March 1, 2016
China's trend defying appetite for beef
By Eric J. BROOKS
An eFeedLink Hot Topic
- At a time when everything from feed output to chicken consumption is falling, China's demand for beef defies recessionary conditions and continues to grow
- Beef's unique consumption demographics are enabling it to defy rising unemployment, pinched mass consumer incomes
- China's beef import supplier base is diversifying away from Australia to South America, and could soon include the US
- It will soon dominate world beef prices in the same way it already drives markets for soy and fishmeal
While China's sharp economic slowdown has curtailed the expansion of everything from feed demand to meat consumption, the country's appetite for beef has so far showed itself to be immune to the gathering recession. The way China satisfies its burgeoning appetite for this expensive red meat however, is changing.According to USDA statistics, from 2010 through 2015, China's beef production increased at a 0.7% annual rate but its consumption of this meat rose at a much faster 2.4% pace. When multiplied by a 1.4 billion people and 5.3kg per capita consumption, this translated into near exponential import growth.
From a mere 43,000 tonnes in 2010, imports jumped by an average of 72% over the next five years. For 2015, the USDA first revised its 500,000 tonne forecast to 550,000 tonnes. Later, it was forced to revise China's 2015 beef import forecast even higher for a second time, to 600,000 tonnes. That is up 44% from the previous year's 417,000 tonnes. In all, it makes for a whopping 1,400% increase in beef import volumes over just five years.
Most impressive of all, even with China's ongoing recession constraining consumption of virtually all other protein lines, demand for beef defies rising unemployment and keeps rising. In fact, the USDA had to revise 2015's domestic beef consumption from its initially estimated 7.30 million tonnes to 7.35 million.
The 2016 domestic beef consumption was revised upwards, from 7.35 million tonnes initially projected to 7.45 million tonnes. In short, 2016's beef consumption is rising 1.6% at a time when consumption of chicken, pork and other protein lines has either fallen or stopped growing for three or more years.
Beef's unique consumption demographics go a long way towards explaining this red meat's surprisingly resilient consumption. Most of it is consumed by the top 10% wealthiest, highest income Chinese. These are the types of consumers who are most likely to consume high-end cuts such as steak. They are not materially impacted by recessionary economic conditions.
At one time, being wealthy enough to afford eating pork was a status symbol. Now however, with per capita pork consumption at 41kg, it has become a mass market, commodity meat –and beef is, to some extent, replacing pork as a status symbol meat, especially in more sophisticated urban settings. For this reason, the USDA's latest report cites, "rising urbanization and increasing consumer preference over pork", as factors fueling beef consumption's ascendancy.
At the other end of the spectrum, the beef consumed by China's less wealthier classes tends to be ground beef. This low-end cut tends to be consumed at low-cost, fast food restaurants. Should a lower-income Chinese become unemployed, he is likely to lose access to his factory canteen's chicken. On the other hand, chances are that he will continue to find a low cost fast food burgers affordable. Hence, both beef's upmarket and downmarket consumption demographics make it more immune to recessionary conditions than a white meat line like chicken.However, with consumption growing 3.5 times faster than its domestic production, it is not easy for China to satisfy this growing appetite for beef. Hence, the import boom.
At first, Australia was the prime beneficiary of China's burgeoning beef demand, supplying up to 60% of imports after demand took off at the start of this decade, with Uruguay usually the second largest supplier.
The last few years however, have seen South American imports partially displace Australian beef. According to Meat & Livestock Australia (MLA) statistics, 2015 saw Australia export 134,307 tonnes of beef. Even though it only started exporting beef to China in June of last year, Brazil unseated Uruguay as the number two supplier, with China importing 97,400 tonnes of beef from that country.
MLA statistics also show that in January of this year, Brazil exported 8,880 tonnes of beef to China, to Australia's 5,317 tonnes. Monthly trade figures from mid-2015 onwards clearly imply that Brazil will overtake China as its main supplier of imported beef in 2016.
Several coincident factors are behind this trend. First, after a three-year ban, China re-opened its market to Brazilian beef in early 2015. 16 Brazilian plants are currently exporting beef to China, most of them very large scale facilities operated by conglomerates JBS or Marfrig. According to Chinese government figures, 66% of the country's Brazilian beef imports were sourced from these two meat processors.
Second, the re-entry of Brazilian beef coincides with a 40% drop in the Brazilian real versus China's currency –and a 21% increase in the Australian dollar's value in Yuan terms over the same time. Needless to say, this has given a huge cost advantage to Brazilian beef over its Australian competition.
Third, Brazil was not the only South American country whose beef suddenly got cheaper in Chinese currency terms. Argentina's peso fell in value even more steeply than Brazil's real. In 2015, Argentina's beef exports to China suddenly tripled, from 7,000 tonnes to over 20,000 tonnes. With the Argentine government removing export taxes off of its beef in late 2015 and China eager to diversify its beef supply base, we can expect soaring Argentine beef exports to China in 2016.
Fourth, increased competition from South American beef coincides with a 15% to 20% downturn in Australia's cattle herd. This leaves Australia with 300,000 fewer tonnes of relatively more expensive beef available for export than a year earlier.
Thus, alongside taking advantage of less expensive, currency-cheapened Latin beef, the ongoing import surge from South America is partly to replace faltering Australian supplies. That is probably the reason why China's government forecasts that for 2016, Brazil will export up to 20,000 tonnes of beef monthly to China while Australia is only expected to ship about 10,000 tonnes.
Moreover, Philip Seng, president of the US Meat Exporters Federation is on record stating that he expects that after being banned for over 12 years, he expects China to fully reopen its market to exports of US beef by the middle of this year. According to Seng, the final step is China's formal auditing of US cattle tracking systems, which he expects to be completed sometime during the second quarter.
At this time the US is only allowed to export a few, limited cuts of boneless beef. Import liberalization could enable America to export far more than the roughly 5,000 tonnes of beef it did last year.
Taken together, the continued rapid growth in Chinese beef imports and the transformation of its supplier base reflects several underlying realities. First, Beijing's policymakers have decided that being import dependence, as a trade-off to maintaining self-sufficiency in more feed-efficient pork and poultry. Given China's large population, rapidly growing beef consumption and flat domestic production, this has catapulted it from an irrelevant player ten years ago to the second or third largest net beef importer in the world today (imports minus exports).If one takes into account the high proportion of Hong Kong beef imports that are re-exported to China, then it may already be the world's second largest beef importer (after the US) and largest net beef importers (when exports are subtracted from imports).
Second, while market forces have clearly eroded Australia's dominance of China's imported beef market, there are greater geopolitical factors at work. China does not want to depend on any one supplier for any particular meat or feed grain.
To avoid excessive dependence on western superpower countries, it imports the lion's share of its soy from South America. To avoid dependence on the US, it is also in the process of boosting corn imports from alternative suppliers such as Ukraine. Sensing that Australia is too close to the core of its western rivals, China is using South America to diversify its beef imports the same way it earlier used them to make sure it did not become dependent on the US for soybeans.
Even so, it is becoming increasingly possible that over time, China's influence over world beef prices will become comparable to the dominant role it plays in the market for feed inputs such as soy or fishmeal.
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