April 10, 2014

 

 

Australia's cattle prices will reach record high driven by concessions on Japanese beef import tariffs agreed in a free trade agreement between Tokyo and Canberra.

 

Australia & New Zealand Bank forecast that the eastern young cattle indicator, Australia's benchmark price index, would average AUD0.460 a kilogramme in the first half of next year, "a 30% increase from current undervalued levels".

 

It also implies the current record of AUD0.42675 a kilogramme, set in December 2011, being easily surpassed.

 

The price rise will be fuelled by the impact of the free trade deal in reversing the decline in Australia's take of Japan's large beef import market, of which the US has gained a bigger proportion since the lifting of curbs imposed in 2003 following the discovery of mad cow disease, or bovine spongiform encephalopathy (BSE).

 

Indeed, the successive lifting of curbs on US beef has allowed the US, as of 2013, to rebuild a 35% share of purchases by Japan, the world's second-ranked net importer of the protein.

 

Japan has been by far the weakest of Australia's major beef export markets, with volumes falling in the first two months of 2014, contrasting with on-year growth of 42% to China, 31% to South Korea and 21% to Indonesia.

 

"Competition has intensified with the US in the last 12 months," ANZ analyst Paul Deane said.

 

However, the free trade agreement "will provide a key price advantage for Australian beef", in cutting the Japanese import tariff on fresh beef to 10 percentage points below that on US supplies as of the end of the second year of the deal.

 

The tariff on Australian frozen beef will be seven points below that on imports from the US.

 

Assuming the agreement is implemented next year, "the preferential tariff rates should provide a boost to Australian beef prices in 2015", exacerbating potential support to values from an elevated global market and from the impact of a likely return to wetter Australian weather.

 

In improving pasture condition, rains would encourage ranchers to restock, reversing the slaughter spree encouraged by the recent dry spell.

 

Australian cattle prices have in fact proved a notable underperformer since 2006, rising by less than 1% a year, and falling in real terms, compared with annual rises of 4% in sugar values, 6% in wool, and 9% in wheat and lamb prices.

 

The comments come as the US, with Australia, Japan and nine other countries, is negotiating a more wide-ranging trade deal, the Trans-Pacific Partnership, set to cover areas including agriculture, but over which Washington and Tokyo negotiators appear to have reached deadlock.

 

They also contrast with a more muted response from some parts of Australia's beef sector, including the Cattle Council of Australia, which said it was "disappointed" that "substantial tariffs" would still remain in place.

 

The deal will, for Australian supplies, cut Japan's standard beef import tariff from 38.5% to 30.5% for frozen beef and 32.5% for chilled beef in the first year, with a succession of smaller annual cuts then taking the duties to a floor of 19.5% and 23.5% respectively.

 

Some Australian dairy, seafood and wine products are also included in the deal, which for Japan will see a 5% tariff on Australian imports of cars and manufactured goods removed.

 

Australia's National Farmers Federation warned that the deal "does not improve – or marginally improves - market access and terms of trade for a number of sectors such as dairy, sugar, grains, pork and rice".