Tuesday, May 28, 2024
InterviewMeat export woes: Livestock realities threaten meat export success

Meat export woes: Livestock realities threaten meat export success

Kelifa Hussein, the CEO of Allana Group Ethiopia, is at the helm of two export abattoirs operating within the country. Frigorifico Boran Foods Plc and Akseker Ethiopia Casing Plc, both under the group’s umbrella, were established with a singular objective: to capitalize on Ethiopia’s vast livestock population.

However, the Group has encountered a series of formidable challenges that have significantly impacted its operations. Issues such as disrupted supply chains, an unfavorable exchange rate policy, surging prices in the domestic market, rampant contraband activities, and formidable barriers to accessing the Chinese meat market have compelled the group to make the painful decision of shuttering its two internationally acclaimed meat processing and export facilities. This unfortunate development also highlights the hurdles Ethiopia faces in its pursuit of attracting foreign direct investment (FDI).

At present, Kelifa, alongside other exporters in Ethiopia, is deeply engaged in negotiations with the government to seek crucial policy amendments to salvage the ailing meat export performance and breathe new life into the industry. Ashenafi Endale of The Reporter’s, sat down with Kelifa to delve into the intricacies of the matter and provide valuable insights into ongoing efforts and the daunting challenges that loom over the sector. EXCERPTS:

The Reporter: Ethiopia, with the largest livestock population in Africa, is facing critical challenges that threaten the operations of its meat export sector. During a recent consultation at Skylight Hotel, industry players and reports highlighted the complexity of these factors. What are the reasons behind these acute challenges?

Kelifa Hussein: Allana, an India-based company, exports meat to 75 countries. With an average annual revenue of USD 2.6 billion, Allana’s business in India nearly matches Ethiopia’s total annual export revenue.

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In 2017, Allana established two state-of-the-art export abattoirs in Ethiopia, marking its first venture outside of India. The decision to invest in Ethiopia was driven by the country’s substantial livestock population, which presented an attractive opportunity.

One of Allana’s meat processing plants is located in Adami Tulu, occupying 75 hectares of land. Built at a cost of USD 80 million, the facility has the capacity to process 9,000 sheep and goats, as well as 3,000 cattle, on a daily basis. It is the first of its kind in Africa. The second facility is situated in Modjo.

However, the reality in Ethiopia did not align with the initial expectations. The availability of supply has become a critical challenge, as Ethiopia lacks commercially viable volumes and quality of livestock, despite its significant population.

According to data from the Central Statistical Agency (CSA), 70 percent of Ethiopia’s 70 million cattle are breeding cows, which are not suitable for meat production. Similarly, 70 percent of the 120 million sheep and goats are female. When considering specific parameters such as weight, variety, quality, and age, the number of livestock suitable for producing high-quality meat is significantly reduced.

Another major challenge is the exorbitant price of livestock in the domestic market, which far exceeds international market prices. Over the past five years, the price of locally consumable meat in Ethiopia ranges from 700 to 1,500 birr per kilogram, equivalent to approximately USD 13 based on the current official exchange rate. In contrast, the international meat price hovers around USD four per kilogram.

Consistent supply poses another obstacle, as the entire livestock sector in Ethiopia lacks market orientation.

Additionally, accessing international markets remains a significant bottleneck. Approximately 95 percent of Ethiopia’s meat exports are concentrated in Saudi Arabia and Dubai, where specific preferences for particular products, such as goat meat, limit opportunities for sheep and cattle meat.

By leveraging Allana Group’s existing clients in the Middle East, we managed to send sheep and cattle meat to markets in Oman, Bahrain, Qatar, Cambodia, Azerbaijan, Seychelles, African markets, and new markets. We are currently trying to access Asian markets, including Malaysia, Vietnam, and Indonesia.

What is the current operational status and output of the two abattoirs?

Akseker at Modjo has the capacity to process 3,000 goats and 500 cattle daily. Currently, it is operating at half of its capacity.

Frigorifico at Adami Tulu has the capacity to process 9,000 sheep and goats, as well as 3,000 cattle daily. However, we have been unable to utilize more than 10 percent of this impressive processing plant.

Due to the unfeasibility of operating at such low capacity, we have decided to close the abattoir, and it is currently not in operation.

Despite the limited capacity utilization, we have been the leading meat exporter in Ethiopia for several years. From just one abattoir, we generate up to USD 25 million in export revenue. At times, when both abattoirs are operational, our export revenue accounts for 45 percent of Ethiopia’s total meat export revenue. It is important to note that we export both chilled (frozen) and fresh meat.

So, could you provide information on the investment returns that Allana has garnered in Ethiopia?

The spike in livestock contraband can be attributed to the significant disparity between the official and parallel exchange markets. The attractive prices offered by neighboring countries have contributed to this problem, which cannot be resolved without policy interventions. The black market exchange rate is twice as high as the official rate at banks, while the markets in neighboring countries align with the parallel market rate.

The underlying issue stems from the flawed business model in Ethiopia’s export and import sectors. Over the past seven years, Ethiopia’s export model has been distorted, with exports being conducted at a loss and the losses being compensated through import business.

This approach is killing our export business, as we are exporting at a loss due to the higher domestic prices compared to international prices. Consequently, the burden is often shifted onto imported items, affecting consumers significantly.

However, as an FDI, we are not permitted to engage in import business. We have been carrying the loss forward. Despite our efforts, we have been unable to reduce these losses, let alone achieve a return on investment.

We are still facing substantial losses. The only way we have managed to mitigate some of the losses is by focusing on byproduct processing. We have established large-scale byproduct processing plants and even hire people who collect byproducts such as bones from local abattoirs to produce and supply our plant. We buy it, process and sell the animal fodder, which has been profitable.

At present, we are contemplating closing the Modjo meat processing plant unless the government addresses these issues. Our losses are substantial, and the government has been aware of the problems for an extended period but has been hesitant to take action.

The government needs to determine whether this business is viable, as it is currently unsustainable. Even exporters who compensate for their export losses through import business struggle to sustain their operations. It becomes even more challenging for us as we are not allowed to engage in import business.

The correct approach is to ensure that the export business can be profitable on its own, while the import business should also be independently profitable. The government needs to ensure this balance.

Alternatively, the government should permit foreign investors in Ethiopia to participate in import business. The recent improvement in the forex retention rate from 20 to 50 percent by the central bank indicates that the government acknowledges the idea of exporters compensating their losses through import.

Some FDIs in Ethiopia might utilize the retained forex for importing inputs, but as meat processors, we have no imports to make, so we cannot utilize the forex in our retention account.

We have now requested the government to allow us to engage in import business and have submitted a letter to that effect. Otherwise, we are on the verge of suspending all operations. We are incurring a loss of USD 2,500 per ton of meat we export.

We purchase cattle from suppliers at a rate of 470 birr per kilo, based on Caracas weight. With the current exchange rate, this amounts to USD 8.4 per kilo. Forget overhead and production costs. The current selling floor price, as per the NBE, stands at USD 6.6 per kilo. However, the actual meat price in the international market is lower than this NBE floor price.

Consequently, even though we agree to export at the set floor price, a portion of the payment is returned to the foreign buyer “under the table” to account for the difference between the NBE floor price and the international price.

Overall, we incur significant losses since the international price is nearly half of the domestic price of USD 8.4 per kilo. When factoring in production and transportation costs, our export of each ton of meat results in a loss of USD 2,500.

The NBE initially set the export floor price when the price of exported meat in the domestic market was 320 birr per kilo. Currently, it has increased to 470 birr, while the actual meat price in the international market remains around four or five dollars per kilo. In this context, requesting the NBE to raise the floor price would be the logical action to take.

Our company has been exporting approximately 300 tons monthly, resulting in a loss of USD 750,000 each month. Local meat exporters offset this loss by engaging in import businesses on the side, inflating the prices of their imported items to generate profits of up to 200 percent, thus compensating for the export losses. Consequently, we have been registering losses for the past three years.

In essence, the meat export sector is the only industry in Ethiopia where the exporters themselves determine the export price through an association. In all other sectors, the government sets the export prices.

Kenya exports meat at USD 5.5 per kilo, whereas our official export price stands at USD 6.6. Unofficially, however, our export price is lower than the USD 6.6, as Ethiopian exporters return approximately USD 600 per ton to the foreign buyer “under the table.”

One possible solution would be to align our export price with the actual international price. However, doing so would mean reducing our purchase price from suppliers, which currently stands at USD 8.4 per kilo. This situation differs from other export commodities in Ethiopia, where under-invoicing occurs. In our case, it is the opposite.

How is the price difference returned to foreign buyers?

The funds are typically returned through the black market. At one point, Ethiopian meat exporters considered setting the export price at USD 6.2 per kilo, but this was still significantly lower than the current price. So, we rejected that plan.

Previously, we would decrease the export floor price whenever the domestic price dropped. However, there has been no reduction in prices lately, especially after the retention rate was increased to 50 percent, causing livestock prices in the domestic market to skyrocket.

The revision of the retention rate is detrimental to us while benefiting other exporters. As meat exporters, it would be better if the government collected 100 percent of our forex revenue to level the playing field.

We made two requests to the government. First, we asked for equal treatment of FDI exporters in Ethiopia compared to local exporters. This can be achieved by either surrendering 100 percent of the forex or allowing retention for import business.

It is worth noting that Ethiopia’s exports are already suffering due to the overvaluation of the birr compared to other currencies.

Currently, our market in Dubai has been completely dominated by Kenyan meat exporters. This is because other exporting countries, such as Kenya, have devalued their currencies. Although Kenya is relatively new to the meat export business, they have managed to surpass us in Dubai and Saudi Arabia. The absence of Ethiopian meat in Saudi Arabia and Dubai often disrupts the market there.

Now, while we purchase export meat at USD 8.4 from domestic suppliers, Kenyans buy the same meat for USD 3.4 per kilo. They then export it for USD 5.5 per kilo, with a freight cost of USD 1.5 per kilo. So, Kenyan meat exporters have an advantage of at least 0.5 dollars per kilo.

We do have an advantage as it costs us one dollar to send a kilogram of meat from Addis Ababa to Dubai or Saudi Arabia. However, in terms of the livestock price in the domestic market, they have a significant advantage.

The Ministry of Agriculture has acknowledged the danger we are facing and has accepted our request. The facts speak for themselves. Our request has been brought to the attention of the Prime Minister’s macro team, and we are eagerly awaiting their final decision.

Time is of the essence for us. Currently, we have reduced our monthly exports to below 100 tons in an attempt to minimize the loss per ton.

Is the request applicable to all foreign direct investment (FDI) exporters in Ethiopia, or specifically targeted towards meat exporters like your company?

FDI exporters in the textile and leather industries have the option to utilize their retained forex for importing inputs. As meat exporters, we do not import any inputs, which means we cannot make use of the retention forex.

That is why we requested the government to allow us to engage in import activities as a side business to complement our export operations.

How many meat exporters are there in the country?

There are 12 meat exporters who have their own export meat processing abattoirs. However, there are over 30 meat exporters who do not have their own abattoirs and instead rent them from the former group.

These exporters without abattoirs are primarily involved in the business to obtain foreign exchange and may not be genuine meat exporters in the true sense.

What are the challenges that make it difficult to invest in ranching and commercializing livestock in Ethiopia?

Allana specializes in meat processing, not ranching, which diverts our attention. However, Allana does have ranches in Australia and India.

In India, they have a total of 17 ranches where approximately 2,500 buffalos are slaughtered each day at each ranch. This means that Allana in India slaughters at least 40,000 buffalos daily, and the operations continue without interruption.

On the other hand, starting a ranch in Ethiopia is very challenging, despite its importance. The main obstacle lies in acquiring the land, as ranching requires a significant amount of space, access to water, and animal fodder. Additionally, ensuring security and infrastructure is also difficult.

For instance, Luna, a supplier for Fresh-corner, attempted to establish a ranch in Ethiopia but faced a 12-year struggle to secure the necessary land, despite receiving support from the World Bank. Although government officials often encourage investment in ranches, it is nearly impossible to obtain land when we approach them.

In Ethiopia, the alternative is to operate without growers. For instance, our processing plant in Tulu Dimtu requires 9,000 sheep and goats daily. To meet this demand, a ranch with 100,000 sheep and goats is necessary.

However, even this would only cover our needs for 10 days. Establishing a ranch capable of supplying up to 100,000 sheep and cattle requires an extensive amount of land.

According to research, small-scale farmers account for approximately 95 percent of the livestock supply market in Ethiopia.

It can be 100 percent. There is no investment in ranches in the country.

What are the reasons behind the inflation of local market prices in Ethiopia?

The current situation can be described as chaotic, with livestock prices escalating without any clear rationale.

Recently, the Ministry of Agriculture drafted a directive intending to establish a minimum price for livestock in the domestic market. The objective is to keep the domestic livestock prices below the international meat prices.

However, I am skeptical about the effectiveness of this approach. It is highly unlikely that suppliers will willingly lower the current livestock prices.

Is there a livestock trading floor similar to the Ethiopia Commodity Exchange (ECX) that exists for crops?

I served as the Director of the Livestock Market Directorate at the Ministry of Trade about 10 years ago. During my tenure, we introduced a series of proclamations, regulations, and directives aimed at regulating the livestock market.

These measures facilitated traceability, starting from the primary livestock markets at the rural level and extending to the processing plants. As a result, the incidence of livestock contraband decreased, and there was a significant increase in exports. The implementation of a receipt system allowed the government to exercise control over every movement of cattle.

However, the enforcement of these regulations eventually ceased. The successful implementation of the livestock market regulation took place under the Ministry of Trade. However, with the establishment of the Ministry of Livestock, it underwent a relocation process. Subsequently, the livestock ministry was dismantled, and since then, no one has taken responsibility for implementing the livestock market regulation law.

So, is the new directive being prepared at the Ministry of Agriculture distinct from the existing livestock regulations?

Yes. The draft directive’s objective is to establish a cap on livestock prices in the domestic market, ensuring that meat exporters can maintain a profit margin.

The plan involves the MoA and the Livestock Institute to regularly assess and determine livestock prices. It is crucial that the domestic market price remains below the export price in the international market, allowing exporters to generate a profit margin.

Currently, the purchase price for export meat in the domestic market is 470 birr per kilogram from suppliers, while the international market price hovers around 320 birr per kilogram. To ensure profitability, local suppliers would need to lower their prices below 320 birr per kilo, which is practically unfeasible.

Suppliers and farmers prefer to engage in smuggling activities to neighboring countries rather than sell below the 320 birr threshold. Nevertheless, the Ministry and Institute are preparing to conduct the first consultation on the draft directive soon.

It has been reported that over 1.5 million livestock were being smuggled out annually, as of four years ago.

That is a very conservative estimate. There is a FAO study on this.

For instance, Somaliland exports approximately five million livestock, with 60 percent of them being Ethiopian livestock smuggled into Somaliland and re-exported from there. When considering other neighboring countries, the numbers are even higher.

The most effective way to curb livestock smuggling is by adjusting the prices. Gold and livestock are the two most commonly smuggled commodities. Gold smuggling decreased immediately after the government raised the gold purchase price. Similar success could be achieved if the domestic exchange rate is adjusted to match the black market exchange rate.

The lack of an export strategy is the biggest problem in Ethiopia. For the first time, the government is preparing an export strategy and has hired a foreign consultant. Two months ago, the Ministry of Trade convened a meeting with top exporters from every sector for the initial consultation, which is a commendable approach.

The draft strategy acknowledges that the high value of the Ethiopian birr is the Achilles heel of exports. This is the first time the government has admitted to this problem so far. The document suggests that the birr should be further devalued in order to improve export performance.

According to the draft strategy, Ethiopia’s exports cannot improve with the current exchange rate.

The economy is already functioning based on the black market exchange rate. Many people are concerned that increasing the official rate will lead to a surge in inflation. However, I do not believe that the parallel market exchange rate will exceed 100 birr per dollar. Dollar-seekers would not be able to offer more than that due to our purchasing power limit. Therefore, I believe there is room for further devaluation.

Is there a significant amount of foreign exchange circulating in the border areas as a result of livestock contraband?

It is indeed a significant. I personally have observed this phenomenon at various border areas such as Wuchale, Moyale, Galabat, and others. The trading of various hard currencies has become as commonplace as commodities.

How is contraband of livestock affecting the overall export revenue?

In the 2021/22 fiscal year, meat exports reached a record high, generating USD 120 million. Out of this total, we generated USD 47 million. However, in the previous year, national performance dropped to USD 87 million, generated from 16,000 tons of meat.

About 10 years ago, Ethiopia used to earn approximately USD 160 million from the export of live animals alone, excluding meat exports. However, this year, the earnings dropped significantly to USD 16 million. This highlights a major concern for Ethiopia as both the export of live animals and processed meat have experienced a drastic decline.

If Ethiopian airlines, hotels, and supermarkets in Addis Ababa import meat, why is it challenging to substitute their imports with local meat?

I am familiar with the case as I held an official position at the Ministry of Trade. We made attempts to replace those imports.

Ethiopian Airlines, for its catering service inputs, imports around 100 items in total from various countries such as Brazil and South Africa. Surprisingly, the price of meat imported by Ethiopian Airlines is half the cost of meat in the domestic market.

Notably, the Airlines is exempt from paying tax duties on these imports. As a result, we decided to include the duty on Ethiopian Airlines’ import price to compare it with the domestic price. At the time, officials from the Ministry of Trade and Ethiopian Airlines collaborated on this analysis.

Even after factoring in the tax duty, the domestic price remained significantly higher than the import price. Ethiopian Airlines utilizes its own hard currency for importing goods. Consequently, we ultimately abandoned the idea of import substitution because importers like Ethiopian Airlines benefit from lower import prices. This situation arises due to the exorbitant prices of domestic livestock and meat.

What do you believe could be a potential solution or way forward to address these challenges?

Ethiopia’s agricultural policy has consistently prioritized the crop sector, often neglecting the livestock industry, which deserves equal attention. A notable example of this discrepancy is the contrasting success of the ‘Green Legacy’ initiative compared to the ‘Lemat Tirufat’ initiative.

While wheat production has shown improvement, the livestock sector has remained unchanged. The government has aggressively promoted the conversion of fruit and vegetable farmlands into wheat farms, resulting in increased wheat production but causing a significant rise in the prices of fruits and vegetables.

Unfortunately, the government lacks dedicated livestock departments and experts within its structure. The crop sector, on the other hand, is well-organized with structures implemented even at the local government level. Even when there was a livestock ministry, it lacked a structure that extended down to the kebele level.

Despite Ethiopia’s abundant resources, there is a need for substantial efforts. One notable area of concern is the government’s failure to improve access to land for ranching purposes. This issue requires immediate attention. The government should provide incentives for the commercialization of the livestock industry, similar to what has been successfully done in the horticulture sector.

Our meat processing plants have an annual capacity to process 100,000 tons of meat. The 12 export abattoirs have a combined installed capacity to process and export 200,000 tons of meat annually. So, Ethiopia has the potential to export 300,000 tons of meat yearly. However, the country has only managed to export an average of 20,000 tons annually, utilizing a mere 10 percent of its capacity.

It is worth noting that FDI in meat export is unlikely to be attracted to Ethiopia, as potential investors have observed the failures in this sector.

What is the approximate land size needed to establish a ranch?

Acquiring a significant amount of land is a crucial requirement for establishing a ranch. The majority of this land would be allocated for cultivating animal fodder, which necessitates irrigation since rain alone cannot reliably meet the demand. However, when we approach regional states to request such vast land for ranch investments, they laugh.

Considering Ethiopia’s circumstances, ranching is not the recommended approach. Out-grower schemes and contract farming prove to be more effective alternatives.

Regarding market access for exports, we have been trying over the past five years to gain entry into the Chinese market. We spent about 10 million birr to facilitate this endeavor. China assessed and approved our facility in Ethiopia; however, they rejected Ethiopia’s livestock health standards.

During the recent agriculture week at the Science Museum exhibition, I had the opportunity to address this issue with Prime Minister Abiy Ahmed (PhD). In a brief one-minute encounter during his visit, we highlighted the challenges we face in accessing the Chinese market.

The Prime Minister subsequently raised this matter when the Chinese Foreign Minister visited Ethiopia. The Chinese Foreign Minister assigned the Chinese embassy in Addis Ababa to address the issue, and progress is now being made.

We were unable to make significant progress through the Ministry of Agriculture over the past five years, but progress was achieved promptly through the intervention of the Prime Minister.

What were the specific requirements set by China in order to access the Chinese meat market?

They say the livestock must be free of Foot and Mouth Disease (FMD). There is no FMD restriction as global standard.

China is also buying meat from countries where there is FMD. The main thing is the ability and system to control it. But it needs diplomatic influence. We are hoping we will access the Chinese market soon.

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