September 26, 2008

 

Rabobank sees bright prospects for Australian beef

Although Australia is faced with a number of short-term challenges that include high input costs, continued dry weather conditions and increased competition in key export markets, the long-term outlook is positive for the cattle industry, according to a Rabobank report.

 

The report, by senior analyst Wendy Voss said the growth in global populations and incomes is expected to lead to an increase in world beef demand over the next decade. At the same time, the cost of competitor meats is also expected to rise, supporting higher beef and cattle prices.

 

However, the Australian beef industry still faces a number of challenges in the short-to-medium term.

 

Ms Voss said drought remains a key concern as seasonal conditions cause volatility in cattle prices. 

 

Key export markets also proved to be challenging: with increased competition from US beef in North Asian markets and a recent slow-down in purchasing from Russia market.

 

However, the fall in the Australian dollar has eased some of the pressure while good rainfall in southern Australia and tightening of cattle supply has supported prices.

 

Reports said that young cattle prices have fluctuated with changes in seasonal conditions over the past 1 ½  years.

 

Miss Voss also said that young cattle prices are expected to remain closely linked to weather conditions this year. After a reasonably dry winter throughout Australia, cattle prices in spring will depend on the level of rainfall received.

Beef markets in Japan and South Korea
 

The ban on US beef imports in late 2003 by Japan and Korea due to mad cow disease has been a significant factor affecting the Australian cattle industry over the past decade.

 

With US beef, its largest beef competitor off the market, Australian export volumes to Japan and Korea surged to record levels.

 

Thus it was no surprise that demand for Australian beef in Korea declined following the re-entry of US beef in July, with importers and end users delaying purchases in expectation of market volatility and declining Australian beef prices.

 

Most large-scale Korean retailers and food service companies are still waiting until negative consumer sentiment dies down. Still, US beef sales can be expected to increase significantly over the upcoming year.

 

In Japan, US beef have been hampered by the restriction that beef has to come from cattle less than 21 months of age. Thus demand for Australian beef in Japan should remain strong until the government eases its age restrictions.

 

Russia as an alternative market
 

While some key export markets are proving to be of a challenge, a number of other markets have seen a surge in demand.

 

One consistent market for Australia has been Russia, an important alternative market for Australian beef exporters which has emerged as the country's fourth largest beef market this year. 

 

However, Russian beef demand is expected to ease due to a backlog of Brazilian product. Weakness of the Russian rouble against the US dollar supports higher US exports.

 

Overall, the long term outlook for the Australian cattle industry is positive with growth in both world population and incomes that are expected to drive higher meat consumption, including beef.

 

Ms Voss also said as incomes in developing countries grow, consumption of meat rises as consumers move away from grain-based diets.

 

The Food and Agriculture Organisation (FAO) forecasts that increased incomes and population growth will support a 55 million tonne, (20 percent rise), in global meat consumption from 2005-2015. The consumption of beef is forecast to grow by 18 percent of about 12 million tonnes.

 

High grain prices to blunt US price competitive edge in beef
 

High grain prices is also impacting feedlotting in the US. The US, being the largest beef producing country in the world, has seen rising grain prices impacting its feedlots.

 

The increased grain prices have delivered a shock to livestock industries recently. Even as prices have eased, they still remain well above historical levels. These higher input costs are expected to drive prices higher in the US.

 

The price of competitor proteins, such as pork and chicken, are also rising or expected to rise in response to higher grain prices, both in Australia and some producing countries.

 

Ms Voss said an increase in competitor protein prices is important in allowing beef prices to rise while still remaining reasonably competitive. For Australia, the production cost of corn also remains high and increased prices for grain are now passed onto consumers through higher retail prices.

Slower growth to reduce competition from Brazilian beef
 

There may be limits to cattle expansion in Brazil, a major export competitor to Australia.

 

Events a few years ago show that if returns to investment decline, Brazilian beef producers may reduce their exposure to the sector. The move resulted in tighter supply, which contributes to the current high prices for Brazilian beef in the global market.

 

Longer term Agra FNP, an agribusiness consultancy firm, expects Brazilian beef to increase by one million tonnes over the next decade, reaching nearly three million tonnes by 2017.

 

Ms Voss said although impressive, it is still a slowdown compared to the last decade, when Brazilian beef exports surged ten fold during the same period.