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COMMENTARY & ANALYSIS
 
July 19, 2019

World beef's slow growth and rapid transformation
 
Many leading beef exporters are being held back by politics or bad weather, leaving Latin American nations to increasingly dominate this meat line.
 
by Eric J. Brooks
 
An eFeedLink Hot Topic
 
 
World beef demand has never been higher but neither man nor nature is allowing suppliers to take full advantage of the situation. Due to the political and meteorlogical misfortunes described below, America, Argentina, Australia and India all have 500,000 tonnes less beef available for export than would otherwise be the case. That's 2 million tonnes fewer beef exports in a world beef market of less than 11 million tonnes
 
After rising by 5.7% in 2017 and 5.9% in 2018, not even China's African Swine Fever epidemic can make world beef exports rise by much more than the USDA forecasted 2.7%, to a record 10.835 million tonnes.
 
But even this year's 2.7% increase is a welcome improvement over beef's long-run performance. From 2014 through the end of 2019 inclusive, beef exports increased at a rather anemic 1.5% annual rate.
 
While strong world beef consumption is growing strongly, nature and politics are determining how much beef can be supplied and who can supply it. While exporters will only supply 8.4% more beef in 2019 than in 2014, supplier rankings are changing far more quickly.
 
Within that 8.4% change, 682,000 tonnes of lost Indian (-382,000 tonnes, -18%), Australian (-276,000 tonnes, -16%) and Paraguayan beef (-24,000 tonnes, -6%) exports were offset by a cumulative  1.241 million tonne rise in shipments from Argentina (383,000 tonnes, +194%), America (+309,000,+27%), Brazil (301,000 tonnes,+16%), Canada (147,000 tonnes,+39%), Uruguay (90,000 tonnes,+26%) and New Zealand (+11,000 tonnes, +2%).
 
If Mexico and a handful of European nations hadn't boosted their collective exports by 278,000 tonnes over these five years, beef would be much more expensive than it currently is.
 
Two unvarying constants dominated all the above described supply-side changes: Politics and nature are transferring world beef market dominance from India and Australia to South America.
 
This is true despite an impressive revival of the once stagnant US beef cattle sector. In America's case, it entered the 2010s with a pastureland drought and closed the decade caught in a nasty trade war.
 
Following three flush years of 10% to 12% increases in export volumes, good pastureland weather and a large yet rapidly growing domestic market, the topping out of US beef's cattle rebuilding cycle is limiting this year's export increase to a still healthy 3.7%, totaling a record 1.476 million tonnes.
 
With cattle inventory growth leveling off, US beef output growth of 6.4% in 2016 and 3.8% in 2017 fell to 2.6% last year and only 1.5% this year. With lower cattle prices making profit margins thin, US beef's diminishing supply increase comes at the tail end of a five year inventory rebuilding cycle.
 
On one hand, post-2016 30% cattle price deflation means that in both 2018 and 2019, cattle inventories are poised to expand by less than 1% annually, compared to the 3% annual growth seen from 2015 through 2017. Over the short-term, this will slow down export growth from its near 10% pace of recent years to incremental increases.
 
On the other hand, provided the post-2015 recovery in pastureland moisture continues, American beef exporters only need cattle prices to recover to start a new inventory building cycle –but for this to happen the US government to do them a few favors.
 
Two years ago China finally allowed the importing of US beef. It started rapidly taking market share away from once-dominant Australia but the Trump administration's trade war got in the way. Last year, China was on its way to becoming US beef's fastest-growing export market when it was slapped with a 25% import duty –and it essentially blocks US beef world's largest fastest growing market for beef imports.
 
Similarly, the Trans Pacific Partnership (TPP) was going to reduce Japanese tariffs on US beef from the current 38.5% to 9.0%. Then America's government canceled the TPP just in time for Japan to sign a free trade agreement with Australia. This is unfortunate, as Japan is the biggest buyer of US beef by volume and even more so on a dollar value basis.
 
As a result, Japan recently cut import duties on Australian chilled beef to 29.3% and frozen beef to 26.9% respectively. By the early 2020s, Japan will tax Australian beef at 19.5%, half the current 38.5% tariff on US beef.
 
This is unfortunate, as the 331,000 tonnes of US beef shipped to Japan accounted for 23% of export volumes and Japanese buyers pay high prices and purchase the priciest cuts. Sadly, US beef impressively recovered from years of severe drought earlier this decade only to become a victim of trade war politics.
 
Compared to US beef suppliers, Indian exporters worry less about the weather and more about religious fundamentalism. Constrained by laws that ban cattle slaughter and make eating or selling beef a crime in many parts most of the country, Indian exporters are victims of Prime Minister Modi's religious fundamentalism, which rocked the industry after his 2014 election. Inventories have stayed in the 300 to 310 million range, varying by less than 3% for nearly twenty years amid flat cattle productivity.

Last year saw a 1.2% 50,000-tonne output increase be more than offset by 10.3% 257,000-tonne jump in beef consumption. Instead of staying steady at a USDA forecasted 1.85 million tonnes, 2018 exports fell 16.3% to 1.556 million tonnes.
 
Constrained by stagnant inventories, growing domestic demand, maxed out slaughter rates and growing restrictions on cattle slaughter, exports remain far below 2014's record 2.08 million tonne level. While it remains an important beef supplier to low income Southeast Asian and Middle Eastern nations, Indian beef's eroding world market influenced peaked in 2014 and is restricted to a niche demographic segment.
While India is constrained by purely by politics, Australian beef, by comparison, is a prisoner of extreme weather conditions spanning more than a decade –and it is getting more of the same this year. The USDA reports that "Australian cattle numbers are expected to decline to 24.6 million head in 2019, the lowest level in two decades, primarily because of the continuing widespread drought in the two major cattle producing states and stock losses from severe flooding in northern Australia."
 
Whereas America's cattle inventory is at its highest level since 2007, unrelenting drought interrupted by regional flooding made Australia's cattle herd fall 12.3% over the last twelve years.
 
Whereas the US drought broke after a few years, Australia's dry spell has continued for nearly 15 years. Thanks to unending bad weather, hopes that Australia's cattle herd had entered a rebuilding stage similar to that seen in America a few years ago have been dashed. The resulting serious deterioration of pastureland quality induced a long-term increase in feed costs, making it uneconomical for farmers to expand their herds.
 
As a result, not only were Q1 slaughter rates 14% than last year's already high number but female cattle slaughter rates jumped 33%. With 58% of Q1 2019 cattle culling accounted for by females, it will take a long time to rebuild cattle herds even if weather and market conditions turn favorable.
 
Consequently, whereas the US continues to break its old beef export records, Australia will supply the world market with 14.8% less than the 1.85 million tonnes it did five years ago.

2018 Australian beef exports came in at 1.662 million tonnes. This was slightly higher than the 1.525 million initially forecasted by the USDA –but only because drought forced farmers to slaughter a higher number of cattle than they had intended. With cattle numbers diminished, exports will slump back 5.2% to 1.575 million tonnes.
 
The good news is that unlike America or India, Australian beef exporters do have politics on their side: New trade agreements with China and Japan are making it easier for Australian beef to be exported into the top two world markets.
 
The bad news is no one knows when Australia's fifteen-year streak of bad weather will stop devastating its grass dependent cattle. It is possible that by the early 2020s, American cattle exports could overtake those of Australia and India and be second only to Brazil.
 
While various combinations of bad politics and bad weather are impeding Australian, American and Indian beef cattle farms, Latin America's beef production is undergoing a renaissance.
 
Nowhere have beef cattle's fortunes turned upwards more strongly than in Argentina, a nation that dominated world beef exports for much of the 20th century. In 2006, beef export quotas, export taxes and heavy government regulations were imposed. After 2010 these restrictions coincided with several years of La Nina-induced droughts that and record high feed costs. That made Argentine beef exports crash from 754,000 tonnes in 2005 to just 197,000 tonnes in 2014.
 
When a pro-free market government was elected in late 2015, it immediately abolished export quotas and removed the heavy export taxes on Argentine beef. Argentine ranchers responded immediately: By the end of this year, exports will have almost tripled, to 580,000 tonnes.
 
But while Argentina's weather has improved, politics continues to cast a long shadow: No one knows if Maurizio Macri's free-market government will be re-elected in late October or if it will be defeated by a government that re-imposes heavy taxes and strict quotas on beef exports.
 
Such uncertainty is not the case in Argentina's next door neighbor, Brazil: Blessed by the most abundant supply of feed resources on earth and no weather problems, politics is finally on the side of Brazilian beef.
 
Partly due to unexpectedly strong Chinese demand, partly due to a trade war windfall, Brazilian beef exports are expanding far ahead of expectations. Two years ago, China began approving Brazilian beef processing plants for export in a big way. As a result, 2017's modest USDA projected 3.4% rise in exports gave way to a 9.3% 158,000 tonne increase totaling 1.856 million tonnes.
 
2018 saw the China-US trade war put US beef at a 25% cost disadvantage in China's market, making life easier for Brazilian exporters. As a result, instead of topping out near 1.9 million tonnes, Brazil's 2018 beef shipments jumped a whopping 227,000 tonnes, to 2.083 million tonnes.
 
With its more elastic beef supply and lower production costs, Brazil has taken over from Australia as the top beef supplier to both China and the world. The US$3.05 billion of Brazilian beef exported to China and Hong Kong (which smuggles much of its imported beef into China) exceeds Australia's US$0.95 billion by a factor of three.
 
Not all is well with Brazilian beef and China's demand came at a lucky time: The mid-2010s saw Brazilian beef lose market share to Indian beef. This was followed by a beef safety scandal that caused its beef to be temporarily banned from Russia and the EU. That loss of European beef markets was coinciding with low beef consumption in recession-stricken Brazil when China's demand came to the industry's rescue.
 
Going forward, things look brighter than ever for Brazilian beef. Alongside booming Chinese demand, Russia lifted its ban on Brazilian beef in late 2018. Earlier this year, the EU signed a free trade pact with Latin America's Mercosur free trading area. Argentina will provide competition but Brazil will take the lion's share of a new 99,000 tonne EU import quota for Mercosur beef.
 
All this implies that Brazil will not only break its 2007 beef export record but likely exceed the 2.2 million tonnes of exports the USDA has projected for this nation.
 
Going into the early 2020s, the present combination of weather issues and political problems strongly imply that world beef supply dominance is rapidly shifting away from India and Australia and migrating to Americas, with South America playing dominating the trade more than North America.
 
Even within the Americas, there exists much political uncertainty regarding US-China trade negotiations and whether Argentina's pro-free market government will get re-elected. All this is compounded with uncertainty about when the next La Nina drought will hit Argentina or if dry conditions will return to America's southern plains. For now, abundant Western Hemisphere feed resources give American, Argentine and Brazilian beef suppliers the upper hand, with the greatest advantage going to the latter two.
 


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