FEED Business Worldwide - October / November, 2011
New markets and pricier cuts: Australian beef adapts to intensified competition
by Eric J. BROOKS
Australia remains the world's leading beef exporter but finds its export destinations changing and its cost competitiveness increasingly challenged. Furthermore, at 2.14 million tonnes, this year's beef production's increase from 2010's 2.09 tonnes is only up 2.5%, and noticeably below the peaks of some years past. While this is yet another tough year, the good news is that production, inventories and exports should turn upwards from next year onwards.
Drought, poor exports make for flat numbers
Having said that, cattle inventories have been stagnant, ranging from 26.7 million to just below 28 million in the three years since 2009. Despite five years of higher beef demand both inside and outside Australia, cattle numbers remain below 2006's 28.1 million head peak.
This is partly due to average carcass weight. It is on a long-term uptrend and increased by 2.8% or 7kg, from 252kg in 2009 to 259 kg in 2010 and an estimated 266 kg this year. Another factor holding back cattle numbers was a serious multi-year drought in the mid 2000s, from which inventories are still recovering. The attempt to rebuild inventories is evident in Australian slaughter statistics, which show many more male cattle being slaughtered than females, as the latter are required for herd expansion.
One more tough year
Although investment in new cattle stock implies optimism about the future, the present remains challenging.
At this time, strong domestic demand and export growth in Russia, the Middle East and Southeast Asia is being offset by sagging shipments to north Asia, Indonesia and the United States. The latter is particularly problematic: While the US market's importance to Australia is declining, America's beef increasingly crowds out Australian exports overseas. Because Australia's cattle sector is export-oriented, the loss of overseas markets impacts it far more than it would their US or Brazilian counterparts.
Furthermore, while the 60% proportion of Australian beef that is exported remains well above America's 10% figure, the percentage of beef shipped overseas is poised to fall. This is because production is flat, domestic demand is climbing and exports are stagnant.
The USDA expects about 1.35 million tonnes of Australian beef to be exported, which is nominally less than last year's 1.37 million tonnes. According to Tim McRae, an economist with Meat and Livestock Australia (MLA), the 2011 beef exports will totaled 345,000 tonnes, about 3% less than 2010's 355,000 tonnes. Over the short-term, this was due to recessionary conditions in Japan and Australian floods. In the first quarter of 2011, the former reduced Japanese demand while the latter constrained Australian beef supplies available for export.
Cheap US beef leads to new north Asian marketing strategy
In such a situation, a lower US dollar has enabled American beef make inroads into Japan's market. The Australia dollar, which was worth barely US$0.60 ten years ago, now is worth approximately US$1.07. Australia's currency has risen by approximately 67% against the US dollar over the last ten years â€“and is up by 13% against the greenback in just the last year alone. This rapid currency appreciation has put Australian beef exporters at a significant cost disadvantage to their American counterpartsÂ®.
This can be seen in the fact that Australia's January to July 2011 beef exports to Japan fell by 6.8%, to 190,483 tonnes, down from 204,370 tonnes in the same period of 2010. This occurred even though Japan's beef imports are now rising sharply, particularly those sourced from the United States.
Due to higher import demand created by the radioactive contamination of domestic beef, MLA expects exports to Japan to recover in the second half of this year, such that 2011 exports to Japan will only be down 3% to 345,000 tonnes.
By comparison, MLA reports that January to June US beef exports to Japan jumped by 53%. US Meat Exporters Federation president Philip Seng expects American beef exports to Japan to rise by 25% this year. Australia's share of Japan's beef imports fell from 71% to a still healthy 65%. However, with America's share rising from below 10% three years ago to 18% last year and 25% this year, the Japan beef import trend is clear.
With its lower cost base and cheapening currency, US beef is capitalising on opportunities created by Japan's tsunami and the radioactive contamination of Japanese beef. However, even while Australia is losing market share to America, Japan still accounts for 23% of total Australian beef exports.
Moreover, a similar story is unfolding with regards to South Korea. Thanks to a late 2010 and early 2011 outbreak of foot-and-mouth disease, beef exports to this country are up 12%.
Even so, this performance was eclipsed by the US, which saw its beef exports to South Korea jump by 100% in the first half of 2011 compared to the previous year's volume. Going from nearly zero exports to South Korean in 2007 to second largest exporter this year, US beef is competing strongly against Australia's once-entrenched position in this market.
The same process is also underway in other parts of north Asia and Canada. Due to an influx of cheaper US and Canadian beef, Australian beef export volumes fell 27% in Hong Kong, 28% in Canada and 1% in Taiwan.
Going forward, with Australia's currency poised to remain high relative to the US dollar for a long-time to come, the country has to reposition its north Asia beef marketing strategy. With the Australian dollar at its current high level, only high-end, premium-priced cuts can be viably exported to north Asian markets such as Korea, Japan or Hong Kong. Consequently, Australian beef producers have no choice but to go upmarket.
According to McRae, "While Japan will continue to be Australia's prime export destination, it will be the value of shipments, not the volume, which will have the greatest impact on the Australian industry over the next few years." In other words, Australia is prepared to lose market share to US beef by volume and make up for it by generating more revenue from fewer but more expensive beef cuts.
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