April 14, 2020
Coronavirus dents the world economy - but not the global beef trade
Coronavirus, trade politics and collapsing western economies will accelerate the rebalancing of a flourishing world beef trade.
By Eric J. Brooks
An eFeedLink Hot Topic
After coming off a banner year and an excellent decade, will coronavirus derail the world beef trade –or merely rebalance it? With economically resilient East Asia accounting for an ever-larger portion of its consumption, beef is poised to transcend coronavirus and the worst global economic calamity in a century nearly unscathed.
Last year, strong Asian economic growth, Southeast Asian ASF outbreaks and China's collapsing pork production made beef exports jump 7.6%, from 2018's 10.107 million tonnes to a record 10.878 million tonnes in 2019. It cherry-topped beef cattle's best decade since the mid-20th century.
From 1988 through 2010 inclusive, world beef exports grew 2.6% annually, significantly lower the growth rate of pork (+3.2%) and chicken (+6.0%) –but in the 10 years from 2009 through 2019 inclusive beef put in a surprisingly strong performance. Beef exports expanded 4.4% annually, compared to 3.4% for chicken and 5.5% for ASF-accelerated pork exports. Led by China and Vietnam, East Asian developing nations showed a much greater than anticipated appetite for red meat.
Over the short term, it was a difficult Q1 for beef exporters and the rest of the year will be equally challenging –but most of the negatives are being counterbalanced by comparably strong macroeconomic factors. Beef and cattle prices are down by a third, but given the social constraints and economic collapse induced by coronavirus, the world beef trade is having a good year.
Going forward, the evidence implies that a strong H2 2020 Chinese demand recovery and stable East Asian consumption will be counterbalanced by falling western meat demand and the risk of intermittent beef processing disruptions, as coronavirus outbreaks are forcing the temporary closure of beef processing facilities throughout the Americas.
Goldman Sach's estimates that China's economy is believed to have contracted by 9% in Q1 2020, compared to the first three months of 2019. –But unlike in the west, China's centralized command economy can "switch back on" heavy industries such as steel, construction, and shipbuilding. Policymakers restarted these industries in late Q1. This can already be seen in China's rebounding electricity usage rates, return to world protein markets and the resumption of high air pollution levels in large Chinese cities.
Beijing's more recent lifting of Covid-19 lockdowns and social restrictions means that privately run, service-oriented businesses such as retail, F&B, restaurants and domestic tourism will also revive. This is also true in wealthy East Asian nations such as South Korea and Japan: All of them were struck with Covid-19 earlier than the west and got it under control. Hence, China and East Asia are poised to recover economically –just as European and American economies contract by -10% to -30% in Q2 and possibly Q3.
All this means that Q2 will see China's economy resume growing at an approximate +10% rate, with strong momentum going into 2021. Hamstrung by ASF, low pig and poultry inventories and a shortage of grandparent stock swine and broilers, China's meat consumption will revive far faster than meat production, thereby extending a longstanding trend for rapid growth in beef imports. This implies that from H2 2020 onwards, China's recovery will be complemented by stable to mild economic growth in Northeast and Southeast Asia.
With US, EU, and Australian beef consumption falling, an increase in the supply of exportable western beef will coincide with rising Asian demand for it, particularly in China. Early statistics imply that this is already underway.
For example, according to Meat & Livestock Australia (MLA), January to March beef exports to South Korea totaled 38,000 tonnes, almost unchanged from Q1 2019. Australian beef shipments to Japan totaled 69,000 tonnes. This is 6.1% higher than last year's Q1 shipments to Japan, with March shipments up 14% on-year. With domestic US beef consumption falling off a cliff, Japan replaced America as Australian beef's leading Q1 export destination.
Most impressive of all, despite March shipments falling 11% on-year, total Q1 2020 beef shipments to China were 58,000 tonnes, 11.5% more than the quantity of Australian beef shipped to China from January through March 2019. The lower March figure is believed to be a delayed reaction to China's January to March Covid-19 lockdowns and demand is expected to revive.
On the other hand, Q1 2020 Australian beef shipments to the United States fell 9.7%, totaling 52,366 tonnes, compared to over 58,000 tonnes in the first three months of 2020. Most alarming is the March's steep 30% drop in beef shipments to America. They totaled 17,108 tonnes compared to 24,440 tonnes in the same month of 2019.
Unlike the prime cuts exported to Asia, Australian exports to America consists almost exclusively of ground beef used by fast-food restaurants such as McDonald's, Wendys and Burger King –and an April 3, 2020, report in Beef Central states "Large US restaurant chains early last week [in late March] reported sales down 60% or more, and conditions have worsened since then."
Based on preliminary reports, North America and Europe are in a -10% to -30% economic freefall during Q2 and possibly even Q3. –And even wealthy nations cannot suffer such a sharp income drop without a significant reduction in their beef consumption.
Not surprisingly, a 9 April 2020 report, MLA stated "Australian beef exports to the US are back 10% [lower] on last year, underpinned by a 14% decline in manufacturing [ground beef] volume, which accounts for 60% of the trade", as it accounts for 64% of the beef consumed by American restaurants. --On the other hand, Japanese ground beef imports were up 20% o from Q1 2019 levels.
While the West's appetite for beef is waning, MLA reported that China's beef import volume increased for the first since December, when the coronavirus crisis began. MLA expects Chinese beef import growth "to kick upwards later in the year as the African Swine Fever (ASF) induced pork deficit encourages consumers to look elsewhere for their meat provisions."
While the volatile, uncertain interplay between Covid-19 and the world economy is far from over, early trade statistics imply the following: After importing 2.177 million tonnes in 2019, Covid-19 made the USDA reduce its 2020 China meat import estimate from 2.9 million tonnes to 2.5 million tonnes.
We believe a faster-than-expected Chinese recovery and falling western meat demand will enable China to import closer to 2.7 million tonnes of beef this year. Whereas the USDA projects beef imports in wealthy East Asian nations to decline slightly, based on present import momentum, we expect the collective beef import of other Pacific Rim nations to either stay level or rise nominally.
Who will benefit from rising Pacific Rim beef consumption? Among top exporters, only India and Argentina will see lower export volumes. Constrained by post-2014 restrictions on cattle slaughtering and the growing beef consumption of India's 250 million Muslims, Indian beef exports stagnated after peaking at 2.022 million tonnes in 2014.
India's 2019 beef exports were projected to rise from 2018's 1.51 million tonnes to a USDA estimated 1.7 million tonnes. Instead, poor cattle rearing returns made them sag to 1.49 million tonnes. Even though Covid-19 made the USDA slash its 2020 India export projection from 1.7 to 1.40 million tonnes, even this may be optimistic:
Formidable trade barriers keep Indian beef out of western, Chinese, Korean and Japanese markets The North African and Middle Eastern nations that buy Indian beef are experiencing deflation from coronavirus and in some cases, also falling oil prices. Having fallen by 528,000 tonnes from 2014 through 2019, the downtrend in Indian beef exports will continue.
India's downtrend will coincide with declining Argentine beef shipments: The beef trade's Cinderella Nation is watching its magic carriage turn back into a pumpkin. After decades of disastrous beef price controls, export taxes and restrictions, late 2015's liberalization of the industry made Argentina's exports quadruple from 186,000 tonnes in 2015 to 763,000 tonnes last year.
On one hand, while 2019's high slaughter rates cannot be sustained into 2020, recessionary conditions should have freed up enough Argentine beef to keep 2020 exports near 2019's high level. On the other hand, Argentina's newly elected government quickly re-imposed a 15% export tax on beef.
This was followed by wildcat strikes as dockworkers refused to load beef on to ships bound for China, followed by a two-week export moratorium. Fearing shortages, the government stopped all beef exports for the first two weeks of April. The loss of reputation will be felt in China, which absorbed over 75% of China's 2019 beef exports or 573,000 tonnes.
--While Argentina's government makes it difficult for China to import its beef, Australia responded to Covid-19-induced shipping disruptions by underwriting airfreight export shipments to China. Australia is also providing subsidies support to ensure that its shipping and airport infrastructure can keep exporting beef to China throughout the entire Covid-19 crisis –just as Argentine ports fall victim to Covid-19 induced wildcat, anti-China strikes at shipping ports and beef export restrictions.
Strong Chinese demand should lift Australian beef exports over their 1.4 million tonne USDA forecast and make them exceed 1.5 million tonnes. While the USDA rightly states production is being constrained by herd rebuilding, its assumption that Australian beef consumption will only decline 1.4% or 20,000 tonnes appears unrealistic, given the economic downturn's severity.
Rising unemployment will make Australian beef consumption fall by 6% to 9%, easily freeing up an additional 100,000 tonnes of beef for export. Hence, Argentina's Chinese market losses will mostly be Australia's gain, as Argentine beef exports fall below their 2020 USDA estimate of 675,000 tonnes to as low as 600,000 tonnes.
Moreover, to meet its Phase 1 trade deal export commitments to the United States, China could use Argentina's supply disruption to substitute more US beef in place of Argentine imports. Because China's Phase 1 export commitments to the US are a dollar figure rather than a physical volume, Beijing can most easily meet its trade promises to Washington by importing expensive US meats –of which beef has the highest export price.
This will entail breaking America USDA forecast of 1.43 million tonnes of beef exports and shipping a record 1.7 to 1.8 million tonnes instead –and this should not be as difficult as a Q2 beef industry stakeholder imagines: The USDA currently projects 2020 US beef consumption to stay flat, fluctuating near 12.4 million tonnes –but with Goldman Sach's stating that America's economy may suffer a -20% to -40% annualized decline in Q2 and Q3, flat US beef consumption is an overly optimistic expectation.
American beef consumption will decline by more than 400,000 tonnes (-3.2%) on-year and fall significantly below 12.0 million tonnes in 2020. That will free up additional beef for export to China. Hence, the Phase 1 trade deal and America's severe recession makes possible a 2020 US beef export increase into the 1.7 to 1.9 million tonne range.
Similarly, top exporter Brazil will happily supply China several hundred thousand tonnes more beef than it did last year. 22% of Brazil's beef exports go to China, where it accounts for 31% of imports. Thanks to Chinese demand, Brazil exceeded 2019 forecasts, exporting 2.314 million tonnes, up 14.5% from 2.021 million tonnes in 2018.
Falling Brazilian beef consumption and a downturn in Argentine exports will force China to buy more beef than it expected from Brazil. Depending on the pace of China's economic recovery, Brazilian beef exports will reach their earlier USDA forecasted 2.58 million tonnes volume –and exceed the more conservative 2.5 million tonne forecast published in April.
Supply-wise, from 2014 through 2019, beef export shipments have shifted away from India (-528,000 tonnes) and Australia (-262,000 tonnes) and towards Brazil (+464,000 tonnes), Argentina (+566,000 tonnes) and the United States (+204,000 tonnes).
For 2020, 100,000 tonnes less beef from India and 100,000 to 160,000 tonnes fewer shipments from Argentina will be offset by rising exports from Australia (+100,000 tonnes), Brazil (+266,000 tonnes) and the United States (+330,000 tonnes). Should the trade war get nastier, China may opt to buy more Brazilian beef at America's expense, but the overall import total will be nearly the same.
The USDA expects world beef exports to fall by 2%, from 10.878 million tonnes to 10.665 million this year. –But supply-wise, cattle's long maturation time means that beef production cannot be "switched off" as easily as that of poultry or pork. At the same time, beef's impressive post-2010 performance is due to rising Chinese imports and stable East Asian demand offsetting falling western consumption.
A strong Chinese recovery will accelerate the world beef trade's eastward shift and mop up surplus supplies created by falling western consumption. We thus project 2020 beef exports rising 1.1%, to a record 11.0 million tonnes. Coronavirus be damned: Beef will keep surprising agribusiness stakeholders and enter a second decade of unexpectedly high fast growth.
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