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A blog about economics in the South Caucasus.

We Don't Need No Regulation: On Georgia’s Dairy and Livestock Sector

 

Dairy production in Georgia is a hot topic right now. Over the last couple of years, new state regulations have been adopted in this sector. The most widely discussed recent change in regulations prohibits the use of milk powder in cheese production. This regulation was adopted in 2015, but was amended in June of 2017 in order to better serve consumer interests.

While defining terms such as “cheese”, “butter”, and “matsoni” is definitely a step forward, the execution of this technical regulation is associated with many challenges, and Georgian consumers are still offered products which do not qualify as dairy products because they contain vegetable fat.


CHALLENGES

The biggest challenge is the large number of unregistered family farms producing and selling cheese on a regular basis. According to sector experts, up to 90% of cheese is produced by those unregistered households, which is not surprising because according to Geostat more than 97% of milk in Georgia in 2017 was produced by family farms.  These unregistered producers usually sell their unlabeled produce (mostly cheese) at open markets through intermediaries.

Another challenge is related to registered producers, who find different ways to overcome regulations through confusing and vague labelling of their products. The most frequent tool used by cheesemakers who use milk powder for cheese production, is by labelling products with names associated with cheese like “Imeruli” or “Sakhachapure”. By doing so, the producer does not explicitly violate the law because the name of the product does not contain the word “cheese”, but consumers definitely consider these products cheese.

One more challenge is associated with consumers’ low awareness of their role in supporting the state’s enforcement of technical regulations on dairy products. Most consumers do not react properly when they identify that the dairy product they have purchased is expired, or not expired, but still spoiled. Most consumers notify a consultant in the retail store about this case or do nothing at all, while only a small portion of consumers notify the National Food Agency (NFA), which is obliged to send its employees to the retail shop and fine it.


A BIT OF STATISTICS…

According to Geostat data, imports of milk powder have increased over time, while the amount of raw milk produced in the country has declined (Figure 1).

Figure 1. Amount of raw milk and milk powder in Georgia, 2014-2017

Thus, milk production in Georgia has declined by 10% in 2017 compared to 2014, while imports of milk powder, on the other hand, increased by a tremendous 88% for the same time period. This signals massive use of milk powder in the dairy sector.

At the same time, exports of live cattle have increased in recent years (Table 1).

Table 1. Live cattle exports, 2015-2018

Indicator 2015 2016 2017 2018
Number of head 53,005 102,363 134,134 127,139
Total live weight (kg) 10,664,000 20,503,000 19,697,000 14,857,000
Total export value (USD) 20,103,000 36,842,000 36,011,000 28,227,000
Unit weight (kg/head) 201 200 147 117
Unit value (USD/head) 379 360 268 222
Unit price (USD/kg) 1.89 1.80 1.83 1.90

Source: Geostat, MEPA, MoF, trademap.org

The biggest jump in live cattle exports happened in 2016 when the number of head exported almost doubled compared to 2015. In terms of export quantities, even more live cattle were exported in 2017 and 2018, although the total export value steadily declined, as did the unit value per head of cattle.

In light of existing trends and practices in the dairy and livestock sector, there is currently a shortage of safe raw milk in the country because of the low productivity of cattle and small size of dairy farms. Inadequate feeding practices, lack of pastures, and poor veterinary practices lead to the lack of intensive cattle farms with high productivity cattle.  The few registered intensive dairies cannot compete with unregistered producers or producers who use milk powder in their production and produce lower quality products at lower prices. As far as current regulations favor family farms (individuals) by allowing them to avoid registration as a business operator, unfair competition among registered and non-registered producers will be apparent in the future as well.

Increased exports of live cattle also contribute to the reduction of milk production in the long-run as well as an increase in meat prices.


THE WAY FORWARD

In an attempt to respond to the challenges in dairy and meat production, just recently the Government of Georgia has banned the export of live cattle under the weight of 140 kg. The arguments listed by some proponents of the ban rely on the assumption that growing cattle in Georgia and after some period selling it for meat within the country is more profitable and generates higher value added locally, rather than exporting low weight calves and heifers abroad. While that might be true, the new regulation has raised many questions about its legitimacy and appropriateness in a market economy.

Interestingly, there are other countries that have implemented a similar policy but with different motivations. For example, in New Zealand, where live sheep exports for slaughter were banned in 2003, the argument for the ban was a concern for animal welfare due to the high number of deaths during transit, as well as inappropriate slaughtering practices in some recipient (importing) countries. While live sheep exports for slaughter are banned, live sheep exports for breeding are allowed, but the actual number of exports for this purpose is extremely low. While animal welfare concerns are growing all over the world (e.g. Brazil, Australia, UK), New Zealand’s ban allowed Australia to capitalize on this market opportunity and increase its live sheep exports. According to Australian authorities, although the country is concerned with animal welfare, the increase in live sheep exports for slaughter was motivated by the fact that the existing slaughterhouse infrastructure in Australia, which is way ahead of Georgia, is not developed well enough to respond to the growing number of sheep in the country.

In light of foreign countries’ experience and Georgian reality, it is hard to believe that the ban on the export of live cattle in Georgia can solve structural problems in the dairy and livestock value chains. Rather, the export ban is likely to have the following consequences:

• Higher exposure of livestock farmers to risks. Given that growing cattle in Georgia in light of the abovementioned poor feeding practices, and pasture- and veterinary-related issues is quite risky, the export ban obviously negatively affects farmers who previously engaged in live cattle exports by exposing them to those risks;

• Lower number of potential buyers of live cattle. Since contract farming is not well-developed in Georgia, sales of agricultural products locally are not only sporadic but difficult. Many farmers simply cannot sell their product for adequate price. By restricting sales of live cattle to local markets only, the number of potential buyers clearly declines. Additionally, introduction of HACCP requirements at slaughterhouses might lead to the closure of some regional slaughterhouses which will negatively affect demand for live cattle. If a local slaughterhouse is not available, the farmer gets a lower profit from sales of cattle for slaughter.

• Low bargaining power for livestock farmers. Restriction to local markets drives the price of live cattle down, which might be good for consumers because meat prices will decline, but producers are negatively affected. The overall impact on society – total surplus has yet to be studied.

These are just a few arguments that should be considered in addition to the potential commercial gains generally obtained when a farmer sells a product with more value added. While theoretically raising cattle and selling it for meat should be more profitable for the farmer, one has to consider very carefully, why such an “obvious” opportunity is missed by the livestock farmer, what challenges the famer faces along the value chain, and whether such a policy is the right solution to those challenges.


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Simon Appleby on Wednesday, 06 February 2019 17:59

Australia has regulations on minimum weights of cattle and sheep to be exported by sea, because juvenile animals at low body weights do not handle sea transport as well as older animals, and are more likely to become ill or die in transit. Death rates of cattle over 350 kg or sheep over 35 kg, for a seven-day sailing, may be as low as 0% if everyone in the supply chain is doing their job properly.

The rationale for live export of sheep in Australia is not because of lack of facilities. Sheep slaughtering facilities in Australia have been steadily closing down over the past two decades because labour costs and restrictive labour practices, coupled with very high electricity and water charges, have rendered slaughtering of aged sheep for mutton unviable. For the higher-value lamb market (less than 6 months of age) and hoggett market (6-18 months), the domestic market, USA market and higher-end segments of Middle East and Asian markets can still afford the premium product with these high labour and utility costs built in.

It is also not because sheep numbers are increasing beyond the capability of abattoirs to cope. In the early 1980's Australia had over 150 million sheep, now it has less than 75 million. The decline in wool utilisation for garments and bedding, and a downward trend in red meat consumption in the West, have driven this.

http://www.abs.gov.au/ausstats/[email protected]/Lookup/7124.0Chapter122010-11

Mature and aged sheep in Australia would be shot and left to rot if not exported live. They are sent to markets where chilled mutton or frozen mutton is not trusted by consumers, and they want a guarantee it was slaughtered the night before sale (usually in a halal manner). So live export is the only way to capture that market segment.

Australia has regulations on minimum weights of cattle and sheep to be exported by sea, because juvenile animals at low body weights do not handle sea transport as well as older animals, and are more likely to become ill or die in transit. Death rates of cattle over 350 kg or sheep over 35 kg, for a seven-day sailing, may be as low as 0% if everyone in the supply chain is doing their job properly. The rationale for live export of sheep in Australia is not because of lack of facilities. Sheep slaughtering facilities in Australia have been steadily closing down over the past two decades because labour costs and restrictive labour practices, coupled with very high electricity and water charges, have rendered slaughtering of aged sheep for mutton unviable. For the higher-value lamb market (less than 6 months of age) and hoggett market (6-18 months), the domestic market, USA market and higher-end segments of Middle East and Asian markets can still afford the premium product with these high labour and utility costs built in. It is also not because sheep numbers are increasing beyond the capability of abattoirs to cope. In the early 1980's Australia had over 150 million sheep, now it has less than 75 million. The decline in wool utilisation for garments and bedding, and a downward trend in red meat consumption in the West, have driven this. http://www.abs.gov.au/ausstats/[email protected]/Lookup/7124.0Chapter122010-11 Mature and aged sheep in Australia would be shot and left to rot if not exported live. They are sent to markets where chilled mutton or frozen mutton is not trusted by consumers, and they want a guarantee it was slaughtered the night before sale (usually in a halal manner). So live export is the only way to capture that market segment.
Salome Gelashvili on Thursday, 07 February 2019 15:45

Dear Simon,

Thank you for your comment. I think Australias experience with sheep slaughtering facilities is very interesting one which should be considered by Georgian authorities when they design policies with motivation to develop domestic livestock production by limiting export possibilities. While in Australian slaughterhouses major challenges are related to high labor and utility costs, for Georgian slaughterhouses, in my view, the major challenge is to adopt HACCP system.
By the way, do you know countries which prohibited live animal exports not because of animal welfare concerns, but perceived commercial gains for domestic economy?

Dear Simon, Thank you for your comment. I think Australias experience with sheep slaughtering facilities is very interesting one which should be considered by Georgian authorities when they design policies with motivation to develop domestic livestock production by limiting export possibilities. While in Australian slaughterhouses major challenges are related to high labor and utility costs, for Georgian slaughterhouses, in my view, the major challenge is to adopt HACCP system. By the way, do you know countries which prohibited live animal exports not because of animal welfare concerns, but perceived commercial gains for domestic economy?
Simon Appleby on Thursday, 07 February 2019 16:35

HACCP is a good start, but discerning importers these days usually look for ISO22000. Halal certification is also important.

I am not aware of any current examples of export bans for economic reasons but I am sure they exist. When I worked in Indonesia in the late 1990s, the 80% currency devaluation in a 6 month period meant that native Indonesian cattle were the cheapest in the region by a wide margin, and Malaysian and Filipino importers were very interested in getting hold of feeder cattle from Indonesia. It was blocked on national food security/domestic economy grounds, which I think was prudent, as the domestic breeding industry could have disappeared in 2-3 years if export of females had been permitted.

Azerbaijan, one of Georgias largest export markets, does not have a free market in either live animal imports or chilled beef, and that is a substantial barrier to chilled beef exports to there. Turkey likewise does not have a free market in chilled beef or lamb.

Georgia has a shortage of people with the skills, facilities and substantial capital to grow cattle out to slaughter weights at a young age, and a shortage of halal-certified HACCP or ISO accredited export plants to process them. So in the short term, export of males as yet unready for slaughter is the main option. Banning exports wont magically remedy those deficits, it will just drive prices down so that people kill males at birth or get out of cattle altogether.

HACCP is a good start, but discerning importers these days usually look for ISO22000. Halal certification is also important. I am not aware of any current examples of export bans for economic reasons but I am sure they exist. When I worked in Indonesia in the late 1990s, the 80% currency devaluation in a 6 month period meant that native Indonesian cattle were the cheapest in the region by a wide margin, and Malaysian and Filipino importers were very interested in getting hold of feeder cattle from Indonesia. It was blocked on national food security/domestic economy grounds, which I think was prudent, as the domestic breeding industry could have disappeared in 2-3 years if export of females had been permitted. Azerbaijan, one of Georgias largest export markets, does not have a free market in either live animal imports or chilled beef, and that is a substantial barrier to chilled beef exports to there. Turkey likewise does not have a free market in chilled beef or lamb. Georgia has a shortage of people with the skills, facilities and substantial capital to grow cattle out to slaughter weights at a young age, and a shortage of halal-certified HACCP or ISO accredited export plants to process them. So in the short term, export of males as yet unready for slaughter is the main option. Banning exports wont magically remedy those deficits, it will just drive prices down so that people kill males at birth or get out of cattle altogether.
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