Focus on sustainability: Enhancing long-term viability and boosting revenues through careful development

Agriculture has been a cornerstone of the Mongolian economy for thousands of years. While the sector has recently been overshadowed by the burgeoning mining industry, as of mid-2013 agriculture was widely considered a central component of the nation’s long-term development strategy and a major potential economic contributor. From early 2012 through 2013 the local agriculture sector posted solid expansion in terms of overall production, due primarily to favourable weather conditions. According to the World Bank, in the first half of 2013 alone Mongolia’s agricultural output increased by 20.6%. With its long, cold winters and dry climate, the country is generally not well suited to growing many crops. As such, livestock – primarily goats, sheep and cattle – make up around 80% of the country’s total agricultural production, according to the National Statistical Office of Mongolia (NSOM).

The Odds

Despite recent expansion, the industry faces several challenges. Weather remains a major concern, particularly in light of climate change, which could have a major impact on Mongolia’s environment. The sector also suffers from a handful of regulatory and long-term development planning issues, many of which can be traced back to the country’s rapid transition to a market economy in the early 1990s. Finally, the industry faces steadily increasing competition – for land, financing and other resources – from the mining sector. “The minerals industry could eventually turn Mongolia into a rich country,” J. Tuvshinsanaa, director of a major domestic agriculture development project sponsored by the Asian Development Bank (ADB), told OBG. “However, improving both the quality and quantity of the nation’s agricultural production is key to ensuring that the local population is taken care of.”

Since the mid-2000s the agriculture sector has benefitted from increasing government attention. The Ministry of Industry and Agriculture (MIA), established immediately after Mongolia’s current government was elected in mid-2012, is implementing several projects aimed at addressing the sector’s most pressing issues.

One of the ministry’s primary overarching goals is to industrialise the sector in an effort to boost food production and the country’s overall food security. Improving current employment levels is another key area of focus. Agricultural employment has declined substantially in recent years. As of the end of the first half of 2013 around 29% of Mongolia’s workforce was employed by the agriculture sector, down from 42% in 2007, according to World Bank data. This is the result of declining sector revenues due to global food price volatility and the related attraction of higher potential incomes in both the rapidly expanding capital city of Ulaanbaatar and the mining sector. These pressures, in turn, have resulted in high rates of rural-to-urban migration in recent years, as young herders and farmers have relocated to the city to seek their fortune.

History

Under the pre-1991 communist regime, Mongolia was 80% self-sufficient in food. The sector was carefully controlled and strictly managed under this system, with livestock and vegetable production taking place in a complex system of individually managed plots of land and state-run farms. From the late 1950s through late 1980s the country’s communist government oversaw the implementation of a series of top-down, five-year developments plans in the sector that resulted in steadily increasing levels of production.

When the Soviet Union collapsed in the early 1990s Mongolia, like many other Soviet bloc countries, entered a period of rapid and largely unregulated liberalisation.

This was a challenging time for local industries, many of which had to negotiate a series of transition-related hurdles on the path to privatisation. The country’s newly elected democratic leaders were charged with the task of building a new government from the ground up. This included drawing up new legal frameworks and appointing new regulatory authorities to oversee a variety of industries, including the agriculture sector.

The state introduced a handful of basic agriculture regulations during this period, but generally the government took a hands-off approach, trusting that regional authorities would implement the new systems, and farmers and herders were left largely to their own devices. By the early 1990s the number of grazing animals in the country reached 50m – more than double the number in the late 1980s – as herders worked to increase holdings. This rapid rise has led to many issues that continue to define the sector today, including overgrazing; a shortage of hay and shelter, particularly during the country’s long winters; substantial livestock loss during an occasional dzud (spells of extreme cold during the winter that come on with little warning); and increased income volatility for most herders.

Decline

In the decade and a half following liberalisation, Mongolia saw a major decline in overall agricultural production. By 2007 just 30% of the country’s total available agrarian land was in use compared to around 76% in 1989. Beginning in the mid-2000s, however, the government began to pay more attention to the agriculture sector, which was seen as an essential and undervalued part of the country’s economy, not to mention a major source of employment.

One major hurdle to successful long-term development has been a lack of institutional continuity across successive governments. In general, when a new government is elected it has had a tendency to scrap the preceding government’s initiatives and, in many cases, entirely reorganise the ministries. In some instances the government has continued to lobby for increased animal production, which would only serve to exacerbate the central challenges of overgrazing, declining livestock health and pastureland depletion. “What is needed in the livestock sector at the moment is a focus on boosting sustainability, which, in this case, will likely require herders to reduce their holdings,” Tuvshinsanaa said.

Regulation & Development

Long-term sustainability is the main aim of the government’s recent undertakings in the sector. Since 2009 it has launched a variety of linked development programmes. Work on a handful of these initiatives has continued under the current government, which came into power in 2012. These include the Mongolian National Livestock Programme (MNLP), launched in 2010 and expected to run through 2021; the State Policy on Food and Agriculture (SPFA), which was put forward in 2009 and will be completed in 2020; and the related Policy on Herders (SPH, 2009-20). The MNLP, perhaps the most comprehensive development programme currently under way in the sector, aims to “develop a livestock sector that is adaptable to changing climatic and social conditions and create an environment where the sector is economically viable and competitive in the market economy, to provide a safe and healthy food supply to the population, to deliver quality raw materials to processing industries, and to increase exports”. The government is at work on a variety of individual components of the plan, including registering all livestock as part of a national database and improving animal disease prevention and detection in the industry.

Under the SPFA, the MIA aims to improve the quality and health of Mongolian livestock via selective breeding programmes, though the plan also provisionally allows for the use of biotechnology and genetic engineering. Finally, the SPH is aimed primarily at improving the lot of Mongolia’s herders, who numbered in excess of 700,000 as of late 2012, according to the World Bank. The policy seeks to boost rural incomes and quality of life by 2020 by encouraging herders to enter into cooperatives and other types of risk- and revenue-sharing partnerships with other herders and nongovernmental organisations, as well as by improving access to markets and raising the quality – and, consequently, price – of Mongolian livestock.

Another major project currently in the works is the launch of the Mongolian Agricultural Commodities Exchange, which, despite having been under discussion since 2010 and in progress since June 2011, had yet to begin operations at time of publication. The project, meant to facilitate the implementation of market pricing throughout the industry, is expected to catalyse the establishment of farmer cooperatives. The MIA is also reportedly currently focused on raising standards and production levels in Mongolia’s dairy industry, which could potentially be a major economic contributor in the coming years; supporting beef farms, particularly in the north-east; and encouraging farmers to make use of advanced technology to boost production.

Livestock

Mongolia is well situated to eventually become a major supplier of a variety of high-grade animal products, including meat, leather, cashmere, wool and dairy products. As of early 2013 it was home to an estimated 45m-50m animals. Major holdings include goats, sheep, cattle and camels. Small-hold private players own the great majority of the grazing animals. Most herders graze livestock on the Mongol steppe.

Under communism, herders were generally put in charge of single-species herds, but since market liberalisation in the early 1990s most have switched to mixed herds as a way to mitigate risk. The doubling in size of the country’s total grazing herd after privatisation has led to some challenges, including poor animal health; poor access to both domestic and international markets; and a lack of access to financing. Extreme weather – like dzuds and droughts – are also a major concern. In 2009, a harsh dzud killed one-quarter of Mongolia’s livestock population.

Until recently local meat production generally satisfied domestic demand and the country managed to export a considerable amount of meat. Estimates of Mongolia’s annual meat exports over the past decade vary widely, from 15,000 tonnes to 25,000 tonnes, depending on the source. During the communist period, the country regularly exported over 40,000 tonnes of meat to the Soviet Union annually. Since 2009 domestic meat prices have risen substantially, in some cases more than doubling by the end of 2012, contributing to rising inflation rates. The country has also seen a steady decline in meat exports over the same period, primarily as a result of rising domestic demand and declining production. While the root cause of these issues is unclear, many local players attribute them to Mongolia’s steadily increasing urbanisation rate, which has resulted in greater demand for meat in Ulaanbaatar. The bulk of Mongolia’s meat exports in recent years have consisted of relatively low-quality, low-priced products to neighbouring countries. The sector remains relatively underdeveloped and informal. Sanitation issues persist, and animal slaughter, meat handling, inspection and grading procedures are generally not up to international standards. Additionally, a considerable amount of locally produced meat is thought to be smuggled out of the country each year, primarily into China.

Dairy

Unlike meat, milk can be produced on a year-round basis. With this sustainability in mind, in recent years Mongolia’s dairy industry has been touted as a major potential economic contributor. During the communist period the country was self-sufficient in milk. However, since then, and as a result of the same issues that caused problems in the meat industry, the market has been somewhat volatile. Mongolian sheep, goats, cows and camels produce a massive amount of milk during the warm summer months, a considerable percentage of which goes toward local consumption.

Due to a lack of domestic processing facilities, however, the country imports around 80% of the milk that is consumed locally each year, primarily in the form of powdered milk from New Zealand. At the same time, an estimated 500m-600m litres of fresh Mongolian milk is wasted every year due to a lack of domestic processing and storage capacity. As of mid-2013 the government was in the process of developing a subsidy and support programme for the milk industry.

Cashemere & Wool

 Mongolia is seen as one of the highest-quality cashmere producers in the world. As of mid-2013 the country supplied around one-fifth of the global supply of raw cashmere, second only to China. After mining, cashmere is Mongolia’s top export earner and a major source of income for many local herders. From the mid-1990s through 2008 the price for cashmere on international markets rose substantially, which encouraged herders to increase the size of their herds. Between 1990 and 2009 the number of cashmere-producing goats in Mongolia jumped some 300%, and the amount of raw cashmere produced rose by around 450%. In 2008 the price of cashmere dropped by half, in line with a rapid decline in price for most livestock products, before rising again in 2009.

In 2012 Mongolia produced around 5600 tonnes of cashmere, up from 4800 in 2011 and 3500 in 2010, according to the Mongolian Wool and Cashmere Association (MWCA). With less than 1500 tonnes of annual spinning capacity, the industry exports the majority of its cashmere raw, primarily to China. According to the MWCA, Mongolia is home to 15 factories that produce finished cashmere goods up to global standards, while there are an additional 200-odd small-scale and family-run cashmere knitting and manufacturing operations. In recent years the industry has brought in annual revenues of around $180m, 80% of which comes from unprocessed, raw cashmere, according to the MWCA.

While raw cashmere production in Mongolia is thriving, the processing and manufacturing segment is underdeveloped. Only a small number of firms currently produce Mongolian cashmere products locally. Adding value to the industry at home is a key government priority. In April 2013 the state approved $58.5m in loans to the cashmere industry, including $45m for cashmere firms and $13.5m for clothes manufacturers. The government estimated that the financing could lead to the establishment of 80 new factories, employing around 30,000 workers in total.

Mongolia is also a major producer of sheep and camel wool, and, to a lesser extent, yak molts. According to data from the MWCA, the country produces around 19,000-20,000 tonnes of sheep wool on an annual basis, 35-45% of which is used domestically. In many cases herders will raise sheep primarily as a food source and for producing wool for personal and local use. Only a handful of firms have the capacity to produce manufactured wool goods in Mongolia, so the bulk of the country’s production is exported raw and at relatively low price points, primarily to China and Russia.

Leather

 In recent years Mongolia has produced between 8m and 10m raw animal skins annually, with sheepskin accounting for more than half this total. The domestic leather processing industry is also somewhat underdeveloped, and 75-80% of Mongolian-produced skins are exported to China for processing. According to the MIA, some 35 firms currently produce leather products in the country. Major challenges hindering development of the sector in recent years include the country’s low-quality national transport infrastructure, which has made it difficult to bring products to market, and a lack of storage, which in some cases forces companies to halt production for months.

In mid-July 2013 the government announced that it would fund the construction of a major new leather complex in Darkhan-Uul Province, north of Ulaanbaatar, with proceeds from the state-owned Development Bank of Mongolia’s Chinggis bond, which was issued in late 2012 and has reportedly been used to finance more than 200 development projects throughout Mongolia. The new facility is designed to serve as a hub for the domestic leather industry. According to the government, the project could potentially result in end-products accounting for up to 80% of leather exports by 2016, making the leather industry one of the country’s leading economic contributors.

Farming

At the end of 2012 less than 1% of Mongolia’s total land area was dedicated to crops. Local production of grains and vegetables declined rapidly in the decade and half following the introduction of a free market economy in the early 1990s. Since the mid2000s, however, the country has produced a steadily increasing amount of produce. According to preliminary government forecasts, the country was poised to achieve in excess of 100% self-sufficiency in wheat and flour in 2013. This is a major achievement, given that as recently as 2008 an estimated 70% of Mongolia’s wheat was imported, primarily from Russia. The jump in local production is closely linked to new tariffs placed on imported Russian wheat in recent years.

Locally produced vegetables include potatoes, carrots, onions, beets and cabbage, among others. The country was around 60% self-sufficient in vegetables in 2012, according to official data, and more than 100% self-sufficient in terms of potatoes. While Mongolia has successfully expanded grain and vegetable production in recent years, many local players point out that Mongolia will never be 100% self-sufficient in all agricultural products. The country’s cold climate cannot support rice or sugar production, for example. “In a globalised economy, self-sufficiency does not necessarily mean meeting all local demand with local production any more,” Stephen Kreppel, director of the Mongolian National Marketing Coordination Office (MNMCO), told OBG. “Financing certain food imports with revenues from high-value branded food exports, or mineral exports, for example, is a perfectly sustainable way to approach food security.”

Outlook

 While some segments are more developed than others, the agriculture sector as a whole faces several interrelated issues. The livestock sector is broadly underdeveloped, and continues to face structural issues that can be traced back to Mongolia’s transition to a market economy in the early 1990s. Generally the country lacks livestock processing and manufacturing capacity. As a result, most Mongolian animal products are exported with little value added.

The government and the private sector are working to transform Mongolia into a producer of high-end luxury agricultural products. “There is huge potential demand, especially in Western markets, for premium-priced branded food and agriculture-based products that are ethically sourced, wholly natural and that respect animal welfare,” said Kreppel. “The potential, therefore, for properly developed Mongolian products here is equally huge.” Indeed, Mongolian cattle, sheep, goats and camels are raised naturally, without the use of antibiotics or hormones, and spend most of their lives in open, unfenced pastures. The government, in conjunction with the MNMCO, is currently in the very early stages of a long-term plan to develop a Mongolian agricultural brand that will eventually be able to command premium prices. Achieving this goal will likely require a series of investments in local processing, technology, transport networks and, importantly, training. So long as these issues are addressed, however, the sector could become a major source of revenues for years.