November 8, 2017

Rebound interrupted: Australian beef output, trade returns to its long-term plateau
World beef exports have risen by 3.4% annually since 2012 but nature, Latin competition prevent the former top supplier from taking advantage of rising demand.
By Eric J. Brooks
An eFeedLink Hot Topic
While a one-time spike in Australian beef production has come and gone bad weather means that cyclical inventory rebuilding and a production rebound has been postponed. This is unfortunate as the Lucky Country is not fully able to take advantage of a world beef market that is expanding at its strongest pace in decades.
From just under 8 million in 2013, the mid-decade dairy market crash coincided with arid weather and parched pastureland amid poor cattle prices and returns. With Australian cattle predominantly grass-fed, a three-year drought that only ended in mid-2016 coincided with high cattle prices. The inability to raise them in drought conditions boosted live cattle exports, which jumped from 860,000 in 2013 to a high of 1.34 million in 2015, before culling exhausted supplies, causing shipments to retreat to a USDA estimated 800,000 head this year.
While live cattle exports boomed, these harsh circumstances mostly jacked up cattle slaughter from just under 8 million head at the turn of the decade into the 9.7 to 9.9 million head range in 2014 and 2015.
Consequently, led by a 20.5% drop in beef cattle inventories from 2014 through 2016 inclusive, overall cattle stocks fell 10.8% from 29.291 million head in January 2014 to 26.142 million head by the start of 2017. Bolstered by higher finishing weights, this mass culling enabled beef production to temporarily escape the undulating 2.0 to 2.2 million tonne plateau it had been stuck in since the year 2000.
It rose 20.6% over two years, raising beef production into the 2.55 to 2.60 million tonne range. With Australian beef consumption falling 15.1% over this same period (from 806,000 to 684,000 tonnes), more than the entire production increase went into exports, which surged 31% in three years, from 1.41 million tonnes in 2012 to 1.85 million tonnes in both 2015 and 2016.
In theory, with cattle inventories bottomed out, high prices and returns are encouraging heifer retention and inventory rebuilding. Unfortunately, what initially appeared to be a break in the country's multi-year drought may turn out to have been a temporary reprieve. The second half of this year has seen rainfall sink far below average levels in critical pastureland regions. Parts of New South Wales and Queensland reported the near-record low rainfall levels in some cases, the least precipitation in 20 years in other places.
The arid weather outlook has depressed Australian cattle prices and put the brakes on the ongoing rebound in cattle inventories. On one hand, mid-2016's break in the drought meant that instead of sinking into the 24.6 to 25 million head range as feared, cattle numbers bottomed out at 26.1 million head.
On the other head, thanks to the return of dry weather, anticipated 2.5% to 4.0% annual increases in total cattle numbers, inventories will only close out 2017 1.6% higher at 26.55 million head. They are expected to rise only 1.9% in 2018. At 27.05 million head, total Australian cattle numbers will remain 7.5% below their pre-culling peak inventory level.
Moreover, dry conditions have had a far deeper impact on beef cattle: After falling from 18% from 13.6 to 11.1 million head in the three years up to 2016, last year's wet weather and good returns induced a healthy 45.7% rebound to 11.75 million head by the start of 2017. –Unfortunately, this year's anticipated 4.3% rise to a 12.25 million head has been aborted. –Instead, drought conditions have levelled off beef cattle numbers, which will enter 2018 at 11.70 million head, 0.4% lower than at the start of 2017.
The drought-induced boost to this year's slaughter rate means that 1.5 million tonnes of beef will be exported this year, 100,000 tonnes more than originally anticipated –but the resulting lack of inventory growth will leave export volumes flat at this level for 2018 too. Formerly the world's top beef exporter, drought's constraints on supplies means that Australia has slipped to third place behind Brazil and India –and that America could conceivably overtake it in years to come.
Destination-wise, Australian beef's export destinations have diversified but not by as much as was hoped for. Japan (25%), America (23%) and South Korea (18.5%) absorb roughly two-thirds of shipments, down from 77% in 2009.
The problem is that while Australia will ship 6% less beef to these four countries in 2017 than in 2009, export growth to emerging markets such as China and Indonesia has been less than what was hoped for. And much like the weather, this too is due to factors mostly beyond Australia's control.
For example, shipments to China initially grew exponentially, from 7,000 tonnes in 2009 to 153,000 tonnes in 2013. Thereafter, China liberalized its beef trade with lower cost suppliers such as Brazil and Argentina. Then, after losing market share to Latin exporters, China allowed US beef into its market for the first time since 2003.
As a result, while China will import approximately 125% more beef in 2016 than it did in 2013, its Australian purchases volume has fallen 36% over these same three years, to a USDA estimated 98,000 tonnes.
It also faces competitive pressure in its established markets. With America's own cattle herds growing for the first time in years, the US, which imported 419,000 tonnes of Australian beef in 2015, will buy barely 200,000 tonnes this year. Partly due to the post-2011 tsunami's recovery in beef production, partly due to its liberalizing of beef imports with other countries, Australia's beef exports to Japan fell 25% over five years, from 352,000 tonnes in 2011 to 265,000 tonnes last year.
Indeed, among Australia's top 4 beef exporting destinations, only South Korea is buying significantly more (+52%) beef in 2016 (196,000 tonnes) than it did in 2009 (129,000 tonnes). Conclusion? While world demand for beef imports has grown 3.4% annually since 2012, Australia is exporting only 7% to 10% more beef this year than it did during the 2000s –and 19% less than it did two years ago.
Up to now, these trade statistics, while depressing have not been entirely tragic: The post-2015 drop in beef exports mirrors the decline in the collective Australian beef purchases of America, Japan and China from previous peak levels. Even so, it does mean that Brazil and America are prepared to take advantage of 3% annual growth in world beef demand. Until its weather changes, former top beef exporter Australia will not be able to do so.

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