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Monday, April 11, 2016

Big players, different markets – Is Brazil a real threat?

By Augusto Semmelroth  |  Source: DAFF, SECEX-MDIC

Key points

  • Australia and Brazil both consistently export 0.8 to 1.2 million tonnes swt of beef.
  • China accounted for only 11.5% of Australian beef exports in 2015.
  • Australia enjoys privileged market access versus Brazil.3

2016-04-11 Brazil Fig 1

2016-04-11 Brazil Fig 2

2016-04-11 Brazil Fig 3

2016-04-11 Brazil Fig 4

Australia and Brazil are undeniably the two “giants” in the global beef trade. Together, both markets account for 35-45% of world trade, and to some extent, dictate the supply and price of beef for available for international customers. With that in mind, our analyst in Brazil Augusto looks into whether the two compete head-to-head for market share.

In theory, yes. However, the presence of rigid trade barriers and uneven market access for exporters, still guarantees Australia a competitive edge over most others players. That’s a reality.

If size was all that mattered, Australia and Brazil would clearly be in a fierce dispute for the pole position in the “beef export race”. Figure 1 shows the total beef exports from each country, as well as their market share in the worldwide trade. Both countries have been consistently exporting 0.8-1.2 million tonnes swt of beef annually for the last 10 years, each representing roughly 15-25% of the total volumes negotiated globally. So, when it comes to shipments, the race is indeed very tight.

What the export stats don’t tell, however, is the identity of the importers of Brazilian and Australian beef. While everyone understands the importance of Japan, the US and South Korea as key export markets for Australia, there’s still some misconception of the combined relevance of these markets, which together represent 60-70% of total exports (figure 2). The “much talked-of” China, for instance, accounted for only 11.5% of Aussie beef exports in 2015.

Brazil, on the other hand, has been seeking to gain access to those same premium markets (Japan, US and South Korea) for decades with limited success. As such, the country’s reach remains restricted to second-tier markets, where it finds solid demand for forequarter cuts (less appreciated by Brazilians). And despite the recently approved access to the US for its frozen and chilled beef, exports will invariably be capped by a restrictive “volume quota” and exporters willingness to pay inhibiting 26.5% “out-of-quota” tariffs. In other words, it’s hard to see Brazil making a major leap into the US market in the short to medium-term.

Now, for those not familiar with the key consumers of Brazilian beef, figure 3 aims to clarify these doubts. The top 5 markets for Brazil until 2014 where Russia, Hong Kong, Chile, Venezuela and Egypt, accounting for 77% of total shipments in 2014. Since trade barriers with China were lifted in 2015, the country has become a noticeable market for Brazilian beef absorbing roughly 97,500 tonnes swt, or 9% of total shipments.

With that in mind, there is very limited overlap between Brazilian and Australian export markets, except for China, where both compete head-to-head. Yet, the country represents less than 12% of Australian beef shipments. As for the remainder 88-90% of exports, it’s fair to say that Brazilian exporters pose little “direct” threat to their Australian counterparts for one simple reason. Australia continues to enjoy privileged market access, which creates an “unlevel playing field” against its South American rival.

The ramifications of this competitive advantage are quite clear when looking at the average value of beef exports from each country (figure 4). While the spread between the Australian and Brazilian average export prices have dwindled remarkably since 2008, Australia still manages to secure 10-25% premium over Brazilian prices.

To wrap things up, the effective marketing initiatives, traceability across the supply chain and consistent delivery of premium quality beef are to overseas customers are all cornerstones of the Australian beef industry. Yet, all these initiatives would be worthless without proper market access. Don’t take it for granted.   

What does this mean?

Australia and Brazil are competitors in terms of scale, and volumes of beef exported. However, there is limited overlap between the importing customers.

It is important that Australia continues to market beef effectively to ensure that we maintain access to premium customers, and continue to receive substantial premiums.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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