What is the path for sustainable and competitive livestock sector in Mongolia?

English summary of the promotion paper prepared by the Center for Policy Research (CPR) on the importance of keeping pastures fresh, livestock product quality improvements and reaching international niche markets for organic products, published on ‘Daily News’ and public websites ‘News’, ‘GoGo’, ‘Shuud’ etc. in April 2016.

Nowadays, the world animal food and raw materials market is dominated by products from intensive farms as a result of the competition for productivity growth in countries with favorable natural endowments. At present, there is no other feasible way to meet the fast growing global demand. For example, intensive grain-fed farms supply 97% of the US beef consumption.

Meanwhile niche markets for organic products are expanding because of health concerns over intensive farming products. The amount of Omega-3 acids, an important health booster, is twice more in grass-fed beef than in conventional grain-fed beef. As of 2015, the retail price of beef per kg in USA was 11 dollars for conventional grain-fed, 12.5 for organic, 14.5 for without antibiotics, 16.4 for grass-fed and 17.4 for grass-fed organic. There are also expanding niche markets for environmentally friendly and free-range animal products.

Niche markets have a strong tendency to grow as peoples’ income and education improve. This creates new opportunities for producers of such products.

Mongolia‘s harsh natural endowments mean that it has no competitive advantage in intensive farming and productivity growth. Instead it has comparative advantages of organic, free-range products from natural pastures. Mongolia needs to realize these advantages in order to compete in international markets.  For this to happen it has to, first, keep pastures healthy and fresh, second, certify animal products on internationally acknowledgeable levels, third, access international niche markets.

 Keeping pastures fresh

Organic product means, first of all, product from fresh pastures. As pasture becomes degraded, its products lose competitive advantages of being organic. For instance, meat from fresh pastures contains much more antioxidants compared to meat from degraded pastures. Thus, healthy food is produced only from healthy and fresh pastures.

Natural causes such as global warming & dryness and human factors like unsustainable use lead to pasture degradation. Long-term adaptation programs are needed to minimize the impact of naturally caused pasture degradation. However, unsustainable use of pastureland has to be stopped immediately to contribute to improved effectiveness of the long-term adaptation programs.

According to the 2014 assessment using 1450 monitoring points jointly conducted by the national bodies for land and environmental management, the “Green Gold” project of SDC and universities & research organizations 65% of pastureland in Mongolia has been degraded to a certain degree with 7% decertified beyond recovery.

The most common type of unsustainable pastureland use in Mongolia is overstocking or increasing animal numbers beyond pasture carrying capacities. This leads to pastureland degradation due to animal pressures beyond vegetation recovery and absence of seasonal rotations.  In addition, overstocking eats up otor reserve areas leading to increased losses in emergencies. In 1999-2002 dzud 11.2 m animals worth MNT 333 billion were lost, 12.1 thousand households lost all animals and 26.7 thousand households left livestock herding. In 2009-2010 dzud 9.7 m animals worth MNT 527 billion were lost.

The current common use regime encourages chaotic use of pastures in which a few wealthy herders, the city rich and companies expand their grazing rights at the expense of other herders’ grazing rights, thus increasing social inequality. Moreover, it encourages improper practices of neglecting the interests of local herders in converting pastureland into other uses such as mining, infrastructure, tourism.

The direct impact of pasture degradation is declined forage supply, increased malnutrition and exposure to risks, decreased quality and productivity of animals leading to increased income and asset losses of herders. A study has shown that compared to fresh pastures, on degraded pastures spring live weight of ewes dropped by 8 kg, milk yield by 2.5 folds and cashmere yield by 8%. Income losses from only these three indicators account for MNT 2.6 m per household and 368 billion nationwide. As pastures make base biodiversity habitat, local attractiveness and tourism values decline due to pasture degradation.

Thus, the key question is how to free herders from devil’s circle in which they strive hard to maximize animal numbers after a dzud but end up with no good returns as their strategy destroys pastures and swallows up otor reserve pastures making losses for the next dzud even more devastating.

There are great unused opportunities of income generation in a sustainable way. For instance, if a herder household halts the current herd size growth of around 10% year and increases the share of breeding females from the current 45% to 53% and sells animals at the full off-take rates (the number of animals sold equals the number of reared offspring), meat production increases by 236.7 kg or 48% per every 100 sheep generating additional income of MNT 947 thousand. Nationwide, this amounts to additional 55 thousand tons of carcass meat worth MNT 220 billion. Most importantly these benefits come in an environmentally friendly way without increasing the herd size. Such estimates can be made for any product of livestock species. A herd structure model estimate shows that, the annual cash income of an average Mongolian herder household increases from the current MNT 15.6 m to MNT 18 m at the existing herd size growth scenario, but increases to MNT 24.4 m if the herd size is reconciled with the pasture carrying capacity. One reason for increasing herd size is herders’ willingness to sell animals at later ages when they reach certain thresholds of live weight. However, the reason why animals can’t reach these thresholds at younger ages, is again related to malnutrition resulted from overstocking. Overstocking by 50% means that animals have malnutrition at roughly the same rate.

Despite unprecedented growth of animal numbers of 55.9 m or 92.6 sheep units in 2015, the meat production potential is only 311 thousand tons of carcass meat including herders’ household consumptions. This is because herders grow animal numbers instead of selling them to the market. A herd structure model estimate shows that reducing the animal numbers to the optimum levels of around 60 m sheep units or 34.8 m animals (camel 367 thousand, horse 2054 thousand, cattle 2774  thousand, sheep 16433 thousand, goat 13182 thousand) and keeping zero growth rate will increase the meat production to 433 thousand tons. This doesn’t include other scopes of increase like improved herd structure, selling of animals at younger ages and productivity improvements using local superior breeds. Adding these opportunities easily makes the meat volumes to 500 thousand tons. Reserving half of it for domestic consumption amounts to 250 thousand tons of meat for export markets. At the market price of USD 4 per kg, this earns USD 1 billion in export revenues, around the same amount of the current earnings of Oyu Tolgoi and Erdenet copper mines combined. Adding other revenue sources such as by-products currently un-utilized due to hand slaughtering, cashmere, wool, hide & skin and price premiums of niche markets, increases export revenues 2 billion. Thus, if guided wisely, the Mongolia’s pastoral livestock industry is capable of generating revenues easily matching the Oyu Tolgoi, Erdenet copper mines and Tavan Tolgoi coal mines combined, but differs from them as being a renewable source of wealth with appreciating value.

The driving force of economic development is technological advancement & innovation. Herders in Mongolia have been maximizing animal numbers but not investing in pastureland and animal product quality improvements.

The key reason behind the human-induced pastureland degradation is the existing common use regime with no accountability mechanisms for overstocking. Users are encouraged for making efforts in sustainable land use only if their rights to reap benefits are secured and protected by land tenure. This basic incentive mechanism is absent with the existing common use regime. As a result herders choose the animal number maximization as the cheapest way of generating short-term incomes at the expense of state owned pastureland degradation as well as the long-term sustainability of livestock herding. Thus, animals and herders are not to be blamed for pasture degradation, but it is the government that fails to introduce right incentive mechanisms.

Private ownership and long-term leases provide secure land tenure to encourage sustainable land use. The private ownership of pastureland is duly prohibited by the Constitution because of the need to keep mobility for rotational use and reciprocal grazing rights in emergencies. Therefore, the draft pastureland law proposes longer-term land use agreements as a way to prevent the degradation of pastures to keep them healthy and fresh for the long-term. It will provide a first step for livestock herding to realize its advantages of producing organic products from free-range natural pastures. We wish that the draft pastureland law promoted by the Ministry of Food and Agriculture discussed and approved by the Parliament as soon as possible.

The key objective of the draft pastureland law is to provide a legal basis to stop the existing chaotic and non-sustainable use of pastures and recover the traditional best practice use- keep optimum stocking densities to ensure ecological sustainability and availability of otor reserves to minimizes losses in emergencies – and enforce it through formal agreements. The land use agreements are not about allocating new land areas; instead they are about recognizing and formalizing the existing informal land use rights of herder households. They shall be based on duly recording and acknowledging the informal land use rights of herder households to avoid any social disturbances and disputes.

The contractual use of pastureland by herder groups proved to be feasible in Mongolian conditions. Under the peri-urban rangeland project funded by the Millennium Challenge Account (MCA) of Mongolia 384 herder groups have established land use agreements in 42 soums in 5 aimags. Herder groups have got the pastureland ranging around 500-2500 ha per group through negotiations with neighbor herders on land use boundaries and getting them approved by bag meetings and soum Governors. Likewise SDC-funded Green Gold project is introducing pastureland use agreements for 33 pasture user groups and herder groups in 7 aimags.

There have been organized surveys indicating the majority support for pastureland use agreements. The nation-wide survey, conducted by the Ministry of Food and Agriculture and funded by the United Nations in 2007, has shown that 70% of herders supported the pastureland possession or use agreements. The 2012 study in the Khanbogd soum of Umnugobi aimag – classic Gobi region, found out that 78% of herder households supported the pastureland possession. The share of supporting herders was highest in households with less than 200 livestock and lowest in households with more than 400 livestock.

Thus, keeping pastures fresh is the first crucial step in making livestock herding competitive, it is senseless to talk about next steps without resolving this issue

Certifying animal products at internationally acknowledgeable levels

Animal products need to be certified as follows:

  1. Organic products from fresh, un-degraded pastures by meeting pastureland use agreement targets for stocking densities, the pastureland state and quality indicators
  2. ‘Environmentally friendly’ attributes by meeting the same targets mentioned in 1
  3. ‘Free range’ attributes by developing and enforcing internationally acknowledgeable standards
  4. Veterinary and hygiene requirements by meeting the international standards as wells standards of importing countries

Mongolia can access the international markets only after meeting the above requirements and standards. Our two neighbors have an interest in low-price meat from Mongolia. However, due to the domestic surge in meat price, Mongolia can no longer compete with other suppliers who can produce cheaper meat using intensive technologies. Thus, the Mongolia’s export market strategy is to target niche markets in our neighbors and other regions.

Accessing international niche markets

Reaching international markets is, first of all, about cooperation. In their current disunited efforts along value chains, herders waste tremendous opportunities for saving costs, improving bargaining powers and receiving quality services. Instead of competing with each other for short-term gains value chain participants – herders, middlemen, quality inspectors, processors and buyers need cooperate for the common interest of making the entire industry competitive internationally. Only in that way every participant can ensure the long-term sustainable income growth. New Zealand, a country 6 times smaller than Mongolia by land area, earns $3.8 billion from meat exports only. New Zealand’s success is not entirely attributable to favorable natural environments but it comes from sound policy and cooperation. It has reduced sheep numbers from 40 million in 2005 to 29 million in 2015 and kept the share of breeding females no less 60% to sell lambs at younger months. The New Zealand Meat Board, a body representative of farmers, processors, exporters and the Government, integrates national efforts to promote meat classification, quality certification and access to international markets.

There are evidences of how good cooperation for the sake of the industry’s interest can benefit everybody. In 2015, under the Oyu Tolgoi Company’s “Local Business & Economic Development Program”, CPR has tested how camel herders can earn more income by improving cooperation across value chain participants. The pilot has shown that cooperation on baby camel wool from combing to spinning can result in improved product quality and economic returns for each value chain participant. Income per 1 kg of end product had potential to increase from MNT 4000 to MNT 12000 for herders, from MNT 2000 to MNT 6300 for local collection cooperatives, from MNT 3000 to MNT 4234 for sorting and scouring, MNT 6000 to MNT 8500 for combing and MNT 15050 to MNT 21240 for spinning. The pilot’s end product 26/2 yarn made of fine 16-17 micron wool was of excellent quality and sold for MNT 85000 per kg. The pilot combed wool cost around MNT 50000 while the international price for the same product was $38 or MNT 76000. An example of niche market price was $90 or MNT 180,000 claimed by Eurostex in Bradford, England for the 1 kg of combed camel wool originating from Alashan in Inner Mongolia.

Although every participant has a role to play, processors have to play a leading role in accessing international markets. One way to address the pressing challenges facing the value chain of Mongolia’s animal products is to promote value chain finance.

The value chain finance takes into account the financial potential of the entire value chain and not just the creditworthiness of a single individual. It offers an opportunity to reduce the cost and risk in financing and reach out to smallholder farmers, expand the financing opportunities for agriculture, improve efficiency and repayments in financing, and consolidate value chain linkages among participants in the chain. Rural small-scale businesses of asset-poor herders can be closely connected with larger businesses, processors and consumers. Thus, value chain finance addresses the financial gap that hampers growth, limits agricultural development and result in a loss to the financial sector, which ignores thousands of potential rural clients.

Given the current focus of herders’ loans on consumption rather than business, processors can be provided loans for their working capital needs with attached conditions to apply price premiums for quality standards in buying raw materials from herders. For example, conditional loans can be given to cashmere and wool processors to collect finer-micron raw materials from herders offering price premiums. Similarly, the quality certification of live animals, carcasses, hide & skin and raw milk can be promoted by price premiums attached to conditional loans for processors. In this way, herders will be encouraged for quality improvements, thus can contribute to sustainable livestock development as well as the processing industry’s competitiveness. Gradually, herders’ demand for business loans will build up expanding markets for financial institutions.

Herders can and should organize into cooperatives to collect raw materials at the soum center, to get initial processing, packaging, quality certifications and negotiate with processors on transportation, storage and pricing terms.

The local administration, civil society organizations like native people’ councils and the private sector can all work together to help Mongolia‘s pastoral livestock industry realize its comparative advantages. The government needs to lead all these efforts to bring Mongolia’s organic, free-range products from natural pastures to international niche markets.