meat outlook to 2010-11 -...

australian commodities > vol. 13 no. 1 > march quarter 2006

contents

> Contact > +61 2 6272 ???? > [email protected]

70

meat

> Andrew Dickson > +61 2 6272 2173 > [email protected]

meat outlook to 2010-11propects for beef and veal, pigs and poultryFrank Drum, Andrew Dickson and John Hogan

> Australian beef production growth and increased supplies in Pacifi c Rim markets are forecast to result in lower saleyard prices for Australian beef cattle in 2006-07.

> Over the medium term, beef cattle prices are forecast to decline further with the assumed re-entry of the United States and Canada into Pacifi c Rim markets and increased competi-tion in Australia’s key export markets.

> Increased competition from major world producers —in key export markets and the domestic market — is expected to lead to lower Australian pig meat prices and a reduc-tion in domestic pig meat production over the medium term.

> Australian poultry meat consumption per person is projected to continue to increase over the outlook period, albeit at a lower rate of growth as the prices of other meats ease.

Beef and vealIn 1996-97, beef prices in real terms (2005-06 dollars) were at their lowest level for over twenty years (since 1975-76). However, since that time the Australian beef industry has expe-rienced an extraordinary period of growth, driven largely by developments in export markets. With almost two-thirds of Australian beef production exported (in value terms), developments in key export markets — and particularly the United States and Japan — will continue to be critical to the prospects for Australian producers over both the short and medium term.

Between 1996-97 and 2001-02, the volume of Australian beef exports increased by almost 25 per cent. Over the same period Australian saleyard prices for cattle increased by almost 80 per cent in real terms. Not surprisingly, Australian beef consumption fell as higher cattle prices were translated into higher retail prices for beef.

In 2002-03, cattle saleyard prices declined, refl ecting both the impacts of the drought and developments in key export markets, particularly Japan (discussed below). This prompted a relatively quick downturn in Australian consumption. However, with the discovery of BSE (bovine spongiform encephalopathy or ‘mad cow’ disease) in Canada and the United States in 2003, demand for Australian beef in the key export markets of Japan and the Republic of Korea increased signifi cantly, raising cattle prices and dampening growth in domestic demand.

Looking forward, the demand for Australian beef on world export markets will continue to be the main driver for Australia’s beef industry. In this context, the outlook for the Asian beef market, in particular, will be critical to Australian producers as over 60 per cent of Australia’s exports are now directed into Asia, as outlined in the boxed section.

71australian commodities > vol. 13 no. 1 > march quarter 2006

Asian beef markets have traditionally been the main desti-nation for a signifi cant proportion of beef exported by Pacifi c Rim producers such as Australia and the United States. Asian markets are particularly important for the Australian beef industry, with the value of exports to Asia accounting for around half to more than 60 per cent of the total value of beef exported over the years 1999 to 2003. Following the discovery of BSE in the United States and Canada in 2003, Australia’s share increased further, to 65 per cent in 2004.

Japan and Korea are the primary import markets in Asia, with countries such as Chinese Taipei, Hong Kong and the Philippines importing relatively lower volumes of beef. Over the period 2000–03 Japan and Korea accounted for approximately 80 per cent of all beef imported by Asian countries, while Chinese Taipei, Hong Kong and the Philippines accounted for just 15 per cent.

In smaller Asian markets, import growth has been less pronounced than in Japan and Korea, partly refl ecting the

greater consumption of lower priced substitute meats. For example, in 2001, buffalo meat accounted for around 79 per cent and 62 per cent of the total volume of beef and buffalo meat imported by Malaysia and the Philip-pines respectively.

While import growth in some other markets has been substantial, the small size of those markets is expected to limit the scope for any signifi cant increase in import volumes over the medium term.

Around 90 per cent of all beef imported by Asian coun-tries is usually sourced from the United States, Australia and New Zealand. In 2003, the United States supplied 47 per cent of total beef imports in Asia, while Australia supplied 38 per cent. With the ban on beef imports from north America in 2003, Australia’s share of Asian beef imports rose to 70 per cent in 2004.

Singapore, the Philippines and Hong Kong are cur-rently the only Asian countries to import signifi cant quanti-ties of beef from South America.

Value of Australian beef exports, by destination

1999 2000 2001 2002 2003 2004

$m $m $m $m $m $mAsiaJapan 1 402 1 522 1 740 1 248 1 390 2 261Korea, Rep. of 210 244 258 339 272 488Chinese Taipei 125 122 134 153 129 128Other Asia 147 164 187 191 151 127Total 1 884 2 053 2 320 1 931 1 942 3 003

Share of Australia’s total beef exports (%) 62 57 52 47 54 65

North America United States 827 1 208 1 715 1 599 1 357 1 411Canada 121 145 196 318 115 40Total 948 1 353 1 911 1 918 1 472 1 451

Share of Australia’s total beef exports (%) 31 38 43 46 41 31

Total exports 3 024 3 580 4 493 4 135 3 611 4 630

Source: Australian Bureau of Statistics.

Asian beef imports, by country Shipped weight

2000 2001 2002 2003 2004

kt kt kt kt kt

Japan 719 674 487 576 432Korea, Rep. of 238 166 292 294 133Chinese Taipei 61 57 65 72 59Hong Kong, China 49 47 53 55 51Philippines 44 30 33 34 36Malaysia 22 19 21 18 22Singapore 14 14 16 16 15Indonesia 16 11 11 12China 6 4 11 8 3

Total 1 152 1 028 989 1 084 762

Source: Comtrade data, United Nations.

Asian beef markets

beef

72 australian commodities > vol. 13 no. 1 > march quarter 2006

Features of the Asian beef tradeApproximately 70 per cent of Asian beef imports are traded in frozen form. In the smaller import markets of Chinese Taipei, China, Malaysia, Singapore, the Philip-pines, Indonesia and Hong Kong, frozen beef typically comprises 90 per cent or more of imports. For Korea the proportion of beef imports that are frozen is similarly high, although the share of chilled beef has been trending upwards. Only in Japan, the largest market in Asia, are signifi cant quantities of chilled beef imported, accounting for around half of total Asian beef imports since 2000.

Most Asian markets also have a preference for bone-less beef. Among the small Asian markets, the vast majority of imported beef is boneless (typically over 90 per cent) and refl ects both the suitability of this product for Asian cuisine and its price, particularly the latter.

Frozen imported beef is also well suited to the tradi-tional ‘wet’ markets that are still the prominent way in which beef is sold in the small beef importing countries in Asia. Beef is moved from importers’ cold stores to the wet market where it thaws and is sold, predominantly to the food service sector. Interestingly, even in the small Asian markets most imported beef is eaten away from home.

Chinese Taipei, Hong Kong and Singapore also import relatively small quantities of chilled beef, predomi-nantly boneless. This product is imported mainly to supply ‘western’ hotels and restaurants.

In common with most Asian countries, Japan imports mainly boneless cuts of beef, both chilled and frozen; more than 99 per cent of Japanese beef imports are bone-less. However, in contrast with the rest of Asia, around half of Japan’s imported beef is high valued chilled product.

In Japan around 60 per cent of all beef is used in the food service sector (restaurants, cafes and fast food),

while more than 30 per cent is sold in retail outlets for in-home meals.

While the Japanese import all cuts from the carcass, cuts from the brisket and ribs as well as from the shoulder and leg (chuck, clod and round), typically account for around three quarters of all imported boneless beef. As price is important in the low end Japanese food service sector, the majority of brisket and rib cuts imported are frozen.

The majority of boneless shoulder and leg cuts are traded as chilled product. This refl ects their use, not only in higher end restaurants in the food service sector, but also because chilled shoulder and leg cuts are demanded by retail outlets.

The Korean market for beef is quite different from those in the rest of Asia. Unlike any other Asian market, the Koreans import signifi cant quantities of beef with the bone-in for use in Korean barbeque style dishes; for Korean barbeque ribs it is necessary to leave a piece of bone attached to the meat so it can be clearly identifi ed as rib meat. Typically, bone-in cuts account for around 55 per cent of total Korean beef imports with nearly all of these cuts imported frozen. There has been some expansion of imports of chilled bone-in cuts as well as boneless chilled beef in recent years, albeit from a low base.

In Korea around 65 per cent of all beef is used in the food service sector, with the remaining 35 per cent sold in retail outlets. Retail outlets comprise traditional butcher shops — where locally produced beef is predominantly sold — as well as hypermarkets, in which both imported and local beef is marketed. In recent years, consumers have been increasingly purchasing beef from hypermar-kets where imported beef is generally thawed and regu-larly sold at ‘special’ discounted prices.

Share of Asian beef imports, by product type Share of total country imports

2001 2003

Boneless cuts Bone-in cuts Boneless cuts Bone-in cuts

Chilled Frozen Chilled Frozen Chilled Frozen Chilled Frozen

% % % % % % % %

Japan 47 52 1 47 52 1Korea, Rep. of 3 43 54 4 41 3 52Chinese Taipei 9 83 1 7 Hong Kong, China 5 80 15 5 81 14Philippines 99 1 99 1Malaysia 6 57 1 36 Indonesia 3 94 3 Singapore 13 81 1 5 China 7 90 2 1 98 1

Sources: Agriculture and Livestock Industries Corporation, Monthly Statistics, Japan; World Trade Organisation 2005, Integrated Data Base, Brussels; Korea Meat Trade Association National, Veterinary Research and Quarantine Service (www.kmta.or.kr), 2005.

Asian beef markets continued

beef


Access to all of the world’s major beef import markets is tightly restricted, either through tariffs and quotas or through sanitary and phytosanitary (SPS) measures. A number of market access liberalisation proposals have been put forward in the context of the current World Trade Organisation (WTO) multilateral trade reform negotiations. Over the medium to longer term liberalisation of market access to major beef import markets will also be critical to the prospects for Australian producers (see the second boxed section).

The embargoes on beef from both Canada and the United States in Japan and Korea were lifted in late 2005 and early 2006. Given this, competition in these markets is expected to increase in 2006 and 2007, with Australian beef exports forecast to ease accordingly. This is likely to be the case in both Japan and Korea where demand for Australian beef is expected to fall following the resumption of trade with the United States, which is assumed to commence in earnest in mid-2006.

The re-entry of Canadian exports to the US market, traditionally Australia’s largest beef market, coupled with strong competition from Uruguayan beef, is also expected to result in increased pressure in the US market. With Australian saleyard prices forecast to fall over the medium term, Australian exports to the United States are projected to increase to 395 000 tonnes in 2010-11. Importantly, Australia is not expected to fi ll its allocated quota in the United States before 20010-11. Australian exports to the Canadian beef market are also expected to increase over the projection period to reach pre-2003 levels by 2010-11.

Australian beef exports to Japan reach record levelsJapanese beef consumption grew steadily and rapidly from the late 1960s to peak in 2000. Strong growth in consumer demand over this period was supported by a decline in the real retail price of beef, which was being driven down by the strong growth in imports associated with liberalisation of the Japanese beef market. Between 1975 and 2000 retail beef prices in Japan fell in real terms by 20 per cent. Over the same period, imports as a share of total consumption rose from 16 per cent to 67 per cent, peaking at 71 per cent in 2001. That the demand for beef in Japan did not grow more strongly refl ects the fact that retail prices for pork and poultry meat also declined signifi cantly over this period, and in fact declined relative to beef.

The discovery of BSE in Japan in September 2001 and the discovery of BSE in the United States in December 2003, has resulted in a signifi cant drop in both the demand for beef in Japan and beef imports. While there are positive signs in that the consumption of beef in Japan rose slightly in 2005, the most recent diffi culty with a shipment of beef from the United States in January 2006 is likely to reinforce consumer concerns about the disease free status of imported beef. At this stage it is diffi cult to determine whether and how quickly Japanese consumers will regain the ground lost since 2000 and resume the trend increases in beef consumption evident over the past three decades.

Immediately following the discovery of BSE in Japan in 2001, beef imports from all suppliers declined markedly. Total beef imports in 2002 were reduced by almost 28 per cent. However, following the exclusion of the United States from the Japanese market in late 2003, Australian beef exports to Japan quickly bounced back to reach record levels in 2004 and 2005.

Australian beef export volumes increased by nearly 41 per cent to 393 000 tonnes in 2004, and by another 3

2000 =100

Retail meat prices, Japan

198419801976 1988 1992 20001996 2004

index

80

120

100

160

140

Chicken

Pork

Beef

beef


The current pattern of global beef trade is shaped by a combination of market access barriers, disease status and differences in supply competitiveness. Consequently, global beef trade is highly segregated. Brazil, Argentina and Uruguay are currently all excluded from the high value Japanese and Korean markets because of concerns about the presence of foot and mouth disease in these countries. Brazil and Argentina are also excluded from the US and Canadian markets, although Uruguay gained access to these markets in mid-2003.

The United States, the European Union, Japan and Korea are the world’s largest beef importers. Together these countries account for about 65 per cent of world beef imports. Australia, the United States, New Zealand, Brazil, Argentina and Uruguay are the world’s largest beef exporters. Brazil, Argentina, Uruguay and Paraguay are also the four members of the South American free trade block referred to as Mercosur (or southern market). The Mercosur countries (excluding Paraguay) together account for around 40 per cent of world beef exports. Brazil and Argentina export primarily to the European Union, the Russian Federation, the Middle East and north Africa, while Uruguay’s main markets are the United States and Canada.

Restricted market accessAccess to all of the world’s major beef import markets is tightly restricted. The European Union has three tariff quotas for beef — the high quality ‘Hilton’ beef tariff quota that is allocated to specifi c supplying countries and two global tariff quotas that are open to all suppliers. For beef, the above-quota tariffs range from 76 per cent to 142 per cent in ad valorem equivalent.

Currently more than 90 per cent of all EU beef imports are sourced from the Mercosur countries of Brazil, Argen-tina and Uruguay. These countries not only fi ll their portions of the ‘Hilton’ quota and most of the other two global tariff quotas, but also export substantial quantities of beef at the high EU above-quota tariffs. This illustrates the signifi cant cost competitiveness of Brazil, Argentina and Uruguay in supplying beef to the European market.

The United States has a large tariff quota for beef that is mainly allocated to specifi c supplying countries such as Australia, New Zealand and Uruguay. Australia and New Zealand have the largest allocation, roughly 387 000 and 213 000 tonnes respectively. Uruguay has an allocation of around 20 000 tonnes. Argentina also has a small allocation but is currently excluded from the US market on the basis of foot and mouth disease restrictions. Imports traded within quota are tariff exempt, while those traded above quota incur a 26.4 per cent ad valorem tariff.

Since Uruguay gained access to the US market in the middle of 2003, it has been exporting substantial quanti-

ties of beef above their quota, and hence at the above-quota tariff of 26.4 per cent. In 2004, the United States imported 128 000 tonnes of beef from Uruguay, nearly fi ve times more than in the previous year. In the eleven months to November 2005, this trade is estimated to have increased again to 160 000 tonnes. In comparison, Australia and New Zealand rarely export out of quota to the US market.

The Japanese and Korean markets are protected by relatively high tariff rates as well as strict disease based access arrangements. Japan currently applies a 38 per cent ad valorem tariff on beef imports, while Korea applies a tariff of 40 per cent.

Market access liberalisation proposalsRecently a number of market access liberalisation proposals have been put forward, notably by the United States and the European Union in the context of the World Trade Organisations current multilateral trade reform nego-tiations (referred to as the Doha Development Round). The United States has proposed large tariff reductions with progressively deeper cuts on higher tariffs. The EU market access proposal contains smaller tariff reductions than the US proposal.

Increased market access liberalisation for beef under both the US and EU proposals can be expected to increase the value of world beef trade, with most of the gains expected to arise from reducing high above-quota tariffs in the European Union. Given that Mercosur coun-tries currently export substantial quantities of their beef to the European Union with the high above-quota tariffs, any reduction in the tariffs will reduce the landed price of their beef. Consequently, Mercosur countries are likely to benefi t from market access liberalisation in the European Union.

Similarly, a reduction in the above-quota tariff in the US market improves the competitiveness of Uruguayan beef as most of their exports are currently incurring the above-quota tariff. If Uruguayan beef could be landed in the United States at even lower prices with an improve-ment in market access, then exports of Australian beef to that market could be adversely affected.

However, Australia and the United States would also gain from improved access to Asian markets, particularly Japan and Korea. The United States is expected to gain more from liberalising the Korean beef market given the preference in Korea for short ribs for use in Korean barbeque. While Australia would be expected to gain in both markets, it is likely to experience the greatest gains from liberalising the Japanese beef market. The continued exclusion of Brazil, Argentina and Uruguay from these two important Asian markets will be an important factor in determining the size of the benefi ts that accrue to Australia and the United States.

Global beef trade liberalisation

beef


per cent in 2005. In 2005, around 405 000 tonnes of beef were exported to Japan, with an export value of nearly $2.2 billion. In both 2004 and 2005, Australian exports accounted for between 85 and 90 per cent of total Japanese beef imports.

In response to strong demand for Australian beef in Japan, Australian lotfeeders have placed more cattle on feed. The exclusion of US beef from the Japanese market, which accounted for around 45 per cent of total Japanese beef imports in 2003, resulted in a signifi cant increase in demand for Australian grain fed beef in Japan. In 2004, the number of Australian cattle on feed destined for Japan increased by around 27 per cent, to 1.6 million. In 2005 this increased by a further 19 per cent to total 1.9 million.

Japan–US trade resumptionIn forecasting export prices and volumes of Australian beef to Japan, assumptions about the resumption of trade between Japan and the United States are critical.

On 11 December 2005 Japan and the United States reached agreement for the United States to resume exports of beef to Japan from cattle 20 months of age and younger. However, on 20 January 2006, Japan reimposed the ban on US beef imports following the discovery of specifi ed risk materials (spinal column) in an airfreight consignment of US veal. While there is still a degree of uncertainty about the status of the US–Japan trade situation, the current embargo is not expected to be retained for very long.

In preparing this set of forecasts it is assumed the trade in beef between the US and Japan will resume by mid-2006. However, given the latest disruption and given Australian producers and exporters are focusing a signifi cant amount of resources toward the Japanese market (such as marketing by Meat and Livestock Australia), it is expected to take a number of years for the United States to regain the market position it held in 2003.

Nevertheless, with the re-entry of the United States (and Canada) to the Japanese market, retail prices for beef in Japan are expected to ease. This is also consistent with both the United States and Australia entering a period of increased supplies. Given this, beef consumption in Japan is expected to increase with the majority of this increase expected to fl ow through to increased import volumes.

Refl ecting this outlook, Australian beef exports to Japan are forecast to ease in 2005-06, with export prices forecast to decline by around 2 per cent to 325 cents a kilogram. Over the medium term Australian exports to Japan are projected to fall away, to total around 300 million tonnes (shipped weight) by 2010-11.

Republic of KoreaIn 2004-05, export volumes of Australian beef to Korea, Australia’s third largest export market, increased signifi cantly, largely because of the implementation of bans on imports of US beef in that country. Australian export volumes in 2004-05 were nearly 21 per cent higher than in 2003-04, with record monthly exports of 13 500 tonnes in December 2004. Australian

Beef consumption and imports, Japan

Mt

Consumption

Imports

0.2

0.4

0.6

0.8

1.0

1.2

1.4

19851981 1989 1993 20011997 2005

Japanese beef imports and Australia’s share

19851981 1989 1993 20011997 2005

kt

100

200

300

400

500

600

700

Imports from Australia

Japanese total imports

beef


beef exports to Korea continued to increase in 2005 and are forecast to total 95 000 tonnes in 2005-06.

However, Korea’s total beef imports have declined signifi cantly since 2003, falling from an estimated 294 000 tonnes to 131 000 tonnes for the year to November 2005.

The Korean market for beef is quite different from those in the rest of Asia. Unlike any other Asian market, Korea imports signifi cant quantities of beef with the bone in (and particularly short ribs) for use in Korean barbeque style dishes. Before 2003 the United States accounted for approximately 70 per cent of the Korean beef import market, with over 60 per cent of the trade being in ribs. In contrast, Australia accounted for 21 per cent of the trade, with only 28 per cent of the trade in ribs.

With the assumed re-entry of US beef into the Korean market and increased domestic production in 2006, Australian beef exports to Korea are forecast to decline relatively sharply over the short term. In 2005-06, Australian beef exports to Korea are forecast to total 95 000 tonnes (shipped weight).

With an increasing population, higher assumed economic growth, and subsequent increased per person income, beef consumption in Korea is expected to trend higher over the outlook period. However, as with Japan, high prices and consumer concerns about the safety of imported beef are expected to dampen the outlook over the medium term. Australian beef exports to Korea are forecast to fall to 82 000 tonnes in 2006-07, largely refl ecting the re-entry of the United States to the Korea market. For the remainder of the outlook period, Australian beef exports to Korea are projected to increase modestly, as lower prices improve Australia’s competitiveness.

US cattle herd rebuildingBetween January 1996 and January 2004, US cattle numbers fell by around 8 per cent, from 103 million to 95 million. However, with improved seasonal conditions and the implementa-tion of bans on US beef in major export markets, total US cattle slaughter fell in 2004, with cow and heifer slaughter falling by 15 per cent and 7 per cent respectively. As discussed in the latest issue of the US Department of Agriculture’s Livestock, Dairy and Poultry Outlook, the impetus for herd rebuilding has remained strong in 2005, with the reopening of the Japanese market occurring when beef supplies (particularly ‘choice’ beef) are relatively tight. The latest USDA statistics indicate that US cattle numbers increased again during 2005 and are esti-mated to have reach 97.1 million in January 2006, an increase of around 2 per cent from 2005. With the low point in the cattle cycle now passed, production levels in the United

States are expected to increase, gaining momentum toward the end of the outlook period.

The outlook for beef consumption in the United States is relatively modest. According to USDA statistics, the estimated per person consumption of both beef and pork has remained almost unchanged since 1990. However, over the same period, per person consumption of chicken has increased by approximately 40 per cent. Looking forward, an expected easing in beef prices in the United States will provide some support for increased beef consumption. However, consumer concerns about calories, fat and cholesterol, as well as a strong preference for convenience will be equally, if not more important. Given this and that US beef production is expected to increase over the outlook period, US beef import demand is forecast to moderate.

US cattle inventory

19861981 1991 1996 2001 2006

million

95

105

100

115

110

beef


Competition from South America

Another critical factor for Australia is the emergence of south American producers — and Uruguay in particular — as genuine competitors in the US beef import market. In 2003 the United States and Canadian beef markets were reopened to Uruguay following the reinstate-ment of ‘foot and mouth disease free with vaccination’ status by the Organisation International des Epizooties (OIE). In 2004 the United States imported around 128 000 tonnes of beef from Uruguay, nearly fi ve times more than in the previous year. In the fi rst eleven months of 2005 this trade increased again to an estimated 160 000 tonnes. In both 2004 and 2005, nearly 90 per cent of Uruguay’s beef exports to the United States were subject to a 26.4 per cent above-quota tariff. In comparison, all of Australia’s beef exports to the United States during this period were tariff exempt.

Refl ecting the current high prices for Australian beef and the rapid penetration of Uruguay into the US market, Australian beef export volumes to the United States are forecast to decline by 13 per cent to 315 000 tonnes in 2005-06, with export prices forecast to average around 290 cents a kilogram.

Over the medium term, Australian saleyard prices are projected to ease and Australian exporters will be better placed to compete with Uruguay and Canada at that time. Australian exports to the United States are projected to recover to 395 000 tonnes by 2010-11. Impor-tantly, Australia is not expected to fi ll its allocated beef quota before 20010-11.

Australian saleyard prices to easeOver the second half of 2005, Australian weighted average saleyard prices increased signifi -cantly year on year, as improved seasonal conditions and increased demand from proces-

Beef and veal outlook

2003 2004 2005 2006 2007 2008 2009 2010Unit -04 -05 -06 f -07 z -08 z -09 z -10 z -11 z

Saleyard price a– nominal Ac/kg 290 320 325 295 275 260 250 240– real b Ac/kg 306 329 325 288 262 241 226 212Cattle numbers c million 27.5 27.7 28.5 29.3 29.7 29.6 29.1 28.4– beef million 24.4 24.7 25.5 26.3 26.7 26.6 26.2 25.4Slaughterings ’000 8 779 8 853 8 505 8 675 9 050 9 250 9 520 9 835Production kt 2 033 2 162 2 070 2 096 2 155 2 180 2 215 2 280Consumption

per person kg 37.7 37.0 36.7 36.8 37.0 37.3 37.6 37.8Retail price– nominal Ac/kg 1 393 1 449 1 487 1 495 1 500 1 520 1 540 1 560– real b Ac/kg 1 469 1 491 1 487 1 459 1 428 1 411 1 395 1 379

Export volume d kt 860 948 888 925 930 937 950 985– to United States kt 361 363 315 340 360 380 385 395– to Japan kt 331 419 390 367 344 308 292 299– to Rep. of Korea kt 75 91 95 82 81 84 88 91Export value– nominal A$m 3 793 4 584 4 174 4 036 3 892 3 707 3 614 3 597– real b A$m 4 000 4 719 4 174 3 937 3 704 3 442 3 274 3 179Live cattle exports ’000 578 550 515 611 645 691 727 756 a Dressed weight equivalent. b In 2005-06 Australian dollars. c At 31 March on establishments with an estimated value of agricultural operations of $5 000 or more in 1998-99, and at 30 June thereafter. d Fresh, chilled and frozen, shipped weight. f ABARE forecast. z ABARE projection.Sources: Department of Agriculture, Fisheries and Forestries; Australian Bureau of Statistics; ABARE.

beef


sors, lot feeders and restockers supported higher saleyard prices. For the remainder of 2005-06, export demand for Australian beef is expected to weaken in Japan and Korea in line with their resumption of trade with the United States. Australian exporters are also expected to face increased competition in the United States market, both from competing exporters (Uruguay and Canada in particular) and domestic US producers. Given these factors, Australian sale-yard beef prices are expected to ease in the fi rst half of 2006. Overall, saleyard beef prices are forecast to average 325 cents a kilogram in 2005-06, around 2 per cent above the 2004-05 level.

In this context, the timing of when the United States resumes trade with Japan, and how quickly traded volumes increase, is critical. While the United States is not expected to achieve pre-2003 export levels before 2010-11, they are expected to achieve a substantial increase in trade with Japan and Korea in the second half of 2006 and into 2007.

As Australian exports to Japan, Korea and the United States are set to come under increasing pressure, exports to other markets, such as Canada, as well as markets in south east Asia are likely to become more important. However, as this switch in export demand away from the high valued Japanese and Korean markets is set to occur as both domestic and US beef supplies increase, Australian saleyard prices are expected to weaken further. Average sale-yard beef prices are forecast to fall by 9 per cent to 295 cents a kilogram in 2006-07.

Over the medium term, saleyard prices are expected to continue to ease in line with increased supplies and increasingly competitive export markets. In 2010-11, Australian beef saleyard prices are forecast to average 212 cents a kilogram in real terms (2005-06 dollars).

One issue that has not been discussed to this point is the potential for Argentina to gain access to the US beef import market. Argentina remains ineligible to ship fresh or frozen beef to the United States because the country has not maintained foot and mouth disease (FMD) free status after a March 2000 outbreak. However, there are growing expectations that Argentina could achieve free status similar to Uruguay as early as 2008. Competition from South American producers in high value FMD-free markets remains a signifi cant risk factor in the medium and longer term outlook for the Australian beef industry.

Cattle numbers to increase until 2006-07Refl ecting improved seasonal conditions in 2005-06 and herd rebuilding efforts (in response to higher prices), Australian cattle numbers have consistently increased since the 2002-03 drought. The Australian cattle herd as at June 2005 was estimated to be approximately 27.7 million. With the continued retention of cows and heifers from slaughter since then, the Austra-lian cattle herd is forecast to continue to increase to 28.5 million by June 2006. However, with prices forecast to ease in late 2006 and into 2007, the impetus for continued herd rebuilding is expected to ease and slaughter rates increase, largely marking an end to the current cycle. Cattle numbers are projected to peak at 29.7 million in June 2008 before easing to 28.4 million by June 2011.

Over the medium term, beef production is projected to continue to rise, with the peak in production expected to coincide with the end of the outlook period. Australian beef produc-tion is projected to reach almost 2.3 million tonnes in 2010-11.

Live cattleAustralia’s live cattle export trade is coming under a large degree of pressure from a variety of sources. These include the appreciation of the Australian dollar (particularly against the US dollar, the Indonesian rupiah and the Philippine peso); strong export demand for Australian beef and hence higher cattle prices; and strong competition from south American beef and

beef


Indian buffalo meat in south east Asian export markets. These factors have combined to pull Australian live cattle exports back from the record level achieved in 2002-03. In 2004-05, live cattle exports totaled 550 000, at an estimated total value of $333 million.

Over the medium term economic growth in south east Asia is projected to moderate from the 4.8–6.4 per cent growth achieved between 2003 and 2005. Nevertheless, growth in this region is still assumed to average between 4.6 and 4.9 per cent a year. With an assumed depreciation of the Australian dollar and reduced cattle prices (refl ecting weaker demand for Australian beef in export markets), live cattle exports are forecast to rise over the medium term, reaching 756 000 by 2010-11.

PigsIn 2004-05, Australian pig production declined by around 4 per cent, resulting in an 8 per cent increase in saleyard prices. In the second half of 2005, saleyard prices have continued to remain high, supported by fi rm domestic demand and a decline in imports. Imports were disrupted in the latter half of 2005 because of uncertainly about the implementation of new quarantine rules for pig meat imports.

For the remainder of 2005-06, saleyard prices for pig meat are expected to ease as domestic production and imports increase and prices for other meats also ease. Saleyard prices are forecast to average 240 cents a kilogram. Over the medium term, increased global pig meat production, particularly in north America, is projected to result in lower world, and hence Australian, pig meat saleyard prices.

Feed costsFeed costs represent the largest single expense in Australian pig meat production, accounting for around 50–60 per cent of total costs. Consequently, fl uctuations in feed prices are critical to the viability of pig production.

In 2004-05, a rise in feed prices and a decline in the prices received for pig meat resulted in the ratio of prices to feed costs falling to its lowest level in a decade. More recently, an excellent winter crop and lower grain prices in Australia in concert with a recovery in sale-yard prices have resulted in modest improvement in returns to the industry. However, over the medium term further reductions in saleyard pig prices are expected to more than offset anticipated feed cost reductions, and hence the pig price to feed cost ratio is expected to ease over the outlook period.

Imports growingAustralian pig meat imports have increased signifi cantly in recent years, particularly from Canada and Denmark. Frozen uncooked pig meat from Canada has been allowed into Australia since 1990; with imports arriving after 1992 required to be boned before export and processed on arrival in Australia. In addition, uncooked and boned imports from Denmark have been allowed into Australia since 1997 under similar arrangements. With the most recent changes in quar-antine arrangements, the fi rst shipments of pig meat from the United States were received in the latter half of 2004.

In 2005, pig meat imports increased by around 23 per cent relative to the previous year. In September 2005, the full federal court ruled that the permits provided to import pig

Australian trade in pork

kt

2

–2

–4

–6

4

6

8

Exports

Imports

2000 2001 2002 2003 2004 2005

Monthly, ended December 2005

pigs


meat were legal as the level of quarantine risk was acceptably low. Pig meat can therefore continue to be imported to Australia under the established quarantine standards. In 2006-07, Australian pig meat imports are forecast to increase by 3 per cent to 72 000 tonnes and over the medium term imports are projected to continue to rise to reach 84 000 tonnes in 2010-11, 20 per cent above the current estimate for 2005-06.

Australian exports fallingThe strong Australian dollar and increased competition in key export markets, such as Japan and Singapore, have resulted in Australia’s exports to these markets falling. In 2006-07, Australian pig meat exports are forecast to decline by 5 per cent to 40 000 tonnes. Over the medium term, increased global competition in key Asian markets, particularly from the United States, Canada and Brazil, is expected to result in Australian export volumes declining further over the medium term. In 2010-11, Australia is forecast to export 33 000 tonnes, 21 per cent below forecast 2005-06 levels.

PoultryOutbreaks of high pathogenic avian infl uenza (HPAI or ‘bird fl u’) in Asia have led to the disruption of production and exports from a number of key poultry meat producing nations. In Japan, the world’s second largest poultry meat importer, total chicken meat imports declined by around 16 per cent in 2004 to 582 000 tonnes. In the second half of 2004, Japanese

Australian pig and poultry outlook

2003 2004 2005 2006 2007 2008 2009 2010Unit -04 -05 -06 f -07 z -08 z -09 z -10 z -11 z

Pig meatBreeding sows ’000 340 338 335 330 326 323 320 315Saleyard price– nominal Ac/kg 235 253 240 235 230 225 220 210– real a Ac/kg 248 261 240 229 219 209 199 186Slaughterings ’000 5 591 5 339 5 300 5 200 5 130 5 050 4 990 4 950Production kt 406 388 380 378 375 370 368 365Consumption per person kg 22.6 22.1 22.2 22.2 22.2 22.2 22.2 22.3Imports– fresh kt 57.9 79.0 68.0 70.0 72.0 76.0 79.0 82.0– preserved kt 2.5 2.5 2.0 2.0 2.0 2.0 2.0 2.0– total kt 60.4 81.5 70.0 72.0 74.0 78.0 81.0 84.0Exports b kt 50.7 43.5 42.0 40.0 38.0 36.0 36.0 33.0Retail price– nominal Ac/kg 1 028 1 071 1 103 1 136 1 170 1 205 1 241 1 278– real a Ac/kg 1 084 1 102 1 103 1 108 1 113 1 119 1 124 1 130

Poultry meatProduction kt 732 792 810 825 840 850 865 880Consumption per person kg 34.7 37.7 38.0 38.3 38.5 38.5 38.8 39.0Exports kt 19.8 19.8 23.4 24.0 25.0 26.0 27.0 28.0Retail price – nominal Ac/kg 379 377 382 386 391 397 402 407– real a Ac/kg 400 388 382 377 373 368 364 360

a In 2005-06 Australian dollars. b Excludes preserved pig meat. f ABARE forecast. z ABARE projection.Sources: Australian Bureau of Statistics; ABARE.

poultry


poultry meat consumption recovered as high prices for other meats (particularly beef) affected demand for poultry meat. In 2005, Japan’s chicken meat imports are estimated to have increased by around 19 per cent to 695 000 tonnes, consistent with levels prior to the outbreak of Avian infl uenza in 2003.

With the effects of the 2003 outbreak of Avian fl u dissipating, production in key poultry producing nations, such as Thailand and Malaysia, are now returning to levels consistent with those prior to the outbreak. Nevertheless, the potential for further outbreaks of Avian fl u remains an important risk factor in the outlook for chicken meat, and indeed for all the meats.

Increased production by Thailand and Malaysia, in addition to increased production in Brazil, the world’s largest poultry meat exporter, is expected to signifi cantly increase competi-tion in the key Asian import markets. However, with low feed costs (and an assumed modest easing in the Australian exchange rate), Australian exports of chicken meat are forecast to increase over the short term. In 2005-06, poultry meat exports are forecast to increase to 23 400 tonnes, and continue to increase, reaching 28 000 tonnes in 2010-11.

In Australia, forecast lower feed grain prices are expected to contribute to higher domestic poultry production in the short term. For 2005-06, production is forecast to increase to 810 000 tonnes, increasing by 9 per cent to 880 000 tonnes by 2010-11. Over the medium term, increased poultry production will continue to be driven by fi rm demand (both in domestic and export markets) and reduced feed costs.

Australian poultry meat consumption is projected to increase moderately to 39 kilograms per person by 2010-11, around 2.6 per cent higher than in 2005-06.

poultry


contactsExecutive director Brian Fisher bfi [email protected] +61 2 6272 2100

Deputy executive director Karen Schneider [email protected] 6272 2033

Chief economist Stephen Beare [email protected] 6272 2040

Commodity outlook branchBranch manager Andrew Dickson [email protected] 6272 2173Commodity outlook and regional conferences Vince O’Donnell [email protected] 6272 2255Commodity and food statistics Geoff Armitage [email protected] 6272 2367Agriculture forecasting John Hogan [email protected] 6272 2056Minerals and energy forecasting Keith Huggan [email protected] 6272 2031

International branchBranch manager Don Gunasekera [email protected] 6272 2366Developing countries Neil Andrews [email protected] 6272 2242International cooperation Jane Mélanie [email protected] 6272 2266International trade Troy Podbury [email protected] 6272 2244Climate change and trade model development Anna Matysek [email protected] 6272 2170

Natural resource management branchBranch manager Peter Gooday [email protected] 6272 2138Fisheries and forestry Leanna Tedesco [email protected] 6272 2295Land, water, resources and trade Anna Heaney [email protected] 6272 2066

Industries branchBranch manager Colin Mues [email protected] 6272 2027Agriculture and biosecurity Lisa Elliston [email protected] 6272 2091Energy and minerals Graham Love [email protected] 6272 2055Regional and farm data analysis Vernon Topp [email protected] 6272 3823

Surveys branchBranch manager Rhonda Treadwell [email protected] 6272 2043Surveys collection Neil Bingham [email protected] 6272 2208

Corporate managementCorporate manager Annette Blyton [email protected] 6272 2222Conferences Yvonne Kingsley [email protected] 6272 2265Media coordinator Maree Finnegan mfi [email protected] 6272 2260Publishing and marketing Andrew Wright [email protected] 6272 2290Publications enquiries Denise Flamia dfl [email protected] 6272 2211

abare management

OUTLOOK 2006 1

A Producer’s perceptions of the threat to the Australian beef industry from 3 South American Countries

John Mactaggart

Beef Producer A group of cattle producers from across Australia together with Agribusiness Managers spent three weeks travelling in Chile, Argentina and Brazil on a fact-finding tour organised by National Australia Bank Agribusiness. This paper is prepared from the facts and perceptions gathered by the group who are well aware of the danger of travellers gaining false overall impressions either through misinterpretation of the language or the personal views of the individuals consulted. Chile

Chile is a country of extremes in topography and climate. It is extremely long and narrow being only 160km wide in places. The Andes in the east and a coastal range of mountains along the pacific coast cradle the more productive land. The natural barriers protect the country and together with strict quarantine restrictions allow it to promote a ‘clean green ‘ image. The cattle herd is approximately 4.3million of which over 80% are dairy or dual-purpose breeds. The beef breeds are mainly Angus and Hereford. These cattle and their associated processing industries are being pushed further south into the higher rainfall areas by more intensive forms of agriculture. Although total herd numbers have fallen around 20% in the last few years, production from both industries is rising steadily; beef to 208000 tonnes last year and dairy by 4-5% per annum. This is expected to continue. The New Zealand multinational Dairy Company, Fonterra, has recently invested both in milk processing facilities and dairy farms. Some New Zealand farmers are migrating to southern Chile and using their technology and know how to further increase production. Two beef processing plants were visited. The first with full HACCP accreditation has more than doubled its exports since starting two years ago and the second, under construction, has been planned after scouring the world for the most efficient and environmentally friendly technology. Aerobic and anaerobic digesters are being installed which will provide all power for the plant. The final wastewater will be used on their adjacent forestry plantation. The plant will be ISO and HACCP accredited These two plants intend to export product to the USA, quota and tariff free, under the Chile/ USA free trade agreement. Other target markets include Japan, Korea, EU, and Central American countries. Marketeers will rely heavily on the ‘clean green ‘ production theme. Foot and mouth disease was eradicated in 1980, HGP implants are illegal and natural barriers protect the country.

OUTLOOK 2006 2

These exports even if they grow dramatically should only lead to changes in the direction of flow and destination of beef traded on world markets. Chile imports in excess of 120000 tonnes of boneless beef per annum, mostly cheaper product, from Brazil, Argentina and Uruguay. Imports from Brazil, and now probably Argentina, are currently banned because of the F&M outbreaks. This has resulted in returns from the domestic market rising rapidly to at least equivalence with export destinations and a redirection of product. The Chilean peso now floats and has risen significantly against the US dollar leading to fears that their beef exports will become uncompetitive, and see more product return to the domestic market. At the farm level we found a number of issues which will inhibit large ongoing increases in production. The family inheritance system leads to the multiplication of small unviable units as each child expects and does inherit an equal share of the family farm. Consequently there are now many of these small farms. The established producers seldom borrow or acquire more land due to firstly the high price of land compared to the returns and secondly past experience of political instability and high interest rates. Taxation is high and extremely bureaucratic VAT is 19% on everything and invoices must be stamped by tax Dept before one can issue them. The vast majority of the beef produced is from dairy animals and should not really impact high quality markets. The movement of beef production to the high rainfall zone, 1200-2000mm per annum, has brought with it practical problems yet to be overcome. The grass looks very good but this is not reflected in the cattle. In summary while Chile may increase its exports our group did not see it as a major threat to our industry. Argentina. During the time available we only traversed a small portion of this large and varied country. The cattle herd is estimated at 49.6million head. In the more temperate zones Angus and Hereford and their crosses predominate while in the sub tropical north more Bos indicus and their crosses are appearing. The cattle industry is under a lot of pressure from the grain industry in competition for land. There is an ongoing huge increase in the areas planted to soya bean, maize,sunflower, oats and wheat simply because of profitability. Cattle have been pushed further and further back into the lower rainfall, poorer land. The farms and research stations visited were principally near the edge of the Pampas south west of Buenos Aires. All are growing grain as well as cattle. Pastures are based on Alfalfa and are rotationally grazed using extensive electric fencing. Figures presented showed young steers, either bought or from other further west breeding properties, coming onto these finishing areas growing at ½kg per day to finish at 420kg liveweight prior to 18months. Strategic supplementation, generally during the first winter, was used to achieve this weight before the next winter. The common supplement

OUTLOOK 2006 3

was whole maize and sunflower meal with perhaps sorghum or other whole grain fed in simple troughs made of narrow strips of tarpaulin stretched between two pipes. Currently there are few actual feedlots. There is an ‘export” stream for cattle principally destined for the EU market as well as a domestic stream. The former stream requires full traceability and documentation. HGP are illegal. Across the country there are a significant number of CREA groups. A group of farmers in an area form a CREA. They get together once a month at a members farm, to critique and discuss their farming practices, sharing all sorts of information, including technical and financial. The CREA employs a consultant who acts as a coordinator as well as consultant. The groups also carry out some research. Members of a CREA visited had a very good grasp of their business, detailed production and financial data. Beef is a staple in the diet of all Argentines very many of whom are poor. A succession of governments has implemented policies to ensure that basic foodstuffs are within reach of all. A newly elected government recently decreed that no bovine could be slaughtered under 300kg liveweight. Veal from animals under this weight is regarded as a delicacy by those that can afford the price, and is a lucrative trade for producers. An export tax is levied on many primary industry products in an attempt to keep local prices down. The tax on beef was 5% in October but has since risen to 25%. Argentina with its large area of grazing land and the large production of grain and vegetable protein has the potential to greatly increase beef production. The development of a large feedlot industry is possible and would lead to heavier carcase weights. However farmers have selected for smaller early maturing animals for many years and it will take significant time to change the genetics. It is anticipated that cropping will continue to generate significantly better returns to the farmer than cattle, which will be pushed still further out into poorer, less reliable areas. Investment by government in beef research appears to be contracting which was disappointing to see and will have inevitable consequences. Government policies will be to maintain low cost beef for the whole population. Even although Foot and Mouth disease is controlled by twice a year compulsory vaccination recent events show that an outbreak cannot be ruled out. Exchange rate will again be a critical in any attempt to expand production or exports. In 2003 it was 3.80 pesos to the US$, now it is 2.20. In short this group did not see Argentine beef being a threat to our premium markets in the short to medium term. Brazil Brazil, a very large and diverse country was the ‘eye opener’ of the tour. Travel was confined to a small part within only two of the states, Mato Grosso de Sul and Parana.

OUTLOOK 2006 4

The seemingly never ending gently rolling fields with impressive soya beans not long emerged, planted directly into newly harvested wheat stubble, were a memorable feature. The reddish loam soil and more reliable rainfall were envied by all. Coffee, maize, Soya beans and sugarcane were seen growing side by side. A country of approximately 170 million inhabitants, under 32 million are rural dwellers the other 80% being classed as urban. Brazil is very much on the move and a large player in international agricultural trade. It is the largest producer in the world of sugar cane, oranges and coffee, second largest in soya bean, beef and chicken and number three in maize and fruits. Farm equipment was generally manufactured in the country and of world class. The country of course is a world leader in bio fuels with standard petrol being 30% ethanol. Trade balance of Brazilian agribusiness exports from 2000 to 2005 has risen some 250%. Of the 846 million hectares (ha) in the country 53million are cultivated. Development has gradually moved north over the years but some 90 million ha are still available to be opened up. Assurances were given that this did not include an extremely large area in the Amazon basin and elsewhere to be retained in its natural state. New government regulations are designed to ensure that all holdings have 20% of area and all streams have at least a 30m strip either side under native trees by 2018. Forestry plantations are ineligible in meeting this requirement. Beef cattle herd expansion has been significant, from 164.3million in 2000 to estimated 195.5million in year 2005, an increase more than the total Australian herd. The rate of increase is expected to moderate given the increase in the percentage of female slaughter. In excess of 80% are based on Nelore, a bos indicus breed. Production in the same time has risen 2.1million tonnes. Exports have risen from 592000 tonnes to 2,150,000 tonnes. Product is exported to around 150 countries worldwide, (Australia 50) of these only 50 restricted entry following the foot and mouth outbreak. These figures indicate the capability of Brazil and its dramatically increasing share of world beef trade. Feedlotting appeared not to have seriously developed yet with paddock supplementation preferred. However there is potential here. Brazil has abundant supplies of reasonably priced suitable foodstuffs should they choose to develop this sector. The recent purchase of a processing plant by a major USA packer may be a catalyst. Research appears to be at a much higher level than in Argentina, work is being carried out in the fields of animal genetics, pasture and crop rotation and increasing carrying capacity . This may offset the loss of grazing land to cropping. Having enunciated the reasons why Brazil could become a major threat to our markets there are still some reasons why it may not develop for some time. The location of both the country and the land still to be developed will be in our favour. The potential land is situated in the tropical zone, with its heat and high rainfall. This will necessitate the use of bos indicus cattle, currently Nelore, which are able to cope with the environment and

OUTLOOK 2006 5

parasites but are not noted for producing high quality meat. Screwworm fly severely limits dehorning and other invasive techniques, which can in turn lower the quality of the final product. Brazil has a common boundary with 10 other countries, sometimes not clearly defined and often porous. Illegal crossings are said to occur. The warm wet tropical conditions along some of those boundaries act as a haven for foot and mouth disease. To counteract this Brazilians are endeavouring to have a multicountry campaign to eradicate the disease from South America by 2010. This would seem an ambitious target. The processing plant, which we visited, was of a very high standard, however other infrastructure requires much investment, to store and transport products quickly and efficiently over the long distances to major centres of population, ports and onto ships. Increases in production will once again only occur if producers can see profit in making the investment. Currently this is not happening. The appreciation of the Real against the US dollar has seen prices to producers decline more than the effect of FMD, which had a negative 18-20% effect on price at the farm gate. Government may need to adopt more farmer friendly policies and a long term serious commitment. In summary our group believe that Brazil production will expand further and given their lower cost of production will capture markets where price is the main criteria. They will endeavour to break into our premium markets of USA, Japan and Korea, as well as others, with what they describe as “natural” beef. We do not see this happening in the short term, however Australia needs to continue to work hard in the time available to ensure customer satisfaction and that we are reliable suppliers of preference in the premium markets. In conclusion I would like to express thanks to National Australia Bank, Agribusiness who instigated and facilitated the fact finding tour and for the help of their staff in translating and putting together this presentation.

meat outlook to 2010-11 -...

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