July 8, 2014
Brightening prospects for Australian beef cattle
Amid an expected El Niño induced drought that never came, growing Asian and Middle Eastern meat demand and new free trade agreements, Australian beef cattle is entering a secular upswing.
by Eric J. BROOKS
An eFeedLink Hot Topic
It has been a good news-bad news for Australian beef cattle farmers. On one hand, falling feed costs a rainy late 2012 and early 2013 made last year's beef output rise 9.7%. Pulled up by triple digit increases in import demand from China and the Middle East North Africa (MENA) region, its exports jumped even more, by 13.2%.
Drought hits production, export recovery
On the other hand, although feed costs fell into the first quarter of this year, a drought hit during late 2013 and early 2014 and constrained beef production, particularly in Queensland. Over the short term, beef production actually increased, as farmers accelerated their cattle slaughter in the face of drying up pastureland acres.
Rabobank estimated that from January to April, an extra 387,000 or 12% more cattle were slaughtered than in the first four months of last year. This was mostly due to grass-fed cattle in Australia's northeast. With feed costs falling, southern Australia's greater dependence on feedlots helped insulate that region from the drought's impact.
With 62% of output exported, this beef supply surge entered a world market with historically high export prices. Beyond such short-term impacts however, a drought-induced downturn in production cannot be avoided. The USDA expects Australia's 2014 beef output and exports to fall by 5.0% and 2.1%, to 2.24 and 1.56 million tonnes respectively. Fortunately, this comes after a very strong 2013 performance, where lower exports to America and Japan were more than offset by rapidly growing emerging market demand.
China, ASEAN, MENA offset losses in Japan, USA
On one hand, Meat and Livestock Australia (MLA) reported that with Japan's 2013 beef consumption falling 1%, from 873,324 tonnes to 864,512 tonnes, Australian beef shipments to that country a far sharper 6%, from 307,230 tonnes to 288,796 tonnes. Its share of Japan's beef market also fell, from 36% to 32%, with US imports picking up most of the lost market share. Nevertheless, Japan remained Australian beef's top foreign market, accounting for 26% of exports.
Similarly, 2013 beef exports to America also fell 5%, to 212,703 tonnes swt, from the previous year's 223,898 tonnes swt, as a rise in US cattle slaughtering rates temporarily narrowed the gap between the US's ground beef supply and demand.
Fortunately, with free trade agreement stimulating exports to South Korea, it offset losses in the Japanese market. Beef exports to South Korea increased 15%, from 2012's 125,535 tonnes to 144,365 tonnes last year. What is interesting is also the nature of the increase: Although grain-fed beef is usually more export-oriented, rising health consciousness among South Koreans caused frozen grass fed beef exports to that country to rise 26% from the previous year, while shipments of frozen grain fed beef only increased 3%.
Beyond that, major inroads were made throughout East Asia and the Arab world. In East Asia (China, Hong Kong, Taiwan, Singapore, Malaysia, Indonesia, Philippines, Thailand and Vietnam), 2013 saw exports boom 79%, rising from 164,835 tonnes swt to 295,056 tonnes swt.
With its imports of Australian beef skyrocketing 371% in one year and amounting to 154,833 tonnes swt, China accounted for 52.5% of Australia's East Asian beef exports and 13.8% of total exports. Brisket was the most popular cut
MENA was another major growth market, with exports to this region up 89% and totaling 61793 tonnes swt in 2013. Within MENA, Saudi Arabia was Australia's largest customer, importing 31,126 tonnes swt in 2013, followed by Jordan (8,113 tonnes swt) and the United Arab Emirates (7,987 tonnes swt).
Going forward, although the drought-induced culling of cattle will impact the industry's third and fourth quarter performance, this year's beef trade got off to a strong start. Powered by a 1,050% spike in chuck roll cuts volumes (which are used to make ground beef), January to May exports to the United States are up 46% from the first five months of 2013.
With PEDv creating a red meat shortfall and US beef demand recovering, its low cattle inventories leave it less to export to Canada and Mexico. Australia took advantage of the resulting supply gap, with its January to May exports to Canada and Mexico up 132% and 49% respectively. In fact, the surge in imports to the US alone has more than made up for its disappointing trade performance in Japan, where it lost market share to US beef.
On the other side of the Pacific, high early year slaughter rates in Australia coincided with low South Korean slaughter rates, such that beef exports to that country increased by 25% in the January to April period.
Similarly, shipments to fast growing East Asia rose 33% in the January to April period from a year earlier, though in contradiction of earlier trends. This time, strong economic growth in Indonesia, Philippines and Vietnam caused Australian beef exports to these countries to rise by 97%, 36% and 35% respectively. With China's market for red meat bloated with a surplus of pork, exports to that country rose a still healthy 26% in the first four months of this year.
Although China's demand for beef cannot continue growing by hundreds of percent annually as was the case for several years, its demand for foreign beef will increase a USDA estimated 39% this year. Due to its price, proximity and banning of Indian and Brazilian beef, Australia's 2014 beef exports to China are expected to rise by another 40% to 50%, to well over 200,000 tonnes.
Weather, free trade agreements point to early recovery
These trends are diversifying Australian beef exports from their dependence on the US and Japanese markets to a more diverse base of destinations. New trading frontiers for Australian beef now include China, East Asia, MENA and non-US parts of the NAFTA trade region.
Furthermore, although MLA expects its export momentum to South Korea is expected to taper off in the latter part of this year, its market share losses have bottomed out. Similarly, although it is expected to suffer further market share losses this year, its trade position in Japan should also turn around soon. In fact, even the second half
In April, a free trade agreement was signed with South Korea. Under its terms, South Korea's 40% tariff on Australian beef is being gradually reduced to 0%. This will help bridge the cost gap between Australian, US and EU beef in South Korea's market, as the latter two had already signed tariff-reducing free trade agreements.
Then, this July saw Australia sign a similar trade liberalization agreement with Japan. Under the Japan Australia Economic Partnership Agreement (JAEPA) signed in early July, tariffs on frozen Australian beef entering Japan will gradually be cut from today's 38.5% to 30.5% when the agreement commences in January 2015. From 2015 to 2033, they will thereafter be gradually be lowered to 19.5%. For chilled Australian beef, Japan will cut the import tariff from 38.5% to 32.5% in the agreement's first year, then gradually lower it further, to 23.5% by 2033. This helps undo the competitive advantage that US beef gained in Japan's market when it earlier signed a free trade agreement with the latter several years earlier.
Best of all, Australia may be able to take advantage of these positive developments faster than it anticipated. The projected decline in beef production, exports and flat cattle numbers are predicated on more than just the early 2014 drought. Australian meteorologists had widely expected an even more severe El Niño-induced drought to strike sometime around mid-year. Instead, with equatorial East Pacific Ocean temperatures falling at the time of publication, regular rainfall is continuing.
This implies that Queensland's pastureland will continue to recover and feed costs are also clearly on a downtrend. Hence, rather than falling, Australian beef production may stay flat, allowing for this year's exports to exceed last year's total on a slight inventory rundown.
With the world market facing a shortage of US beef and pork, Australia's own beef production looking to hold up better than expected, Japanese and South Korean tariffs are scheduled to start falling next year. Hence, do not be surprised if in one year's time, Australia's beef production and exports are rising faster than was initially anticipated.
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