A QUANTITATIVE ANALYSIS OF SUPPLY RESPONSE IN THE NAMIBIAN MUTTON INDUSTRY by Daniel Nicolaas van Wyk Thesis presented in partial fulfilment of the requirements for the degree of Master of Science in the Faculty of Engineering at Stellenbosch University Supervisor: Mr Nico Treurnicht March 2011 Stellenbosch University http://scholar.sun.ac.za Declaration By submitting this thesis electronically, I declare that the entirety of the work contained therein is my own, original work, that I am the sole author thereof (save to the extent explicitly otherwise stated), that reproduction and publication thereof by Stellenbosch University will not infringe any third party rights and that I have not previously in its entirety or in part submitted it for obtaining any qualification. Date: 28/01/2011 Copyright 2011 Stellenbosch University All rights reserved i Stellenbosch University http://scholar.sun.ac.za Abstract In terms of its contribution to the agricultural economic activity in Namibia, the small stock industry is the most important sector, second only to the beef industry. This sector makes a significant contribution to the agricultural business in Namibia due to the sector’s exports, its provision of employment, use of natural resources, contribution to GDP and to consumer spending as well as food security. Agricultural activities in Namibia contributed 5.5 percent to Namibia’s GDP, while 70 percent of the population relies on agriculture for employment and day-to-day living. Livestock farming in Namibia is free ranging on natural pastures and therefore produces high-quality meat that is in high demand in both the national and international markets. Small stock production in Namibia is unstable due to the high variability of weather patterns, changes in economic and social environments, unpredictable droughts as well as political and structural changes. Due to the decline in mutton production over the last years, research in the supply economics of the mutton industry in Namibia is important. The purpose of this study is to investigate the relationships between the various price and non-price factors contributing to the supply dynamics within the mutton industry in Namibia. Two hypotheses are tested with the aid of econometric modelling techniques on monthly time series data. The Autoregressive Distributed Lag approach to co-integration was used to determine the long-run and short-run supply response elasticities towards economic and climatology factors. Results showed a significant long-run relationship between the average Namibian mutton producer price and mutton supply. Results revealed that a one percent increase in the mutton producer price leads to a 1.97 percent increase in mutton supply. Beef producer price, a substitute product to mutton, showed a significant negative long-run effect towards mutton production whereas rainfall showed a meaningful positive long-run contribution to mutton supply. These supply shifters towards mutton production also showed significant short-run elasticities. Results further revealed that the system takes nearly two months to recover to the long-run supply equilibrium, should any disturbances occur within the supply system. The study showed that price-related and climatological factors play a major role in the Namibian mutton production industry. Industry stakeholders and policy makers should therefore incorporate these significant relationships between supply shifters and production output into future decisions and marketing policies to secure a healthy, growing and sustainable mutton industry in Namibia. ii Stellenbosch University http://scholar.sun.ac.za Opsomming In terme van bydrae tot die landboubedryf in Namibië is die kleinveebedryf die tweede belangrikste sektor, net kleiner as die land se grootveebedryf. Die sektor maak ‘n betekenisvolle bydrae tot die landboubedryf in Namibië deur middel van werkskepping, die gebruik van natuurlike hulpbronne, bydrae tot Bruto Binnelandse Produk, uitvoere, verbruikersbesteding sowel as voedselsekerheid. Landbou-aktiwiteite dra by tot 5,5 persent van die Bruto Binnelandse Produk van ‘n land waar meer as 70 persent van die bevolking afhanklik is van landbou om ‘n bestaan te kan maak. Veeboerdery in Namibië geskied ekstensief op natuurlike veld wat lei tot die produksie van ‘n hoë kwaliteit produk, wat hoog in aanvraag is in plaaslike en internasionale markte. Kleinvee produksie in Namibië is onstabiel as gevolg van fluktuasies in weerpatrone, veranderings in ekonomiese en sosiale omgewings, onvoorspelbare droogtes asook politieke- en struktuurveranderinge. As gevolg van die huidige afname in skaapvleis produksie is navorsing in die aanbodkantekonomie van die skaapvleisbedryf belangrik in Namibië. Die doel van hierdie studie is om die verwantskap te ondersoek tussen verskeie prys en nie-prys faktore wat bydra tot die aanboddinamika van die skaapvleisbedryf. Twee hipoteses word getoets met behulp van ekonometriese modelleringstegnieke op maandelikse tydreeksdata. ‘n Outoregressiewe verspreide sloeringbenadering tot ko-integrasie is gebruik om die langtermyn en korttermyn elastisiteite tussen ekonomiese en klimaatsfaktore vir die aanbod van skaapvleis te bepaal. Resultate dui op ‘n betekenisvolle langtermyn verwantskap tussen die gemiddelde Namibiese produsente prys en skaapvleis produksie. Resultate wys daarop dat ‘n een persent styging in skaapvleis produsente prys ‘n 1,97 persent styging in skaapvleis aanbod het. Die beesvleis produsente prys, ‘n substituut vir skaapvleis, het ‘n beduidende negatiewe effek getoon oor die langtermyn op skaapvleis produksie. Reënval het ‘n beduidende positiewe bydrae getoon ten opsigte van skaapvleis aanbod. Hierdie aanbodsfaktore het betekenisvolle korttermyn elastisiteite getoon. Resultate het ook getoon dat die stelsel twee maande neem om te herstel tot die langtermyn aanbodsewewig, sou daar enige drastiese veranderings in die stelsel plaasvind. Die studie het getoon dat prysverwante en klimaatsfaktore ‘n uiters prominente rol speel met betrekking tot skaapvleisproduksie in Namibië. Bedryfsaandeelhouers en politieke leiers sal hierdie betekenisvolle verwantskappe tussen produksie faktore en aanbod uitset in ag moet neem in toekomstige beplanning en bemarkingsbeleid om ‘n gesonde, groeiende en volhoubare skaapvleisbedryf in Namibië te verseker. iii Stellenbosch University http://scholar.sun.ac.za Acknowledgements I would like to take this opportunity to express my gratitude to the following individuals, who have contributed to this work either directly or indirectly: My Heavenly Father for the talents, energy and enthusiasm He has given me to participate in this study. Without His blessings, I could not have completed this study My parents and family for their love, encouragement and motivation during the course of this study My colleagues and friends for their support Mr Willem Boshoff for his guidance in Econometric Modelling Mr Willie Schutz of the Meat Board of Namibia for providing all the required data for this study and for his support My supervisor, Mr Nico Treurnicht, for his inputs, positive feedback, support and guidance throughout the duration of the project iv Stellenbosch University http://scholar.sun.ac.za “The future belongs to those who believe in the beauty of their dreams” Eleanor Roosevelt v Stellenbosch University http://scholar.sun.ac.za Table of Contents Declaration ............................................................................................................................................... i Abstract ................................................................................................................................................... ii Opsomming ............................................................................................................................................ iii Acknowledgements ................................................................................................................................ iv List of Figures ......................................................................................................................................... ix List of Tables ........................................................................................................................................... x Chapter One – Background and Introduction ......................................................................................... 1 1.1 Introduction .................................................................................................................................. 1 1.2 Background and Overview ............................................................................................................ 1 1.3 Research Problem and Objectives ................................................................................................ 2 1.4 Research Methodology ................................................................................................................. 3 1.4.1 Research Classification and Reasoning .................................................................................. 3 1.4.2 Research Strategy .................................................................................................................. 3 1.4.3 Data Collection and Analysis Method .................................................................................... 4 1.4.4 Restrictions of the Study .......................................................................................................