Despite a strong currency, excessively high slaughter rates and competition from US beef in East Asia from, things are looking up for Australia's beef cattle industry and its exports. Under competitive pressur from Indian beef at the low end and trade liberalized US beef at the top of the market, 2012 was a tough year, with exports falling a nominal 0.2%.

By comparison, this year has its share of problems but is so far, is turning out better. Despite drought accelerated slaughter, with more cattle being raised in wetter, more southerly or coastal regions, output will rise by 2.5% to 3.0%, well ahead of the domestic market's growth rate.

 

But with two-thirds of Australia's beef output exported, trade matters more to this country than to any other major exporter except Canada, which exports a similar proportion of its own output. Fortunately, instead of falling 7% as initially projected, the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) quarterly report now projects Australia's 2013-14 beef export volumes to rise to a healthy 5.4%.

 

 

 

In the overall performance, large export volume increases to China, Russia and the United States more than offset lower sales in East Asia, Indonesia and other parts of the world. Perhaps the most ironic portion of this mixed performance is the United States: with trade restrictions on US beef being removed in Japan, an ABARES-estimated 7% drop in shipments to Japan is being is being partly offset by higher beef exports to the United States itself. ABARES expects Australian beef exports to the US to rise by 10% while America's USDA forecasts a 14% increase.

 

But with respect to market losses in Japan and gains in America, export volumes tell one story, export values another. The market share being lost in Japan is that for high end cuts such as steaks. On the other hand, with US beef consumption oddly skewed towards low value cuts, America's drought and high feed prices has seriously devastated American cattle numbers, forcing it to import more ground beef than ever from Australia. This in turn was aided by the Australian dollar's near 10% fall against the US greenback. But in actual dollar terms, the value of additional ground beef exported to America cannot offset the lower sales of high-end steak cuts to markets like Japan.

 

Fortunately for Australia, Russia's sudden, second quarter ban on US beef exports allowed steaks that would once be sold to the Japanese or South Koreans to be diverted to the Russian market. This enabled Australian beef exporters to maintain their sales volumes of high-end cuts while boosting ground beef exports to America.

 

Trade restrictions also worked in Australia's favour in China, after Beijing severely restricted imports of US and Brazilian beef after both countries reported cases of mad cow disease in August of last year. With China using Australia to fill the resulting  supply gap, from the September 2012 to May 2013, Australia's where beef export shipments to that country jumped 1,700% above their five-year average –but are expected to zoom up to an even higher level still.

 

According to ABARES, "Since September 2012 monthly exports to China have averaged 9,000 tonnes, compared with average monthly exports of around 500 tonnes over the five years to August 2012," adding that, "In 2013-14 exports to China are forecast to increase to around 120,000 tonnes."

 

The news from Southeast Asia is also mixed, but decidedly positive. There, last year saw Australia restrict live cattle exports to Indonesia after NGOs filmed cruel practices at that country's slaughterhouses. Indonesia retaliated by putting quotas on exports of Australian beef, causing shipments to that country to fall by 24% from a year earlier. Fortunately, with exports to Singapore, Philippines and Malaysia more than offsetting the decline in Indonesian shipments, export volumes to Southeast Asia will total 95,000 tonnes, up 6% from 89,623 tonnes a year earlier.

 

 

 

With May's monthly exports topping 100,000 tonnes for the first time, the enhanced trade performance could not come at a better time. Despite its population increasing by nearly 1.5% annually, Australians have greatly substituted pork, poultry and fish in place of beef, such that domestic consumption is lower today than in the late 2000s.

 

At the same time, northern Australia's drought, especially in and around Queensland state, has accelerated the pace of this year's cattle slaughter significantly above expectations. On one hand, that flooded Australia's domestic market. By mid May, that depressed prices to their lowest level since 2009. As if northern Australia's drought was not bad enough, this  put many producers into a net loss position, as they coincided with high feed costs.

 

For example, in a late June interview with the Australian Broadcasting Corporation, farmer Keith Danz stated, "To be getting  [Australian currency] $1.60/kg to $1.80/kg of cattle is unrealistic. We were getting $2.20/kg to $2.30/kg ten or 12 years ago [when feed costs were at half of today's level]."

 

In that respect, early 2013's export was a mixed but timely affair. On one hand, it encountered a world beef market where Brazil and America where also slaughtering unusually high number of cattle, causing global beef prices to sag by more than 5% from early 2012 levels.

 

On the other hand, much of the Brazil's unusually high cattle slaughter was counteracted by America's domestic beef shortage, which Australia has taken full advantage of. Moreover, even though export's dollar value did not perform as well as it did by volume, by removing all that excess beef from Australia, it provided a supply safety valve.

 

And this recovery of returns and fundamentals is already underway. With exports booming and excessive slaughter leaving little for later in the year, the balance between supply, demand and prices is tightening up. According to ABARES, by mid July, prices had recovered by more than 18% from their mid May lows.

 

Although that leaves live hog costs some 13% below their level at this time last year, the market path is now set for prices to rise and inventories to keep declining before supplies recover some time in 2014. With feed prices on track to be much lower in the second half of this year than in the first quarter of 2013, the motivation to grow and export cattle is returning.

 

With America's cattle herd sinking to lower levels than expected, India's unexpectedly smaller buffalo herd constraining its capacity to export, Australian supplies face less competition. With the US dollar in a Fed-induced monetary tightening uptrend against Australia's currency, the stage if being set for a strong Australian beef export performance from the second half of 2013 and well into next year.

 

And a consistent one or two good years is badly needed. Although output and exports are on track to set new records, output is not much higher than it has been over the past decade. Despite being a top three beef exporter, the previous decade's drought, the late 2000s, resurgence of US beef exports and latter rise of Indian beef has left Australia's export-oriented cattle sector in a flat state.

 

This is not entirely Australia's doing, as the world market for beef is growing slower than any other protein line. But with domestic supplies, foreign cattle shortfalls and currency trends all pointing in Australia's favour, the next 12 months may see it take back market share that it previously lost to Brazil, America and India.