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COMMENTARY & ANALYSIS

August 24, 2018

A revived and restructuring world beef market
 
Economically mature nations give way to Chinese, Southeast Asian and Middle Eastern buyers. US, southern hemisphere suppliers take over from India.

By Eric J. Brooks
 
An eFeedLink Hot Topic
 

Developing country consumers have made the world's priciest red meat fashionable again. Low feed costs, rising Asian beef demand are coinciding with a strong expansion in US and southern hemisphere cattle numbers. Hence, the USDA has already been forced to revise its earlier 2.0% projected increase in world beef production to 2.4%, from 61.557 million tonnes in 2017 to 63.025 million tonnes this year.
 
This is much faster than the 0.8% average growth rate in beef production in the thirty years since 1988. While we don't expect output to keep rising at this rate, there are good reasons to believe that beef's long-term annual output growth has doubled into the 1.5% to 2.0% range.
 
With Asian beef demand increasing faster than the domestic consumption of supplying countries, exports are rising 5.1% from 2017's 9.696 million tonnes to a USDA estimated 10.474 million tonnes this year.
 
After being held back by US and Australian droughts earlier in the decade, this will finally break the 9.995 million tonne export record set in 2014. It is also significantly faster than 2018's projected growth in either chicken (2.2%) or pork (0.7%) exports.
 
Indeed, beef's new, export-driven growth metrics have in fact already changed one important long-term trend. From 1988 through 2018 inclusive, annual beef export growth (1.4%) has been far lower than that of pork (2.1%) or chicken (6.3%).
 
On the other hand, in the ten years since 2008 world beef exports have increased by 3.3% annually, which is slightly faster than how much shipments of chicken (3.0%) or pork (3.1%) have increased. Moreover, trade wars between the US, China or other countries may actually reinforce the trend for beef exports to grow quicker than that of other meats.

-Because pork and poultry have lower feed conversion ratios, domestic production of swine and poultry can be substituted more easily in place of imports than cattle, whose inferior feed conversion is exacerbated by extravagant land requirements. This is especially true in resource deficient East Asia and the Middle East, where world beef demand is growing the most quickly.
 
Improving export metrics reflect beef's increasingly strong demand fundamentals, which are now firmly rooted in highly populated, fast-growing but land-poor countries. Economically mature nations which drove late 20th century consumption are being replaced by surging demand from emerging market buyers.
 
Japan, in 2000 imported 1.045 million tonnes of beef and accounted for 18% of world imports. It now only buys 832,000 tonnes and amounts to 10% of world market purchases.
 
Similarly, while the US is maintaining its world market position as a top beef exporter, its influence as a beef importer has been waning. America went from importing 215,000 tonnes more beef than it exported in 2000 to exporting 179,000 more tonnes than it will import this year -while supplying the world market with a third-ranked 1.372 million tonnes.
 
Whereas beef consumption was once driven by wealthy western nations, the past decade has seen China, Southeast Asia and the Middle East North Africa (MENA) dominate world markets.
 
-Interestingly, the accompanying graphs show that beef consumption in emerging regions such as China, Southeast Asia and the Middle East grew more quickly in the 1990s than in our present time -but beef import growth was slower then. The difference is that after the late 2000s, arable land availability started to constrain the expansion of developing country cattle herds.
 
This was particularly true in China, which relies on aging dairy cattle for most of its beef production. After 2008, decelerating milk output expansion and rising dairy cattle productivity slowed down China's dairy herd growth and with it, the country's beef production.

Too land poor to raise cattle exclusively for their meat, with post 2008 Chinese beef consumption rising 3.4% annually and beef production  by only 0.7%, imports skyrocketed: Whereas beef imports to China and Hong Kong grew at a USDA estimated 1.7% annually from 1988 to 2008, over the past ten years they have risen at a torrid 30.5% yearly rate.
 
China wasn't alone: Red meat consumption also raced ahead of cattle inventories in nations ranging from South Korea to Thailand, Egypt to Indonesia. Beef imports grew at 3% to 4% annual rates in MENA, ASEAN and East Asian nations while expanding at 30%+ rates in China's 1.35 billion market.
 
Despite falling beef consumption in Russia or Central America, their populations were a fraction of China, Southeast Asia or MENA region countries. Thus, from 469,000 tonnes in 1998 and 819,000 tonnes in 2008, MENA nations such as Saudi Arabia, UAE, Kuwait and Egypt will import a collective 1.15 million tonnes of beef this year -and throughout this time, Japanese, US and EU beef import volumes have either stagnated or declined.
 
A similar story is unfolding in both Southeast Asia and South Korea. ASEAN beef imports more than doubled from 240,000 tonnes in 2000 to an estimated 505,000 tonnes this year, while those of South Korea went from 303,000 to 555,000 tonnes over these same 18 years.
 
-But while the collective 1.7 million tonnes of world beef demand created by South Korea, ASEAN and MENA is impressive, one country's appetite for beef is growing far more quickly and in half the time. China's post-2008 beef demand growth is decelerating but continues to exceed expectations. Total 2017 beef consumption was a USDA estimated 8.22 million tonnes. That was an 8.8% increase over 2016's 7.759 million tonnes and more than the 8.0 million tonnes initially projected.
 
For 2018, the USDA's initial 8.14 million tonnes of 2018 Chinese consumption projected last October was first revised to 8.4 million tonnes. Then in April, it was revised upwards again to 8.53 million tonnes. That's 3.8% more than in 2017. With beef output only rising by 0.9% (to 7.325 million tonnes) projected 2018 beef imports have been revised upwards from the previous 1.05 million tonnes to 1.20 million. This is 23% more than the 0.974 million tonnes imported in 2017.
 
Going forward, even if China's beef import volumes expand by a third of their 24% post 2014 annual rate, by no later than 2020, it will have overtaken the United States as the world's biggest beef importer.
 
Due to cattle's exceptionally long grow out time, we can several years of increases are clearly in the pipeline. Closing world cattle inventories increased by 6.86 million head, 6.50 and a projected 6.49 million head in 2016, 2017 and 2018 respectively.  It is the first time world cattle inventories have increased by 5 million head or more for three consecutive years in many decades.
 
From a supply-side perspective, higher carcass yields and herd growth in major exporters like Australia (3.9%) and Brazil (3.0%) is offsetting near flat inventories in top exporter India. With a strong four-year upturn in US cattle numbers starting to level out, 2018 beef output growth is concentrated in exporting countries such as Australia (+6.1%), America (+5.6%), Brazil (+3.7%) and Argentina (+3.0%), which supply over half of the world market.

Having caused the stagnation in production and exports earlier in the decade, America and Australia are now leading the beef sector's revival. US cattle recovered from a drought-induced sixty year low of 89.1 million head in 2015 head to 94.5 million by the end of 2018. While overall US cattle herds recovered by 6.1% from their 2015 bottom to their opening 2019 level, beef cattle have risen a faster 9.1%. From 29.085 million head in 2015, they will have increased to 10% to an estimated 32 million head by the start of 2019.
 
Whereas US cattle herds started recovering in 2015, Australian cattle numbers kept falling, from 29.2 million head at the start of 2013 to 24.97 at the start of 2017.
 
Due to coinciding higher cattle prices, falling feed costs and improved pastureland conditions, Australia is enjoying a sharp rebound in cattle numbers. They rose to 25.5 million at the start of this year and are expected to enter 2019 at 26.5 million head, a 6.1% increase over two years after bottoming out at 24.97 million head in 2016.
 
With US beef output increases leveling out, Australia still has one to two years of large production increases ahead of it. Going forward, with Indian beef production constrained by a flat herd size and legislative barriers to cattle slaughter, the end of this decade will see most beef production and export increases from the market's traditional main three suppliers; the United States, Australia and Brazil.
 
Over the longer term, there is no doubt who will account for a majority of the world beef supply increase after 2020: While their carcass yield is only over half that of their American or Australian counterparts, Brazil has been increasing its total cattle herd by approximately six million every year, or by more than the United States did in four years.
 
After slack domestic demand and poor returns kept them stagnant between 52 and 53 million head for several years, Brazilian beef cattle numbers increased by an average of 800,000 head since 2015 and will exceed 58.2 million by the end of this year. That is a 5.5 million head or 10.4% increase from 52.9 million head six years earlier.
 
Hence, while Indian supply growth is giving way to that of America and Australia, the early 2020s will see Brazil account for a lion's share of world beef supply increases. In short, Brazil has the world's fastest-growing cattle inventories while those of leading exporter India are by Law forced to remain stagnant.
 
Consequently, last year saw Brazil (1.856 million tonnes) overtake India (1.849 million tonnes) as the leading exporter. While Brazilian beef shipments rise to 2.025 million tonnes this year, once rapid Indian export growth is leveling out at around 1.9 million tonnes in 2018.
 
Going forward, aside from lacking proper feed inputs and cattle genetics, India is near the end of the what it can do with a flat buffalo herd. Constrained by increasingly strict regional bans on cattle slaughtering, it only derives beef from male buffalos or dairy cattle at the end of their productive life.
 
Rising milk making productivity has kept its cattle herd constant near 300 million head for years. With male buffalo and bull slaughter rates near their peak and carcass yields flat, India's once strong beef production growth is tailing off.
 
In the future, only nations with cheap, ample feed resources will be able to keep up with rising Chinese, Southeast Asian and MENA meat demand. Hence, the world beef trade will continue to grow strongly, with shipments from America, Brazil, Australia and possibly Argentina supplying the world's most expensive red meat to hungry Asian and Middle Eastern customers.
 


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