March 27, 2019
Buoyant demand, inelastic supply and the future of India's beef trade
Amid booming domestic consumption, encroaching industry restrictions and maxed out slaughter rates, Indian beef will find it difficult to retain its world market niche.
By Eric J Brooks
An eFeedLink Hot Topic
The good news for Indian beef suppliers is that after five years of stagnation, exports are rising for the first time since 2014, when India briefly became the world's leading beef supplier. The bad news is that this weak recovery is based more on falling consumption growth than rather than higher productivity, competitive advantage or a transformation of their dairy-based, religiously restricted business model.
From 2000 through 2018 inclusive Indian beef output, consumption and exports grew at average annual rates of 5.9%, 4.8%, and 8.8%, respectively. They are not growing anywhere near these rates today, nor will they do so in the future.
Last year's strong economy caused beef consumption to skyrocket 10.3%, from 2.487 million tonnes in 2017 to 2.744 million tonnes in 2018. Even though beef's price rose 7% in 2018, 12% in 2017, supply-side constraints kept output to a mere 1.2% increase, from 4.20 million tonnes in 2017 to 4.25 million tonnes last year.
With consumption rising a much faster 10.3%, exports to fell for a fourth straight year, by 11.4% to 1.556 million tonnes, their lowest volume since 2012 and down 25.3% from their 2014 peak of 2.082 million tonnes. Moreover, based on Ministry of Commerce and Industry data, export revenues dropped twice as fast as volumes shipped, declining 20.6% from US$4.17 billion to US$3.31 billion –down 33% from their peak of US$4.94 billion in 2014.
Falling export volumes and revenues were mainly due to Beijing's crackdown on the illegal smuggling of beef into China via its land border with Vietnam –a majority of Indian beef "shipments to Vietnam" actually end up in China. As a result, from 1.1 million tonnes in 2017, beef exports to Vietnam/China fell 32% to 747,000 tonnes last year, but still accounted for 48% of export volumes.
Chinese market losses were to a small extent counterbalanced by export gains in Indonesia, where beef shipments skyrocketed from under 10,000 tonnes three years ago to 125,000 tonnes last year. While it accounted for 8% of 2018 exports, the industry puts much long-term hope in Indonesia, which has only given export permits to 3 of the 27 Indian beef processing plants it approved.
With almost ten times more people, Indonesia has the potential to buy much more beef than Malaysia, the current second-ranked buyer, which imported 171,200 tonnes last year, accounting for 11%.
A poor man's supplier of expensive red meat, the USDA notes that while other top suppliers mostly export to Japan, South Korea, Britain, or China, "Indian sales were destined for developing countries, which are mostly price-sensitive markets." Indian beef's 2018 export destinations include China/Vietnam (48%), Iraq (78,000 tonnes, 5%), Philippines (66,000 tonnes, 4%), with Saudi Arabia, Myanmar, UAE, and Egypt each buying 3% of Indian beef exports and importing 46,000 to 60,000 tonnes each.
Alongside faltering Chinese demand, there are serious, intractable supply-side related reasons for declining Indian exports. Already banned in most of India, an additional six states have banned cow slaughter since 2014, when India's current Hindu nationalist government took power. Other Indian states broadened existing cattle slaughtering bans to include bulls and bullocks. After 2015, many Indian states passed laws that punish anyone caught eating beef or transporting either beef or cattle with heavy prison sentences.
According to Human Rights Watch, this coincided with vigilante action that saw 44 cattle farmers murdered and hundreds assaulted or injured over the last three years. Along with a ban on all cattle sales intended for slaughter that was subsequently overturned by India's supreme court, these circumstances deeply disrupted beef production and forced smaller, illegal abattoirs out of business.
On one hand, these measures disrupted beef production growth, which was already decelerating due to its religiously constrained industry model. From 7.4% in the ten years to 2010, beef output expansion slowed to 5.6% in the five years to 2015. After Modi's government got elected, this slowed to 1.5% in the four years ending in 2019 inclusive.
On the other hand, while Indian beef output slowed down, meat consumption accelerated. After rising only 0.8% annually due to high feed costs from 2010-15, Indian beef consumption rose at a 6.2% annual rate from 2015 through 2018.
As the accompanying graph shows, even when beef output grew far more rapidly than it does today, exports only grow rapidly when consumption is growing slowly or vice-versa. Severe feed driven cost-push inflation during the late 2000s and early 2010s caused consumption to fall and exports to skyrocket.
Since 2014, the opposite has occurred: Demand-pull inflation driven by rapid consumption growth and falling exports has taken place. With post-2014 consumption rising eight times faster than production, there were two microeconomic consequences.
First, beef went from being the cheapest meat line to its most expensive. In 2012, beef sold at a 25% discount to fish, was 10% cheaper than chicken and 5% cheaper than mutton. While the feed cost inflation of 2010-13 boosted beef's price, by 2014, it still sold at a discount to these other meat lines.
From 2015 onwards, strong demand growth made Indian beef pricey in its own market. This demand-pull inflation was made worse by the new restrictions on cattle slaughter: They resulted in the closing down of smaller slaughterhouses that catered to the domestic market. By 2016, the price gap between beef and inland fish had narrowed to 15%, while poultry meat and mutton sold at a 6% to 9% premium.
By 2017, beef achieved price parity with chicken and mutton. By early 2019, beef was approximately 5% more costly than fish and 15% more expensive than both chicken and mutton. As the attached graph shows, Indian beef exports skyrocketed when consumption stagnated for five years beginning in the late 2000s. After 2014, skyrocketing domestic consumption limited the supply of exportable beef, causing exports to decline and stagnate.
On one hand, several years of beef price inflation has finally tamed domestic demand: 2019 will see beef consumption fall back 1.6% to 2.70 million tonnes; the first decline since 2014 and the largest since falling 2.2% in 2013. This is allowing 2019 exports to rise by 6.7%, to 1.66 million tonnes, the first increase since 2014, when the consumption boom began.
On the other hand, this is 20% below its peak 2014 export volume and prospects for boosting exports above 2 million tonnes are bleak. That's because as the accompanying graph shows, India boosts beef production by raising slaughter rates while cattle inventories stay constant. Over the long run, this is mathematically unsustainable.
Cattle inventories entered 2019 at a USDA estimated 306.4 million head. Due to the high dairy demand, a rising number of dairy cattle will push inventories to 307.9 million head by the end of 2018. –That is only 1.8% above their 2009 level, but beef production will have risen 30% and exports nearly tripled at one point, with almost no increase in carcass yields.
Hemmed in by restrictions on the slaughter of female bovines, beef production growth has been sustained by sharply boosting male cattle slaughter rates. The attached graphs make clear that rising beef production closely tracked rising slaughter rates amid near-flat cattle inventories.
After 2010, male slaughter rates approached their natural peak levels. Since 2015, Indian cattle slaughter –and beef production –has only been increasing in proportion to small, nominal increases in cattle inventories. Scope for cattle inventory increases is constrained by post-2014 government restrictions on the industry, which reduce returns and create uncertainty.
For religious reasons, only aging water buffaloes or bulls can be slaughtered. Because the supply of cattle eligible for slaughter is detached from market demand, the surges in beef output and exports were not based on rising inventories.
From 2011 through 2015, beef production expanded 24%, exports by 42% while domestic consumption rose 12.5% --but India's cattle herd increased a measly 0.9%, from 300 million in 2011 to 302.6 million in 2016. In the previous ten years, beef production had doubled but its cattle inventory rose a mere 7.4% over eight years, from 284.8 million head in 2000 to 306 million in 2008, before falling back to 302.6 million by 2010.
Consequently, exporters face a declining quantity of males eligible for slaughter and numerous restrictions on female slaughter. A projected, dairy-demand driven increase in bovine female inventories (due to rising dairy demand) will result in slower growth in the supply of beef available.
All this makes India's international beef trade a zero-sum game: One where producers can satisfy rapid consumption growth, rapid export demand, but not both at the same time. Coincidentally, India's economy is entering a stage when growth in personal incomes –and red meat consumption– typically hit historic peak levels.
Constrained by a dairy-driven business model amid growing legal restrictions on slaughter and near peak male cattle slaughter rates, India's increasingly inelastic beef supply is being challenged by highly elastic, fast-growing domestic demand.
In a population-dense, pastureland poor, water scarce nation like India, beef production could, in theory, be boosted in two ways. One would be by allowing the slaughter of female bovine animals (which is politically unthinkable).
Another way would be by boosting cattle productivity. Theoretically, there is great scope for getting much more beef out of Indian cattle: With 30 million cattle or 90% fewer animals than India, Australia produces 50% as much beef as India's 306 million cattle. If India could make its cattle 60% as efficient as those in Australia, beef production would triple.
Unfortunately, all this is impossible in the current political climate. It is also unlikely that any future election would bring in a government liberal enough to allow a radical enough restructuring of Indian cattle farming to legally and economically justify boosting cattle productivity, much less allow female bovine slaughter.
Under such constraining circumstances, something has to give –and it will likely be Indian beef's position in the world market. There are many factors holding back Indian beef production and far fewer constraints on per capita income growth or red meat consumption. Formerly the top exporter, the number three beef supplier may find itself soon falling behind the United States in world beef export rankings. It will, however, becoming a leading world market for beef consumption.
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