October 29, 2013

 

Indonesia releases additional feeder cattle permits

 

 

Indonesia has started issuing import permits for an additional 100,000 feeder and slaughter cattle, in preparation for two months of intense competition for available supplies in northern Australia.

 

The release of the new permits began on October 25 and will be valid until the end of 2013. It follows almost two months of negotiations between Australia and Indonesia over rules which will underpin live cattle imports in future. The mix of feeder cattle and slaughter cattle in the new permit allocation has not been announced yet.

 

Trade sources said that it seems likely that there will be more permits for feeder cattle than slaughter cattle in the new allocation. However, the final ratio is yet to be agreed upon by Indonesia's ministries of trade and agriculture.

 

In order to support the lowering of beef prices for consumers, the Ministry of Trade is trying to ensure that there will be enough slaughter cattle included in the new import allocations, and getting more beef into wet markets and supermarkets as soon as possible.

 

Australia began the year with a quota to supply 267,000 feeder cattle to Indonesia in 2013. As a shortage of beef forced consumer prices to costly levels around Ramadan, Indonesia released new permit allocations for 25,000 slaughter cattle in July and for a further 75,000 slaughter cattle in early October.

 

The short supply of slaughter cattle in northern Australia means that most of those orders are yet to be filled. It is also unclear whether the recent 75,000 head allocation issued earlier this month will form part of the 100,000 now being issued under Indonesia's new price reference mechanism or whether the new permits will be over and above what has already been announced.

 

For most of this year, a lack of Indonesian orders has led to an oversupply situation which saw prices for export feeder steers drop from around US$2/kg live-weight at the start of the year to around US$1.50 by mid-year.

 

Indonesia's substantial new orders come as northern Australian cattle numbers are in tight supply following successive years of herd rundowns and destocking due to Indonesia's recent import quota cutbacks and dry conditions.

 

Export feeder steer prices from Darwin have been quoted at around US$1.70/kg in recent weeks. However, it remains to be seen if the price is enough to convince producers to sell available stock over the next two months or if higher prices will be required to attract supply.

 

Prices for export slaughter cattle (380kg+) rose to US$1.80/kg earlier this month, reflecting a lack of suitable stock and strengthening demand, in the form of the Indonesia's 75,000 head order and a simultaneous order for slaughter cattle from Vietnam. 

 

One benefit of the release of new feeder cattle permits is that it will allow exporters to continue filling shipments to Indonesia with a mix of both slaughter and feeder cattle. The fourth quarter permits for 46,000 feeder cattle are almost filled. Without new feeder cattle permits being issued, it would have been difficult for exporters to find sufficient slaughter cattle to justify shipment.

 

The new rules also mean importers face a challenge in trying to source as many cattle as possible to refill feedlots which have been running at just 25% of capacity for more than a year due to import quota restrictions.

 

A new 80% trade realisation rule, imposed by the Department of Trade, requires importers to deliver 80% of the volume of import permits they are allocated to the consumer market as beef or ready-to-slaughter cattle within a 12 month period. The rule is designed to prevent importers from seeking to withhold beef or finished cattle from the market, in order to push prices to a higher level which they can sell at. Importers who fail to meet the 80% rule can be penalised by having their share of future import permits reduced.

 

Importers have encountered difficulties in submitting applications for high permit numbers in recent weeks, but the lack of available supply could make it harder to source the numbers required to supply 80% of their allocated permits as finished cattle or beef to the market under the realisation rule.

 

Indonesia has also sought to improve supply by removing permit restrictions for beef imported for the restaurant trade. Technically, this beef is not bound for wet markets or supermarkets. However, it is not known how this rule will be implemented, with significant increases of imported boxed beef expected to enter the market in the coming weeks.

 

The rising price of live cattle, due to a supply shortage in northern Australia and Indonesia's intention to reduce the price of beef in its wet markets, are contradictory forces influencing prices in the current market.

 

Indonesia has recently abandoned the previous annual quota system and will now allocate quarterly import permits based on estimates of how many additional cattle or tonnes of boxed beef will be needed to keep wet market prices at affordable levels for consumers.

 

Beef is currently selling above US$9/kg and Jakarta has set a goal of reducing the price back to around US$7/kg, which will clearly require a substantial injection of additional boxed beef and live cattle in the short term.

 

The new system will see import permit allocations change from quarter to quarter. While it will mean a significant increase in exports for the moment, it will not necessarily resolve uncertainty concerning future export volumes.

 

A general consensus does prevade that a return to import volumes of 500,000-600,000 head annually is a sustainable volume which would help to meet Indonesia's demand, without affecting the sales and incomes of local Indonesian cattle producers.