the Middle East (ME)
- 7. BMC export markets in 2013 Angola 1% Germany 11% Namibia 0.002% Netherlands 4% Norway 0.24% South Africa 54% United Kingdom 30% Botswana Meat Commission Export Market Share (UN COMTRADE 2013 Data)
- 8. Price received per BMC market channel 5651 13375 3172 11651 19608 4965 5651 0 5000 10000 15000 20000 25000 Angola Germany Namibia Netherlands Norway South Africa United Kingdom USD/ton Price of boneless beef from Botswana – UN COMTRADE 2013 Data
- 9. Middle Eastern markets (Bahrain, Jordan, Oman, Saudi Arabia, UAE, Qatar, and Kuwait) Australia 29% Brazil 25% India 28% Others 18% Australia, Brazil, and India Market Share of the targeted Middle Eastern Markets (UN COMTRADE 2013 data)
- 10. Australian beef price in ME 7532 6235 10340 6267 9425 9240 7546 0 2000 4000 6000 8000 10000 12000 Bahrain Jordan Oman Saudi Arabia United Arab Emirates Qatar Kuwait USD/ton Price of boneless beef from Australian – UN COMTRADE 2013 Data
- 11. Brazilian beef price in ME 4671 6936 5896 5336 6806 0 1000 2000 3000 4000 5000 6000 7000 8000 Jordan Oman Saudi Arabia United Arab Emirates Kuwait USD/ton Price of boneless beef from Brazil- UN COMTRADE 2013 Data
- 12. Indian beef price in ME 5644 4228 4137 4764 4545 4112 4330 0 1000 2000 3000 4000 5000 6000 Bahrain Jordan Oman Saudi Arabia United Arab Emirates Qatar Kuwait USD/ton Price of boneless beef from India- UN COMTRADE 2013Ddata
- 13. Modelling approach • We present a holistic quantitative value chain model of the beef sector in Botswana to evaluate the effects of beef export to the Middle East on all value chain actors. • Methodologically, we used a system dynamics modeling approach to develop a dynamic value chain framework that highlights the changes and the performance of the beef value chain among involved actors over time (Rich et al. 2011).
- 16. Tested scenarios (1) A baseline; (2) We look at the effect of trading beef to the Middle Eastern markets on the profit performance of producers and other value chain actors (assuming price of 4,500 pula per head the Middle Eastern markets) (3) This scenario is the same as run 2 but we assume a price of 5,500 pula per cattle in the Middle Eastern markets; and (4) This scenario is the same as Run 2 but we assume a price of 6,500 pula per cattle in the Middle Eastern markets. (Note: these assumed prices are within the range of main exporters price to the Middle Eastern markets)
- 17. Model results: Cattle price (Source: simulation results)
- 18. Value chain actor’s cumulative profit performance relative to baseline scenario (Source: simulation results) Runs Producers BMC Feedlots Traditional Butchers Modern Butchers Run 2 vs 1 42% 1% 6% No Change No Change Run 3 vs 1 49% 10% 7% 2% 2% Run 4 vs 1 55% 20% 8% 4% 3%
- 19. Value chain actor’s average profit performance over time (week to week comparison) relative to baseline scenario (Source: simulation results) Runs Producers BMC Feedlots Traditional Butchers Modern Butchers Run 2 vs 1 79% -23% 12% No Change No Change Run 3 vs 1 88% 9% 16% 5% 4% Run 4 vs 1 95% 43% 20% 10% 7%
- 20. Conclusion Our model results highlight the importance of beef trade to the Middle East to diversify beef export market channels of Botswana. • A notable result is that during FMD outbreaks, trading beef to the Middle Eastern markets significantly improves the financial performance of producers, feedlots, BMC, and, to a lesser extent, traditional and modern butchers profits. • However, trade to the Middle East is less profitable in the short term when BMC has access to the EEA markets (unless BMC receives higher prices for its beef in the Middle East than the EEA markets). • This suggests that although beef trading to the Middle East has potential benefits to producers, careful consideration of Botswana’s beef price in the Middle East is key to make Botswana’s beef export feasible to the Middle East.
- 21. Limitations • Price analysis is done based on UN COMTRADE data. This database does not provide information about cuts and quality of beef traded. It only provide volume and price received per ton. • The model presented here can be improved in terms of precision about beef sector costs and returns, particularly regarding the costs of BMC to access new market channel such as those of the Middle East. We assumed a 5% of received price as entry cost but more research is needed to provide more precise cost estimates.
Editor's Notes
- Email: kdizyee@gmail.com
- Rectangles represent chain actors and the flows represent trading channels
- Price settings and supply demand interaction and sales decision making by producers. The red flow, BMC export to the Middle East represent addition market channel.
- Run 1(baseline): The following are key assumptions of the business as usual run (run 1) (Hamza et al. 2014): During FMD outbreaks, exports to the EEA (over 75% of export market share) are blocked for two years. Thus, we assume that demand from the export market declines by about 75% for two years based on lost access to the EEA markets, and then returns to normal. FMD outbreaks (big enough in scale to interrupt export market) were programmed to occur randomly once each 7 years (based on historic outbreaks) (BIDPA, 2006; Mapitse, 2008). The reported simulation introduced an FMD outbreak in early 2015 (week 264) (simulation time horizon is 572 weeks). However, we deliberately introduced 2011 (week 60) FMD outbreak to ensure we replicate past events as it happened not based on stochastic events. Run 1 was used for two purposes: (1) to validate the constructed model, and (2) to provide a benchmark to compare alternative beef trading scenarios (runs 2, 3, and 4 below) relative to business as usual (run 1). Sterman (2000) and Forrester and Senge (1980) suggested several procedures to validate SD models. Hamza et al. (2014-under review) validated this model by comparing model results with historic data (from 2010 to 2013) for three key variables (total cattle population, BMC prices, and BMC slaughter rate). Run 2 (trading beef to the Middle East): In this run, we look at the effect of trading beef to the Middle Eastern markets on the profit and productive performance of producers and other value chain actors. In addition to the existing domestic and export market channels, this policy targets exports of boneless beef to the Middle East. We use this scenario to look at impact of extra beef trading to the Middle East on chain actors’ performance in particular during FMD incidents where access to the EEA markets is banned. We only target boneless beef export to ensure market access during disease incidents (i.e. focusing on disease-free meat rather than disease status of the region). We evaluate the effect of exporting 1,000 heads of cattle (equivalent in boneless beef) starting from 2015 (week 260). This scenario is motivated by the need for market diversification because during FMD-outbreaks, Botswana loses significant access to its its (current) export market. In this scenario, we assume the price per cattle (its equivalent in boneless beef) sold to the Middle Eastern markets is 4,500 Pula (1 USD = 9.5 Pula). Run 3: This scenario is the same as run 2 but we assume a price of 5,500 pula per cattle in the Middle Eastern markets. Run 4: This scenario is the same as Run 2 but we assume a price of 6,500 pula per cattle in the Middle Eastern markets.
- In all figures, trend line 1 represents run 1(business as usual), 2 represents run 2, 3 represents run 3, and 4 represents run 4. Supply and supply demand parameters, and BMC monopsony power enables the model to endogenize price which in turn feeds back to production and consumption in a dynamic manner. In particular, as price goes up due to shifts in supply and demand, producers’ willingness to sell increases, which in turn has an implication for the stocks of animals in future periods and on numbers produced and sold. In contrast, the price increase reduces demand which in turn affects market incentives so as to put downward pressure on future prices. Figure shown in this slide highlights price movements in the adult cattle price paid by BMC. The BMC monopsony strongly influences cattle prices in Botswana, with the prices in each market channel updating accordingly to changes in prices paid by BMC. Exporting beef to the Middle East (runs 2, 3 and 4) introduces higher demand to the market which in turn forces BMC to pay higher prices to ensure a stable supply of cattle. Additionally, higher price of run 4 relative to runs 3 and 2 is because we set three different price scenarios for beef in the Middle East markets. That is, if prices in export market are high, then higher price is transferred to producers, and vice versa. In 2011, for all runs, an FMD outbreak is forced into the model because FMD actually occurred in Botswana in early 2011. The model randomly generated another FMD shock to all runs in early 2015 (week 264). FMD outbreak leads to changes in supply and demand because total animal demand declines due to the lack of access to the EEA markets. This can be interpreted in figure 9 (above) through lowering demand curve. The demand curve moves toward a new equilibrium (below current demand curve) as excess inventory is sold. Price crashes at early stages of FMD shock because lack of access to EEA markets increases volume in the domestic market. Reduced prices lower the incentives for farmers to sell cattle, causing supplies of animals to fall. Likewise, lower prices increase domestic demand. It should be noted that there are time lags for this information to flow to producers, and delays in the flows of cattle to the market as sales, production and breeding decisions are made and implemented. The market reacts vigorously to disease-related shocks, with increased volatility arising in the short-term which gradually dissipates over time. When the FMD outbreak finishes (after two years), total demand heads back to the levels before the FMD outbreak which leads to an increase in price. The situation is different for runs 2, 3, and 4 relative to run 1 because there is a permanent demand increase to supply markets in the Middle East. We assume FMD related shocks will not ban access to the Middle Eastern markets because BMC supplies boneless beef and removes lymph nodes from the carcass to reduce the likelihood of disease transfer. Thus, prices in runs 3 and 4 is higher than run 1 because of higher demand in export markets (run 2 price is low because we assume that Botswana’s beef is value at 4,500 pula per head in the Middle East and only a fraction of export market price is paid to producers by BMC). The magnitude of price changes depends on prices paid for beef in export markets. The higher the price in export market, the higher price paid to producers which in turn increase price in all domestic market channels and vice versa. Intuitively, higher prices in export and producers market should increase both BMC and producers profit and reduce domestic market channel chain actors profit because higher price lowers demand in domestic market. Similarly, we expect run 2 to generate the worst returns to BMC and producers because cattle price is the lowest relative to other runs. But lower price in run 2 should increase volume traded at domestic market which should positively impact domestic chain actors (traditional and modern butchers) profitability. Similarly, increase in price (export) should positively affect producers and BMC. Likewise, higher price lower demand at domestic market which in turn affects traditional and modern urban butchers trade volume. Table in the next slide summarizes changes in the cumulative profit performance of different value chain actors in each run relative to the business as usual run (run 1).
- To explain this, for example, in run 2 vs 1, producers cumulative profit over 11 years (i.e. simulation time horizon) has increased by 42%. BMC profit has increased by 1% and traditional and modern butchers profit remain unchanged. Generally, cumulative profit at the end of simulation (year 2021) of chain actors is higher under export of beef to the Middle East assumption runs (runs 2, 3 and 4) relative to business as usual run (run 1) for all three price scenarios of beef in the Middle Eastern markets. In general, the higher the price received per ton of beef at the Middle Eastern markets, and export markets in general, the higher the profit performance of chain actors. Producers gain the most from access to the Middle Eastern markets. BMC and feedlots, in particular in runs 3 and 4, make significant profit gains relative to business as usual (run 1), while traditional and modern butchers gain are minor relative to other chain actors. Under run 2, producers and feedlots cumulative profit increased by 42% and 6%, respectively, relative to run 1, while changes in other chain actor’s performance were minor. Despite the fact that cattle price in run 2 is lower than cattle price in run 1, chain actors made higher profit because more cattle were traded to export markets. That is, more traded volume offsets lower profit margin for all chain actors. Under run 3, where traded beef in the Middle Eastern markets is valued higher than run 2 (run 2 price was set at 4,500 pula/cattle, while price in run 3 is set at 5,500 pula/cattle), the performance of all value chain actors rises notably (producers: +49%; BMC: +10%; feedlots: +7%; traditional butchers: +2%; modern retailers: +2%; see table 3). This notable improvement is due to more flow of cattle at a higher price (5,500 pula/head) to the Middle East relative to run 1 and 2. Under scenario 4, where higher price (6,500 pula/head) is assumed per cattle in the Middle East, the performance of all chain actors increases significantly (producers: +55%; BMC: +20%; feedlots: +8%; traditional butchers: +4%; modern retailers: +3%; see table 3). Higher prices in runs 3 and 4 lower beef demand relative to run 1, however, a combination of annual increase in meat consumption (3% per year) at domestic markets because of population and income growth and increased chain actor’s profit margin because of higher prices offset lost demand. While cumulative profit indicates long term return of investment of any investment, it is important to evaluate the impact of investments in the short run in terms of profit over time. Table shown on the next slide summarizes chain actor’s average profit performance over time relative to business as usual (run 1).
- Epi, -23% of BMC reflects that over a few years period of time BMC profit in run 2 is significantly lower than run 1. In other words, this does not reflect that BMC’s profit is lower in run 2 compare to run 1 over simulation time horizon. Generally, when BMC has access to the EEA markets, trading to the Middle East makes BMC profit to be lower than run 1. Otherwise (when access to the EEA markets is banned), then BMC profit under runs 2 (3 and 4) is higher than run 1. Under run 2, producers and feedlots average profit over time increases by 79% and 12%, respectively, relative to run 1. Increased trade volume to export markets in run 2, despite lower cattle price relative to run 1, increased both producers and feedlots profit over time. However, on average, BMC’s profit over time under run 2 relative to run 1 declined by 23% because of lower profit margin relative to run 1. This is because exports to the Middle East lowers weighted average price of BMC’s export market and, hence, lowered BMC’s profit margin especially when there is no trade interruption to the EEA markets. In general, under run 2, all chain actors profit over time, except producers, is lower than run 1 when the access to the EEA markets are uninterrupted. However, the condition changes when access to the EEA market is banned. In this case, all chain actors profit over time under run 2 are higher than run 1. Changes in profit over time for both traditional and modern butchers were very small. Average profit over time for runs 3 and 4 were higher than business as usual run (run 1) (table 4) for all chain actors. In general, in the long term, the trade of beef to the Middle East proves to be profitable (table 3 above) under all tested runs. Unreported simulation figures show that under business as usual scenario (run 1), BMC’s profit over time in case of no market disruption to the EEA markets is the highest relative to runs 2, 3, and 4. Adding extra trade to the Middle East when there is no disruption to the EEA markets lowers BMC’s profit margin because BMC has to pay producers higher prices to obtain sufficient supply to meet the EEA and the Middle Eastern markets demand. Unless we assume that prices of Botswana’s beef is valued higher in the Middle East than the EEA markets, BMC’s profit margin declines. This could justify BMC’s, despite the difficulties to maintain access to the EEA markets because Botswana is FMD endemic region, insistence to keep access to the EEA markets. However, during disease incidents (such as FMD), BMC losses access to the EEA markets for about two years, in this case, trade to the Middle East is profitable (even at a lower profit margin than trading to the EEA markets) to BMC because more beef is traded to the export markets.
- In general, producers are the major winners as more beef is exported to global markets. Feedlots gain significantly from extra trade because feedlots charge BMC a commission fee per head of cattle grown at their facilities. Domestic market players (traditional and modern butchers) gain slightly from extra beef trade to export markets mainly because of the movement of price at domestic markets. However, BMC’s profit measurement is more complicated than other actors, under all scenarios illustrated in this paper, trade to the Middle East is economically profitable to BMC only during the time were BMC losses access to the EEA markets. The outlook to trade beef to the Middle East seems promising especially under high price scenarios (5,500 pula/cattle and, particularly, any prices higher than 6,500 pula/head). This paper contributes to the policy debate on beef market diversification in Botswana. First, it provides an overview of beef price in current market channels of Botswana and possible price range of beef at the Middle Eastern markets. Second, it highlighted distributional impacts throughout the value chain associated with trade of beef to the Middle Eastern markets under different price assumptions. The model presented here can be improved in terms of precision about beef sector costs and returns, particularly regarding the costs of BMC to access new market channel such as those of the Middle East. We assumed a 5% of received price as entry cost but more research is needed to provide more precise cost estimates. In addition, cost analysis is needed to evaluate the costs of rejecting animals due to disease presence at BMC facilities on BMC’s profitability.