Demand relationships in orange exports to Russia: a differential demand system approach focusing on Egypt

Hatab, Assem Abu Article Demand relationships in orange exports to Russia: a differential demand system approach focusing on Egypt Agricultural and Food Economics Provided in Cooperation with: Italian Society of Agricultural Economics (SIDEA) Suggested Citation: Hatab, Assem Abu (2016) : Demand relationships in orange exports to Russia: a differential demand system approach focusing on Egypt, Agricultural and Food Economics, ISSN 2193-7532, Springer, Heidelberg, Vol. 4, Iss. 22, pp. 1-16, https://doi.org/10.1186/s40100-016-0066-5 This Version is available at: https://hdl.handle.net/10419/179083 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ RESEARCH Open Access Demand relationships in orange exports to Russia: a differential demand system approach focusing on Egypt Assem Abu Hatab 1,2 Correspondence: [email protected] 1 Department of Economics and Rural Development, Faculty of Environmental Agricultural Sciences, Arish University, Al-Arish, Egypt 2 Department of Economics, Swedish University of Agricultural Sciences, Ulls Väg 27, Box 7013750 07 Uppsala, Sweden Abstract Recent years have witnessed closer diplomatic relations between Egypt and Russia, which have led to significant growth in the countries’bilateral agricultural trade. As a world-leading producer and exporter of oranges, these developments represent an opportunity for Egypt to promote its orange exports to Russia. Another emerging opportunity for Egypt to increase its share in the Russian market for imported oranges has been provided by import embargos imposed by Russia in recent years on agricultural andfoodcommoditiesfromseveralcountries,creatingasupplygapofaround25%in the Russian orange market. To assess the competitiveness of Egyptian oranges and explore the potential export opportunities presented by the Russian market, this paper uses a Rotterdam import allocation model to analyse demand relationships among major orange suppliers to Russia during the period 1996–2014. The results show that in comparison with other orange suppliers, Egypt enjoys a strong comparative advantage in the export of oranges to Russia. The econometric results suggest that both Morocco and Egypt would benefit the most if Russia were to allocate a larger budget to the import of oranges. The expenditure elasticity estimates indicate that an increase in Russia’sdemand for imported oranges would lead to increases in the quantity of Egypt’s orange exports, as well as in its share of the Russian orange market. Furthermore, cross-price elasticity estimates reveal that Egyptian oranges are substitutes for Turkish and South African oranges, implying that Russia has a tendencytoswitchtothesetwosupplierswhen Egyptian oranges become relatively expensive. In light of these results, the adoption of strategies to produce oranges sustainably and cost-effectively, upgrade the orange value chain, acquire processing technologies and enhance the technical and organisational capacity of farmers and exporters could be useful means for promoting exports and boosting the competitiveness of Egyptian oranges on the Russian market. Keywords: Egyptian orange exports, Russia, Import demand, Differential demand system, Rotterdam model JEL Classification: F14, Q11, Q17 Background Fuelled by an increase in real disposable incomes over the past two decades and the growing tendency among domestic consumers to maintain healthier diets, the demand for fresh fruit and vegetables among Russian consumers has grown significantly in recent years (Honkanen and Voldnes 2006; Kolchevnikova 2010; Hamza 2015). With a share of around 7 % of the fruit market, oranges are the second most popular citrus Agricultural and Food Economics © The Author(s). 2016 Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made. Abu Hatab Agricultural and Food Economics (2016) 4:22 DOI 10.1186/s40100-016-0066-5 fruit in Russia (Ilyina 2011). The Russian orange market depends entirely on imports since oranges are not grown domestically, with the country having the largest share (around 12 %) of world orange imports (GRC 2012). Between 1996 and 2014, Russia’s orange imports have grown by an average of 4.6 % annually, rising from 257.5 thousand tons to around 469 thousand tons (WITS 2016). Egypt, the world’s sixth largest producer and second largest exporter of oranges, has always been one of the main orange suppliers to the Russian market (Hamza 2014). Particularly since 2001, Russia’s orange imports from Egypt have increased substantially, skyrocketing from about 8 thousand tons in 2001 to 76 thousand tons in 2003 (Fig. 1). Between 2004 and 2010, the quantity of Russian orange imports from Egypt practically doubled, rising from 110 thousand tons to almost 219 thousand tons. Despite the socio-political unrest in Egypt in 2011, which adversely impacted its foreign trade sector, Egypt’s orange exports to Russia have shown relative resilience and have generally continued to grow in the period after 2011 (Fig. 1). Generally, this very strong performance of Egyptian orange exports on the Russian market can be attributed to the special attention that Egyptian agricultural policies have paid to the development of the orange supply chain at all levels. Such attention is motivated by the very significant contribution made by oranges to the country’s fruit production (one third of total fruit production) and exports (around 10 % of total agricultural exports worldwide) (Hamida 2012; WITS 2016). Furthermore, the promotion of orange exports to Russia has always been an objective of Egypt’s agricultural export development strategies aimed at diversifying the map of the country’s agricultural exports and reducing its dependency on a limited number of EU and Arab markets. Moreover, the importance of Russia as a target market for Egyptian orange exports has recently increased. Abu Hatab and Nsanimana (2016) indicate that “political proximity”between Egypt and Russia in recent years has revitalised their bilateral agricultural trade relations significantly. Thanks to several trade agreements being signed by the two countries to promote a greater level of trade liberalisation, bilateral agricultural trade has grown from USD 85 million in 1996 to about USD 2.2 billion in 2014, making Russia a major trading partner of Egypt (Parker 2015; WITS 2016). In this context and given Egypt’s position in the global orange market, oranges have repeatedly been cited by Egyptian agricultural trade policymakers as an area in which the country could benefit from these improved bilateral agricultural trade 0 10 20 30 40 50 60 0 30 60 90 120 150 180 210 240 270 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 % 1000 tonnes Im p orts from E gyp t E gyp t's share in Russian total oran g e im p orts Fig. 1 Russian orange imports from Egypt, 1996–2015. Source: World Bank, WITS (2015) Abu Hatab Agricultural and Food Economics (2016) 4:22 Page 2 of 16 relations with Russia and secure a greater foothold in the Russian market for imported oranges. In addition to these recent improvements in Egypt-Russia bilateral agricultural trade, the recent embargos imposed by Russia on agrifood imports from several destinations, including the EU in 2014 and Turkey in 2015, opened up another opportunity for the promotion of Egyptian orange exports to Russia (Hamza 2014). According to Abu Hatab and Nsanimana (2016), these two embargos have created a supply gap of about 25 % in the Russian market, providing export opportunities to Egypt and other orange suppliers to fill the resulting import void. Although it is too early to assess the impacts of these embargos on Egyptian orange exports to Russia, Fig. 1 shows that there has been an increase of around 11 % in the quantity of Egyptian oranges exported to Russia in 2015 in comparison with the preceding year. To assess the competitiveness of Egyptian oranges and explore the export opportunities that the Russian market may offer Egyptian oranges, the present study used a sourcedifferentiated approach within a Rotterdam import allocation model to analyse the Russian demand for imported oranges from Egypt and other major suppliers during the period 1996–2014. This paper contributes to the literature in the following ways. First, especially in light of the above developments in Egyptian-Russian bilateral agricultural trade relations as well as the structural changes in the Russian market for imported oranges following the imposed import bans, the subject covered by this paper is very timely and its results could be useful to Egyptian agricultural trade policymakers in the development of informed strategies for the promotion of orange exports to Russia. Second, a closer look at the existing literature on the foreign demand for Egyptian agricultural exports shows that the majority of previous studies have ignored horticultural commodities in favour of other agrifood commodity groups, despite the fact that horticultural commodities are progressively making up an important proportion of Egyptian agricultural exports. Third, previous related empirical studies mainly focus on the EU, USA, and Arab markets, while few studies have so far investigated the demand for Egyptian agricultural exports in Russia and other Eastern European countries. This paper therefore attempts to fill this void in the literature by providing empirical evidence based on the analysis of the Russian demand for imported oranges from major suppliers including Egypt. The next section in this paper provides a brief assessment of the competitiveness of Egyptian orange exports on the Russian market. This is followed by a presentation of the econometric model and a description of the data and their sources. The econometric results and the estimated demand elasticities are presented thereafter followed by a discussion of the results and concluding remarks. Assessing the competitiveness of Egyptian orange exports on the Russian market Several studies have shown that Egyptian oranges enjoy greater competitiveness factors relative to their rivals on the Russian market (Soliman and Bassiony 2012; Soliman 2013; Torayeh 2013; Hamza 2015). A recent USDA report by Hamza (2015) points out that Egyptian oranges traditionally enjoy a set of characteristics that include favourable production conditions, low labour costs and well-established supply chains, which collectively enhance their competitiveness on the Russian market. Specifically in terms of production capacity, recent statistics from MALR (2015) point out that oranges Abu Hatab Agricultural and Food Economics (2016) 4:22 Page 3 of 16 comprise almost half of the total area under fruit cultivation in Egypt. Egyptian orange production increased from 1.6 million tons in 1996 to around 3 million tons in 2014, recording an average annual growth rate of 3.6 % (FAOSTAT 2016). It is worth mentioning that Egypt produces a wide range of orange varieties, including Baladi (domestic), Sukkari (the sweet orange), Valencia,blood orange and Navel. However, both Valencia and Navel varieties represent the major export varieties, whereas other varieties are mainly consumed domestically (MALR 2013). With respect to product quality and consumer preferences, Rudolf (2015) shows that despite the fact that other competitors (e.g. Turkey and Greece) have a more favourable geographical position with regard to their proximity to the Russian market, the competitiveness of Egyptian oranges on the Russian market relies primarily on their quality and price. Soliman (2013) assessed the competitiveness of Egyptian fresh oranges in a number of European markets, including Russia, using the global value chain analysis approach (GVCA) based on interviews with buyers and key stakeholders in these markets. His results suggest that Egyptian oranges are perceived to be of higher quality than oranges from Turkey and Morocco. Moreover, unlike many other competing countries and due to favourable climatic conditions, Egyptian Valencia oranges do not normally experience the “re-greening phenomenon”which breaks down the colour dyes that give oranges their normal colour, causing a greenish tint, i.e. the reappearance of chlorophyll in mature oranges (Abu Hatab and Nsanimana 2016). Increased health concerns among consumers in Russian and other importing markets and fears of the use of chemicals to re-colour oranges therefore result in a high demand for Egyptian oranges on the Russian market. With regard to export prices, Hassan et al. (2010) compared the export prices of Egyptian oranges with the export prices of other Mediterranean competitors, namely Spain, Israel, Morocco and Turkey. They concluded that Egyptian export prices of oranges are on average approximately 26 % lower than the export prices of these competitors. Furthermore, using annual time series data covering the period 1981–2010, Soliman (2013) found that the average farm prices of Egyptian oranges have usually been lower than the corresponding average world price and that the export price of Egyptian oranges is lowest compared with the prices of traditional competitors such as Morocco, Syria, Tunisia and Turkey. The lower prices of Egyptian oranges further enhance their competitiveness in cost-conscious and heterogeneous markets such as the Russian market. Another important factor that gives Egyptian oranges a competitive edge on the Russian market comes from their early harvest compared to other major producers in the region, thus allowing Egyptian oranges an export season from midNovember to the end of August (Hamza 2015). To develop a clearer picture of the Russian market for imported oranges, Fig. 2 portrays the distribution of major orange suppliers to Russia during the period 1996–2014. With an average import budget share of about 22.3 %, Morocco tops the list of major orange suppliers to the Russian market. Egypt ranks second, with an average expenditure share of 20.8 %. South Africa comes third (18.5 %) followed by Turkey (15.4 %), while Greece and Argentina lag behind with average budget shares of around 7 and 5 %, respectively. Collectively, these six countries supplied the Russian market on average with nearly 89 % of its total orange imports during the period 1996–2014. The empirical analyses in this paper therefore focused on these orange suppliers. Abu Hatab Agricultural and Food Economics (2016) 4:22 Page 4 of 16 A closer look at Fig. 3, particularly in the years after 2000, reveals that the budget shares of these major orange suppliers to Russia have experienced dramatic changes over time. For instance, Morocco’s budget share declined from about 49 % in 2000 to just 5.4 % in 2014. Albeit from a much lower starting point, Egypt’s budget share has, in contrast, increased substantially, from nearly 3 % in 2001 to around 44 % in 2014. In particular, Egypt’s share largely surpassed that of other major orange suppliers to Russia during the period 2007–2014, averaging roughly 40 %. With respect to the budget Egypt 20.8% Morocco 22.3% South Africa 18.5% Turkey 15.4% Greece 7.0% Argentina 5.0% RoW 11.0% Fig. 2 Russian orange imports by the major country of origin, average 1996–2014. Source: World Bank, WITS (2016) 0 10 20 30 40 50 60 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 % Egypt Morocco South Africa Turkey Greece Argentina RoW Fig. 3 Trends in the budget share of major orange suppliers to the Russian market, 1996–2014. Source: World Bank, WITS (2015) Abu Hatab Agricultural and Food Economics (2016) 4:22 Page 5 of 16 shares of other suppliers, Fig. 3 shows that they have been largely unchanged, with minor increases and decreases over the period 2000–2014. To undertake an empirical assessment of the competitiveness of Egyptian oranges, the economic literature suggests that several approaches based on trade data can be used to measure international competitiveness. Originally, the concept of revealed comparative advantage (RCA) was introduced by Balassa (1965). Balassa’s RCA index states that a given country has a comparative advantage (disadvantage) in a commodity when the commodity’s exports market size in terms of its total exports market size is greater (less) than the commodity’s world exports market size in terms of the world total exports market size, i.e. when the value of the index is greater (less) than unity (Abu Hatab and Romstad, 2014). Due to criticisms of Balassa’s RCA index (e.g. Laursen 2015 and Leromain and Orefice 2014), Vollrath (1991) introduced three alternative indexes to measure a country’s RCA. The first index is the relative trade advantage (RTA ad ), which is calculated as the difference between relative export advantage (or Balassa’s RCA index) (RXA ad ) and relative import advantage (RMA ad ): RTAad ¼RXAad−RMAad ð1Þ where RXAad ¼Xad=Xna ðÞ=Xdr=Xnr ðÞ¼Balassa’s RCA index ð2Þ and RMAad ¼Mad=Mna ðÞ=Mdr=Mnr ðÞð3Þ While X ad represents the exports of commodity dby country a,X na represents the exports of all commodities, excluding commodity d, by country a;X dr is the exports of commodity dby the rest of the world, excluding country a;X nr is the exports of all commodities, excluding commodity d, by all countries in the world excluding country a;M ad represents the imports of commodity dby country a;M na represents the imports of all commodities, excluding commodity d, by country a;M dr is the imports of commodity dby the rest of the world; and M nr is the imports of all commodities, excluding commodity d, by all countries in the world excluding country a. The second index introduced by Vollrath is the natural logarithm of the relative export advantage (lnRXA ad ), while the third measure is the revealed competitiveness RC ad defined as follows: RCad ¼Ln RXAad ðÞ−Ln RMAad ðÞð4Þ Vollrath (1991) points out that positive (negative) values of lnRXA, RTA and RC indicate a revealed competitive advantage (disadvantage). The results of Vollrath’s indices of revealed competitive advantage for Egypt and other major suppliers of oranges to Russia are summarised in Table 1. As an average of the period 1996–2014, the results indicated that Egypt had the highest relative export advantage index (Balassa’sRCA index) value, implying a greater revealed comparative advantage in the export of oranges in comparison to other competitors on the Russian market. However, the results suggested that Egypt’s RXA for oranges has been fluctuating over the years. Morocco’s orange RXA has shown a decreasing trend, declining from 34.9 in 1996 to around 5.8 in 2014, implying a reduction in orange competitiveness. With respect to Abu Hatab Agricultural and Food Economics (2016) 4:22 Page 6 of 16 other suppliers, namely South Africa, Turkey and Greece, the results showed that their orange RXAs have improved steadily, although at slower rates and with less vibrations in comparison to Egypt. The values of orange RXA for Argentina and Turkey showed that they significantly lag behind other orange exporters to Russia in terms of revealed comparative advantage. The results of the natural logarithm of the relative export advantage and the revealed competitiveness indices in Table 1 further confirmed Egypt’s strong export advantage and competitiveness in comparison to other orange suppliers to Russia. In particular, the results of the revealed competitiveness index revealed that Morocco ranks first with an index value of 15.04, followed by Egypt 12.72, South Africa 6.15, Turkey 4.02, Table 1 Vollrath’s indices of revealed competitive advantage for Egypt and other major orange suppliers to Russia Morocco Argentina Egypt Greece Turkey South Africa Relative export advantage (RXA) = Balassa’s RCA index 1996 34.96 0.72 9.35 7.21 1.62 10.35 2000 19.70 0.38 27.66 7.57 2.47 13.82 2004 15.02 0.67 15.16 7.62 2.29 18.76 2008 18.85 0.61 47.90 8.94 2.82 23.63 2012 7.91 0.24 41.12 8.69 5.42 23.37 2014 5.81 0.25 40.87 10.15 4.16 24.48 Average 1996–2014 16.11 0.58 26.24 9.45 3.38 18.73 Natural logarithm of the relative export advantage (lnRXA) 1996 3.55 −0.33 2.24 1.98 0.48 2.34 2000 2.98 −0.98 3.32 2.02 0.90 2.63 2004 2.71 −0.40 2.72 2.03 0.83 2.93 2008 2.94 −0.49 3.87 2.19 1.04 3.16 2012 2.07 −1.45 3.72 2.16 1.69 3.15 2014 1.76 −1.38 3.71 2.32 1.42 3.20 Average 1996–2014 2.66 −0.64 3.11 2.23 1.13 2.89 Relative trade advantage (RTA) 1996 34.96 0.54 9.35 7.08 1.44 10.32 2000 19.70 −0.81 27.66 7.52 2.47 13.77 2004 15.02 0.64 15.16 6.55 2.05 18.74 2008 18.85 0.47 47.90 8.57 2.60 23.52 2012 7.91 0.24 41.11 8.52 5.18 23.32 2014 5.81 0.24 40.87 10.06 4.01 24.40 Average 1996–2014 16.11 0.38 26.24 9.21 3.19 18.68 Revealed competitiveness index (RC) 1996 17.19 1.41 16.72 4.02 2.18 5.94 2000 16.40 −1.15 17.51 4.98 7.60 5.55 2004 9.03 3.15 9.39 1.96 2.25 7.17 2008 11.74 1.50 18.95 3.19 2.54 5.42 2012 16.52 6.42 8.67 3.96 3.09 6.11 2014 16.19 3.21 10.27 4.71 3.37 5.66 Average 1996–2014 15.04 2.76 12.72 3.98 4.02 6.15 Source: Author’s calculations based on data from the World Bank, WITS (2015) Abu Hatab Agricultural and Food Economics (2016) 4:22 Page 7 of 16 Greece 3.98 and lastly Argentina 2.76. As an overall analysis of the results of Vollrath’s indices during the period 1996–2014, it could be concluded that there are competitiveness gains for the majority of orange suppliers to Russia, albeit to varying degrees. Egypt seemed to be the country that has achieved remarkable improvements in the comparative advantage and competitiveness of its orange exports. Alternatively, there was a loss of competitiveness in Morocco and an obvious lack of comparative advantage of Argentinian orange exports in relation to other exporters, while the values of the indices in certain years are below zero. Methods Orange import allocation model One of the most common approaches to estimating demand relationships is based on a direct differential approximation of the demand function, which generates a set of equations that are local first-order approximations of the underlying relationship between prices, quantities and income (Okrent and Alston 2011). Yu et al. (2004) indicate that the Rotterdam model (Barten 1964; Theil, 1965) has become a prominent vehicle for the econometric analysis of patterns of consumer demand and rigorous testing of the utility maximisation theory. Barnett and Seck (2008) point out that the Rotterdam model gained prominence in food demand analysis, thanks to its locally flexible functional form. Moreover, it does not place a priori restrictions on the possible elasticities at a given point and also features enough parameters to approximate elasticities at a given point. The Rotterdam model has therefore been used quite extensively to analyse agrifood demand from different supply sources (e.g. Fonsah and Muhammad 2008; Feleke and Kilmer, 2009; Seale et al., 2013; Clements and Gao, 2015). Surprisingly, the Rotterdam model has to date received less attention in the literature on foreign demand for Egyptian agrifood commodities, while the few studies featuring differentiation in the source of origin have without exception applied the AIDS model (e.g. Elkady and Abd Elmessih 2005; Abu Hatab and Romstad 2014; Abu Hatab and Surry 2015). In this paper, the Rotterdam model was therefore used to analyse the demand relationships between major orange suppliers to the Russian market during the period 1996–2014. In this context and following Seale et al. (1992) and Theil (1980), total orange demand in the estimated model is determined in the first stage, and conditional on total orange expenditures, the demand for oranges from each source is determined in the second stage. Therefore, assuming that Russia imports orange from nsupplying sources and letting (q i ) denote the imported quantity of orange from supplier iand (p i ) denote the import price of orange from supplier i, the Rotterdam model can be specified as follows: wit dlogqit ¼θiDQtþXj¼1 nπijdlogpit þεit ð5Þ where wit ¼wit þwi;t−1  =2  represents the expenditure share of orange imports from supplier (i) in the year (t). In Eq. (5), dlog q it =log(q it /q i,t−1 )anddlog p it = log(p it /p i,t−1 ). DQ t is the Divisia volume index which can be expressed by the following formula: DQt¼Xiwitdlogqit.Therandomdisturbanceterm(ε i )isassumedto be normally distributed with a mean of zero. The parameter (θ i )istheconditional marginal expenditure share on orange imports from supplier iin the total import Abu Hatab Agricultural and Food Economics (2016) 4:22 Page 8 of 16 Abu Hatab A, Romstad E (2014) Competitiveness analysis of Egyptian cotton exports with special focus on the Chinese market. 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