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Wednesday, August 21, 2013

IN-DEPTH REPORT: The China beef market – a free ride for Australia?

By Amy Bellhouse  |  Source: Global Trade Atlas, China Customs, DAFF, Ministry of Agriculture of the People’s Republic of China

Key points

  • Australian beef exports to China soared in late 2012 and continue high in 2013.
  • Preferences appear to be changing, with a lower percentage of exports being manufacturing beef.
  • Economic growth, urbanisation and crack downs on grey channels are contributory factors.
  • We have competitors and significant challenges


2013-05-27 The China Beef Market - A Free Ride For Australia FIG 1

2013-05-27 The China Beef Market - A Free Ride For Australia FIG 2

2013-05-27 The China Beef Market - A Free Ride For Australia FIG 3

With a growing population exceeding 1.34 billion and a food and beverage sector estimated to be the largest in the world, the 324% year-on-year increase in beef imports in 2012 is just one example of the considerable opportunities for Australian food exporters that China’s demand has generated.

Increasing Imports

China has been importing significantly more beef over the past 5 years, increasing its global imports from 4,243 tonnes swt in 2008 to 61,386 tonnes swt in 2012.  Its importance as an Australian export destination has increased from taking 0.3% of our beef in 2008 to 3.4% during 2012 (figure 1).  Record exports to China in the first half of 2013 made them the third largest destination for Australian beef.

Competitors

Australia held 44% market share in China in 2012, with our main competitors being Uruguay (24%), Brazil (14%), New Zealand (12%) and Canada (5%) (figure 1). 

Tight slaughter followed the 2008-09 drought in Uruguay; however, 2012 saw rising numbers, lower steer prices, and increased beef exports.  Chinese imports from Uruguay increased 97% year on year.  Uruguay is recognised as having a quality product and a safe beef traceability system, factors likely to appeal to the increasingly affluent Chinese market.

Brazil’s exports have been suppressed in recent years. However, 2012 saw a recovering herd, slowed domestic consumption and a 14% devaluation in the Brazilian Real.  Chinese imports from Brazil increased 316% year on year, equating to a 4% year-on-year increase in market share.

New Zealand’s proximity to China and ‘clean, green’ credentials make it a strong competitor. Chinese imports from New Zealand in 2012 increased 166% year on year, equating to an increase in market share of 8% since 2008.

Changing Preferences

Changed cut preferences are emerging in China’s Australian imports (figure 2): a move toward individual cuts that are likely to be sold in retail markets or restaurants, and away from manufacturing beef that is generally used for value-adding.  While these percentage figures show us how preferences are changing, it must also be remembered that these are percentages of a vastly increased volume. 

For example, between 1994 and 2012 manufacturing beef fell from 88% (690 tonnes swt) of Australia’s exports to China to 22% (2,410 tonnes swt), while  actual volumes of brisket rose from 107 tonnes swt to 7,051 tonnes.  Even faster growth has been seen in the last 12 months, with brisket volumes exported going from 65 tonnes swt in July 2012 to 2,698 tonnes swt in July 2013 alone.  Shin/shank and loin exports have also surged in 2013, increasing 472% and 603% year-on-year from July 2012-13, respectively.

Ninety four percent (30,864 tonnes swt) of China’s Australian imports in 2012 were frozen, compared to 95% (2,252 tonnes swt) a decade earlier.  However, there is an increasing proportion of grain fed beef, with 3% (756 tonnes swt) of imports from Australia being chilled grain fed, and 9% (3,021 tonnes swt) frozen grain fed in 2012, compared to less than 1% (17 tonnes swt) and 2% (43 tonnes swt) in 2002, respectively (figure 3).  A more recent surge has seen chilled grassfed shipments go from 53 tonnes swt in July 2012 to 1,931 tonnes swt merely a year later.

What could be behind this surge in imports?

Sustained high economic growth since the 1960s has seen significant increases in per capita income, and a growing middle class.  Increased urbanisation has brought a more developed retail industry serving the growing demand for packaged foods. The wealthiest households purchase not only more food, but higher quality food: better cuts of meat, and branded, packaged or processed products. Food safety concerns are driving part of this change.

Factors such as urban expansion into farming areas and pollution have seen slowed agricultural productivity growth.  Domestic prices for land-intensive products such as beef have increased significantly (figure 4).  This is likely behind part of the recent surge in imports.

Historically, ‘grey channels’ have been a significant route for imports.  Central government crack downs and increased grey channel costs have reduced this.  Hence, some of the recent surge could be increased direct imports, rather than increased imports per se.

Potential Outlook

There is reason for optimism about opportunities in China. However, we also face significant competition and challenges.  The 2012 surge in imports surprised the market, and in the first half of 2013 we exported 64,241 tonnes swt to China, as compared to 3,048 tonnes swt in the first half of 2012.  This may represent partly opportunistic buying due to our current low beef prices, on top of a reportedly low domestic cattle herd.  Meat and Livestock Australia (MLA) has recently published its mid-year forecast for total 2013 Australian beef exports to China, at 115,000 tonnes swt.

China’s food demand will not increase indefinitely.  The top 20% of urban households have reached a stable food intake, and further increases in income will not equal increases in demand.  For the remaining 80% of households, as income rises, less of each unit of extra income will be spent on food.  It is also common for economic growth to slow as a country goes through a middle-income transition. There are also distribution and storage problems to consider, with unreliable cold chain outside of urban areas, and a large number of households not owning refrigerators.

What does this mean?

The Chinese market represents opportunities, but not a ‘free ride’.  China has a potentially enormous appetite for beef and is beginning to demand higher quality product. Australia’s image as a safe, reliable supplier is in our favour, and China’s importance to us as an export destination is growing.  That said, there are big competitors in the market, and demand may grow more slowly in the future.  There are also practical hurdles to growth in high quality beef imports, such as the lack of cold chain systems.

Cuts increasingly demanded by China, such as shin/shank and brisket, are traditionally demanded by Australia’s established markets such as Japan and Taiwan.  This increases the competition internationally for these products.  China and changing consumer preferences should be considered an important new market to ‘keep an eye on’, but producers should continue to see China in the context of our world market.

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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