Monday, October 26, 2020

‘BMC must increase total export to survive’ ÔÇô BIDPA report

It is inevitable that in order to succeed, organizations must be more responsive to their surroundings and attentively incorporate leading strategies to become more competitive. Though the Botswana Meat Commission (BMC) increased cattle prices by 40 percent and initiated the export parity pricing system to entice farmers to bring more cattle to its abattoirs, low throughput prevailed, hence the two-week closure of the Lobatse abattoir from November 27.

Nevertheless, Botswana Institute for Development Policy Analysis (BIDPA) recommended, in their report: “Prospects for Export Diversification in Botswana”, that the most urgent goal for BMC was to increase total export. The report stated that on present trends, the export of beef from Botswana to non-regional markets looked set to become uncompetitive within a few years.

“It would not disappear overnight, but BMC would suffer in a continuing and growing fashion from the corrosive effects of under-supply of cattle, unless government funds ever-larger deficits or takes more drastic action, such as the closure of one abattoir, its capacity to operate commercially will decline,” said BIDPA in its report.

The beef sector has long been a recipient of government support in the form of artificially high producer prices, heavy direct subsidies into the sector, a very lenient tax system, heavy provision of livestock-specific infrastructures and trade protection. A major question facing policymakers is how long this should continue, in what form, and alongside what reforms. Industry restructuring would allow time for either a substantial shake-up to the supply side or an orderly decline of the beef export sector.

However, the report by BIDPA cautioned precipitate moves to privatize BMC, at least until the supply side had been improved.

“The supply baseline is a throughput sufficient for only one abattoir, and standard might be compromised,” said the report. “On a practical level BMC could hardly be split up unless both the Lobatse and Francistown abattoirs were maintained. This will require government to consider how to fund the deficit caused by the insufficiency of throughput to cover the fixed costs of both operations. Improving production efficiency is a long-run objective and unlikely to resolve the current immediate profits crisis.”

The report advised the government to consider continuing BMC’s monopoly in terms of exports to Europe and other distant markets, but its removal for sales to South Africa, stating that at the present time “it seems improbable that any organization other than BMC would sustain substantial exports outside the region, and South Africa may be the market of the future since it will continue to be commercially viable for Botswana to export to South Africa for some time after it has ceased to be sensible to do so to on-regional markets. The relative balance of gains and losses between restricted-channel fully competitive marketing is likely to be different for the South African and the European markets. Nimbleness in finding rapidly changing consumer niches will tend to be relatively more important for South Africa than it is for the EU.”

Negotiating power to ensure that the economic rents created by the Common Agricultural Policy (CAP) and trade preferences accrue to Botswana will be less relevant. Hence, it is possible that the balance of advantage lies with continuation of the BMC monopoly in terms of export to Europe and other distant markets and its removal for sale to South Africa.

However, the report also stated that BMC should rather pay consideration towards the scope for liberalization of the beef import to increase supply to BMC. In the industrial sector and advanced countries, it is commonplace to have intra-industry trade ÔÇô “there is no reason in principle why the same should not occur in the agricultural sector, with the region importing larger quantities of forequarter meat partly in order to release hindquarter meat for export. The background study argues that government may have to choose between a partly export-oriented and a wholly domestically-oriented beef industry.”

If policy makers decide that Botswana should maintain beef exports, it may be necessary to increase the domestic incentives to sell to BMC for export. Increasing the costs of local slaughter “which the government is doing” will go some way to reducing the prices that butchers can offer to cattle owners, but probably not enough. Only an increase in supply via imports will push down the price offered by BMC’s competitors to a level at which its prices become attractive. In other words, cattle owners will have to accept lower aggregate prices either via Pula depreciation or via import relaxation if exports are to continue. Under this scenario BMC could also use its existing infrastructure in moving chilled meat import from Brazil and government could offer a duty drawback as in South Africa.

The report also mentioned that interest should be given to the scope for penetrating higher value market niches in Europe. Since Botswana’s beef is, by and large, “free range and organically reared”, this could command a price premium, with good marketing.

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