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Thursday, July 09, 2015

US halts ‘Developing Asia era’ transition

By Augusto Semmelroth  |  Source: DAFF, MLA, Peter Weeks

Key points

  • Aussie beef exports increased a further 13.6% year-on-year to 1.35 million tonnes swt in 2014/15.
  • US import demand revival has soaked up most of the domestic production surplus and even priced other markets out of the beef trade.
  • Increased US share of beef exports came at the expense of upcoming markets to see expected transition into a ‘Developing Asia era’ coming to a halt.
  • Competitive tension between export markets is projected to intensify further in a tighter supply environment.
  • This will support firmer beef and cattle prices in the near future.

2015-07-07 Beef Exports FIG 1

2015-07-07 Beef Exports FIG 2

2015-07-07 Beef Exports FIG 3

The 2014/15 financial year was marked by ongoing dry conditions, strong cattle turnoff, and record cattle/beef prices, all leading to unprecedented beef exports. While the prospects of a new “Asian era” for beef exports remain a hot topic in the cattle industry, the US stole the spotlight last year. It absorbed an astonishing 35% of the record 1.35 million tonnes swt shipped overseas.

As rightly observed by leading industry expert, Peter Weeks, the Australian beef export industry has gone through three distinct phases since the 1970s. The first steps into trade liberalisation led to a surge in exports to the US during the 1970-80s. Later improvements in market access into key markets such as Japan and South Korea saw a gradual transition from a ‘US era’ into a ‘North Asia era’ during the 1990s and 2000s.

More recently, the attention has quickly shifted towards China and other Asian markets, and rightly so. Beef exports to key Asian markets (excluding Japan/Korea) have moved from around 55,000 tonnes swt (6% of total exports) to 285,000 tonnes swt, or roughly 25% of beef shipments, in 2013/14. That was sufficient for Meat and Livestock Australia (MLA) to describe it as the ‘next export wave’ or a ‘Developing Asia era’.

However, this trend has come to a temporary halt in 2014/15 on the back of a sharp reshuffle in the global beef trade. The resurgence of US demand for beef has changed export market dynamics completely to see beef prices moving into uncharted territory, particularly for lean/manufacturing beef. Inevitably, the US beef import binge has pushed price-sensitive markets to the sidelines during the period.

To put this into context, figure 2 shows the total beef exports to key markets in 2013/14 and 2014/15, together with the year-on-year change in volumes. The surge in shipments to the US is literally ‘off the charts’ with total exports jumping 77% year-on-year to 471,061 tonnes swt in 2014/15, or 35% of total Aussie beef exports.

Volumes shipped to Japan and South Korea increased by a more modest 8.5% to 303,517 tonnes and 1% to 156,916 tonnes swt, respectively, in 2014/15. Developing Asian markets (including China), on the other hand, have not coped well with higher beef prices and fierce competition from the US. Beef shipments to ‘developing Asia’ fell 15% to 243,031 tonnes swt in 2014/15 to see market share retreating to 18% (figure 3). 

What does this mean?

Developing Asian countries will continue to play an important role in diversifying the pool of export markets into the future, but will not be the panacea some believe. Despite the positive long-term prospects, those markets remain more price sensitive than traditional markets and susceptible to short/medium term changes in global market forces.

As mentioned in previous Mecardo articles, the US is in the midst of a herd rebuild phase and will continue to require large amount of beef imports to offset its domestic production shortfall in the years to come. This will most likely halt, or even reverse, the expected transition into a ‘developing Asia era’.

With the competitive tension between export markets expected to become much stronger going forward as supply tightens, higher beef prices will be required to ration export demand. That in turn, will alleviate the shrinking processor’s margins and give them scope to bid higher for finished cattle.  

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