Australia is the U.S. beef industry’s primary competitor in many key global markets, including Japan, South Korea, Hong Kong, Taiwan and Southeast Asia.
Australia’s beef production and exports have been record-large over the past two and a half years, due in large part to drought-induced herd liquidation resulting in the highest slaughter levels since the 1970s. Major herd rebuilding efforts were anticipated in 2015, but took longer than expected to materialize. In the first half of the year, slaughter levels and exports surpassed the record-setting pace of 2014. But Australia’s herd rebuilding efforts have finally begun to gain traction, as evidenced by a recent slowdown in exports.
Coming off a record-shattering year for beef production and exports in 2014, the Australian beef industry was expecting to undergo a significant slowdown this year. In fact, Meat and Livestock Australia (MLA) projected a year-over-year decline of 14 percent in beef production and a 20 percent drop in exports.
Through the first half of 2015, this scenario did not materialize. Slaughter levels remained record-large, and beef production through July was up 5 percent from last year, with disappointing rainfall dampening the prospects for herd rebuilding. Beef exports did not skip a beat, as large supplies and the weak Australian dollar helped push first-half export volume to 738,166 metric tons (mt), 9 percent ahead of last year’s record pace.
In July, Australia’s beef production declined by 1 percent, the first year-over-year decrease in 34 months and a significant sign of tighter supplies to come. Correspondingly, Australia’s export growth finally stalled in July, though exports were still steady with last year’s large volume at 121,568 mt. In August, exports dipped below year-ago levels for only the second time since 2013, with volume slowing by 5 percent to 106,010 mt as slaughter numbers also continued to trend downward.
The United States has been the big growth market for Australia’s exports this year, with volume through August up 37 percent from a year ago to 309,926 mt. The combination of high lean beef prices and the strong U.S. dollar is pulling more beef into the United States – in fact, Australia will fill its duty-free quota for imports entering the U.S. for the first time since the U.S.-Australia Free Trade Agreement was implemented in 2005. Exports to Australia’s other top markets have grown at a more modest pace compared to 2014, with results through August as follows:
|Japan||187,487 mt + 1 percent|
|South Korea||105,845 mt, + 8 percent|
|China||94,696 mt, + 7 percent|
With the Japan-Australia Economic Partnership Agreement (JAEPA) taking effect in January 2015, Australia is the only major beef supplier to have gained relief from Japan’s 38.5 percent tariff on imported beef. Under the JAEPA, tariffs on Australian beef now stand at 31.5 percent for chilled product and 28.5 percent for frozen.
These tariff advantages are especially significant when considering the current strength of the U.S. dollar versus both the Japanese yen and Australian dollar. But fortunately, the duty reductions in the JAEPA were front-loaded, and further reductions in subsequent years will be more modest.
Australia’s exports to Korea have been supported by high domestic beef prices and implementation of the Korea-Australia Free Trade Agreement. However, U.S. beef has captured a greater share of Korea’s chilled imports as it regains popularity with retail consumers.
While U.S. beef remains locked out of the Chinese market, Australia is its largest supplier. Australia’s exports to China dipped sharply in mid-2014 when China began testing imports of Australian beef for hormone residues, citing a hormone ban that had been in place for more than a decade. But Australia responded by implementing a certification program to meet China’s requirements, and exports to China quickly rebounded.
Australia’s January-August exports trended lower for many of its smaller markets, including Indonesia, where erratic import policies create great uncertainty for the trade. Exports to Taiwan have also slowed considerably in 2015, dropping nearly 30 percent as U.S. beef continues to gain market share. In fact, U.S. beef currently holds more than 60 percent of the chilled imported beef market in Taiwan, the highest U.S. market share of any Asian destination. But Australia is shipping much larger volumes to Canada, reflecting a situation similar to the U.S. – tight supplies of lean grinding beef due to significantly reduced cow slaughter. Europe is an important destination for Australia’s grain-fed beef, and the Australian industry continues to expand its exports under the European Union’s duty-free high-quality beef quota.
For the final quarter of this year, MLA expects Australia’s beef production to be down about 7 percent from last year’s record pace. This should support continued strength in Australia’s cattle and beef prices as production and exportable supplies slowly return to more normal levels. During the second week of September, Australia’s cattle indicator price kept its record-setting pace, averaging $5.83/kg, up 61 percent from last year. In U.S. dollars, prices were $1.86 per pound, up just 22 percent and reflecting the ever-weakening Australian dollar.
Australia’s cattle feeders are estimated to be losing money, pressured by higher feeder cattle prices and feed costs that remain relatively high. Feedlot capacity utilization is still historically high, so the situation will likely worsen as feeders start to compete to fill pens. The latest inventory survey showed near-record cattle-on-feed numbers of 956,927 head, up 13 percent year-over-year.
Australia’s long-awaited herd rebuilding is causing its beef supplies to tighten, and this will improve the competitive position of U.S. beef through the end of this year and into 2016, especially as U.S. beef production rebounds. Prices for some U.S. beef cuts commonly exported to Asia – including short ribs and short plate – have also softened this year, which is providing renewed momentum with Asian buyers. This is particularly true in Korea and Taiwan, where U.S. beef has withstood significant headwinds to post impressive gains – especially in the highly valued chilled beef category.
It is important to note, however, that Australian beef still enjoys significant advantages in Asia, including lower import duties in Japan, a weak Australian dollar and the lack of access for U.S. beef in China. To maintain long-term success in Asia, the United States must continue to strive for market access gains in order to put the U.S. industry on a more level playing field with its primary competitor.