What is the need to revive the Namibian redmeat industry?
By Helmke Sartorius von Bach.
Cattle production is practised in most areas of Namibia, affecting most livelihoods in the rural areas. Over the years, the national cattle herd has fluctuated from 1 515 283 to 2 713 394 during the past seven decades. Even with a relatively low national offtake of average 14% over the years, Namibia is a net exporter of beef and of live cattle. However, the past drought changed this scenario, which significantly impacts the future of the cattle sector. This is attributed to the reduced national herd size to only about 60% of the normal stock.
The cattle sector was always an important contributor to the economy. This sector contributed some 19% to agriculture in the 1950s, at a time when the karakul sector yielded better returns to farmers. Since the collapse of the karakul sector in 1980, most of these farmers changed to the cattle sector, which grew during the 1990s to reach a 50% contribution of the agricultural sector. Currently it contributes 43% of agriculture. Any decline in contribution of a sector can be attributed to participants’ movements to other more lucrative enterprises. To understand the changes in the cattle sector, this article presents some trends for the stakeholders to point out some implications.
The figure below presents how the national herd has doubled since the 1950’s from 1.5 million to 2016. The past years of limited pasture, however, resulted in a declining herd size to an estimated current herd size ranging between 1.5 and 2 million cattle, nationally. With this low number, the offtake rate will reduce from the average of 14% to about 8%. This reduction is caused by farmers’ herd build-up, which limits the number of animals traded either as slaughter or for live export. It is estimated that the slaughter animals available in 2020 will be almost equal to local consumption of beef. This low cattle supply translated into a new economic situation, which is different to the previous scenario where supply exceeded the local demand, and resulted in export marketing. Exporting resulted in increased benefits derived from higher prices earned. With this in mind, a new supply strategy must be found to address local demand of beef, which benefits from relatively low retail prices.
The current divergence between cattle prices obtained on auctions and the prices paid by slaughter houses is a sign of this new scenario. Typically, the auctions attract the weaner animals for local fattening, for live exports to the RSA feedlots, or to attract slaughter animals for the local slaughter houses. Depending on the price paid and the timing of payment, farmers will select the supply chain (auction or abattoir), to send their slaughter animals to. As an example, if the price paid for an ox at the Otjiwarongo auction fetches N$22.51/kg live weight, it equals the export abattoir price of almost N$42/kg carcass, based on the dressing rate and transaction costs, such as commission, transport, etc. With this information in mind, the cattle farmer will determine the best option. However, this example explains only the pricing factor and excludes the implications for production systems. To understand the beef supply variation, it is important to list the three cattle production systems practised in Namibia. Namibian farmers follow either a cow to ox system, a cow to weaner system or a speculating from weaners to oxen. These systems’ offtake resulted in the following number of cattle slaughtered and exported live over the years, as presented in the figure below.
Cattle producers generally select a system depending on environmental factors, but also on the price ratio between the kg price obtained for a seven months weaner live-weight relative to the kg carcass price of a 27 months old slaughter animal. On average, this ratio is about 60%. Once the weaner price is higher than 60% of the carcass price, it is not profitable for the farmer to keep the weaner for an additional 20 months to sell it as a slaughter animal, but rather to sell the weaner at an auction. On the other hand, if the weaner price is less than 60% of the carcass price, it is profitable to keep and feed that weaner to reach 27 months and to sell this animal as a slaughter animal. This price ratio thus affects the farmer’s decisions, but also impacts the trough put of slaughter animals by the abattoirs. Analysis found, that if the price ratio decreases with 10%, the number of cattle slaughtered will increase with 8.6%. It shows that the producer price paid by the abattoir competes with the auction price and directly impacts the abattoir level of throughput and its profitability.
Especially in today’s situation, where the number of cattle is limited, the supply and demand situation shows some interesting trends. While last year’s producer prices increased to almost N$47/kg, it dropped again during the beginning of this year. The opposite happened with cattle auction prices. The figure below shows how the ratio of weaner to carcass price fluctuated over time. A linear trend of increasing 0.29% annual growth was determined. This trend basically points out that the ox production system in Namibia is becoming less profitable over time and that rational decision making should have forced producers to adjust to the weaner system. Therefore, the industry needs to find solutions to reverse the trend by allowing export abattoirs to pay higher prices to attain sustainable troughput.
It should be pointed out that the number of cattle slaughtered over the years declined by 1.71% annually. This can be attributed to the pricing system of the slaughter houses. For example, in 1994, the producers obtained 70% of the abattoirs selling price, and the producers’ share declined to less than 60%. This producer share declined by 0.7% annually over the past three decades. The question to be asked is why financially strong export abattoirs’ producer share weakened?
The Namibian abattoirs have different alternatives where to sell the beef. Either they sell the different cuts locally to the retail shops north of the redline for N$48.93/kg on average or sell them south of the redline for N$45.41/kg on average. With the existing beef retail prices ranging between N$50/kg to N$69/kg (based on the weighted average carcass cuts), they can only offer around N$32/kg to the producers, which is equal to a producer share of approximately 70%. These prices are based on research done last year, showing that local retail beef prices vary, and that the highest local retail prices were found to be in Katima Mulilo. The following figure explains these beef value chains starting from the producer up to the Namibian retail store, both for the formal and for the informal market.
Alternative to local sales, the export abattoirs can sell beef cuts according to different export requirements to different destinations (local Namibia, RSA, Europe, China and others). Selective trading will depend on prices paid in foreign destinations and exchange rate benefits. The next figure shows the different returns to the abattoir based on different exchange rates. It shows, that in 2019, the abattoirs bought carcasses for N$45/kg, for which they received on average N$74.97/kg at an exchange rate of €1: N$16. At present, the exchange rate changed to €1 : N$19.5, implying that the same producers only receive the current N$44/kg, for which the abattoir could earn approximately N$83/kg. At the current exchange rate, the producers would expect a price of at least N$51/kg for the carcass, assuming that the abattoir can financially achieve the same producer share of 60% as last year. Without this achievement, a producer will look out for alternatives or will be forced to adjustment the production system from slaughter to the weaner system. At present, producers receive up to N$40/kg for a seven-month old weaner, compared to selling that animal 20 months later for about N$21/kg, which is equal to a N$44/kg carcass price.
This article shows that with the limited size of the national cattle herd, the abattoirs are under pressure to obtain the required troughput. It is estimated that available slaughter cattle are less than the local demand for beef. Based on the local value chain calculations, starting with the local retail beef prices, only allow slaughter houses to pay approximately N$32/kg carcass to the cattle farmer, which is significantly lower than the producer price listed by the export abattoir (currently about N$44/kg).
Furthermore, the high weaner prices of up to N$40/kg on recent auctions, has moved the price ratio above the trendline again, and therefor favours the weaner production system. Consequently, some ox producers might adjust their practices resulting in a further decline in the number of slaughter animals. It has to be understood that the adjustment from ox production to weaner production can be performed immediately, but the opposite will take years.
The above provides a bleak picture for the beef sector. The only solution for export abattoirs to financially survive in these times, will be to adjust the producer price upwards to a realistic price. This is based on the empirical evidence that the number of slaughter cattle is determined by the price ration of weaner to the carcass price, as discussed above. Therefore to attract slaughter cattle, the export abattoir must set a producer price by using the average carcass returns, and subtract their operational and management costs to obtain a producers’ share of approximately 60%. With the estimated current export returns of about N$83/kg, Namibian cattle producers expect a price of around N$50/kg. Such price will be regarded sustainable for producers to fatten some of the locally produced weaners locally for value addition resulting in increased export abattoir throughput, which in turn contributes to their financial sustainability. It would allow the continuation of exporting the Namibian pristine beef cuts to foreign markets, to improve the producers’ trust in the pricing system, and ultimately to attract increased investment into the cattle sector for future national returns.
It will be essential to allow the RSA buyers on weaner auction, for competition purposes. A live cattle export closure would result in a collapse of the cattle sector during this time of limited cattle numbers. Furthermore, in the interim, until the national herd is rebuilt, Namibia will have to accept the consequence of consuming imported beef at the current retail price levels. Alternatively, average beef retail prices have to increase from an approximately N$57/kg level to N$83/average carcass kg level, which is equal to a 50% addition to the current retail shelf price.