abare.gov.au - research report 08.01

Indonesia

Indonesia’s beef cattle production is dominated by smallholder producers that fatten domestic native cattle purchased from smallholder breeders. Large commercial feedlot operations were introduced in 1990, when the government allowed the import of feeder cattle from Australia. This policy formed part of a broader program to develop partnerships between feedlots and smallholders. Under the program, feedlots with superior financial and management resources were obliged to supply smallholders with imported feeder cattle, feed and technical assistance. They were then required to purchase the fattened cattle at prevailing market prices. All cash costs were paid by the feedlot and reimbursed from the sale price.

Until the Asian financial downturn in 1997, the buyback program proved effective. Relatively low prices for imported cattle and a favourable exchange rate underpinned the steady increase in Indonesian demand for Australian live cattle. By 1997, 47 per cent of Australia’s total exports of live cattle (424 000) were shipped to Indonesia. The main reasons for the large export share were the low price of Australian cattle, comparatively low transport costs and the high genetic potential of the animals being shipped. However, in 1997, the sudden devaluation of the Indonesian rupiah (figure d) caused a steep increase in the relative price of imported cattle. As a result, Indonesian feedlots closed or opted to source cattle domestically. Australian live cattle exports to Indonesia fell to around 41 000 in 1998 (figure e). This drastic decline from pre-1997 levels reflects the sensitivity of Indonesian demand to changes in import prices. Indeed, as the rupiah regained its value, import demand for cattle from Australia and other sources resumed. By 2002, Australian live cattle exports had recovered to a record 426 000.

Import demand from Indonesia for Australian live cattle remains highly sensitive to changes in the exchange rate and Australian saleyard prices of cattle. Beef is consumed by middle to higher income consumers in Indonesia. When consumers have sufficient disposable income their preferred source of protein is beef.

However, increases in the price of beef relative to other sources of protein result in substitution away from beef toward lower priced protein sources such as poultry and fish. The steady increase in the nominal saleyard price of Australian feeder cattle since 1997 is shown in figure f.

Currently, Australia’s live cattle export industry has an advantage over other potential suppliers of meat to Indonesia, such as India and Brazil, because of its disease free status. However, in the absence of the Indonesian government policy to restrict the entry of beef from Brazil and India to minimise the risk of an incursion of foot and mouth disease, competition in the market would be more intense

Philippines

In the 1990s, strong population growth in the Philippines combined with changing food preferences and more liberal import laws resulted in a significant increase in demand for beef. With backyard cattle operations unable to meet the growing demand for beef there was an emergence of commercial farms and feedlots. The industry was heavily dependent on imports of low priced feeder cattle from Australia and New Zealand. This resulted in a significant increase in Australian live cattle exports to the Philippines during the 1990s, with live cattle exports rising to around 223 000 in 2000.

A depreciation in the Philippine peso against the Australian dollar and increased Australian saleyard prices for cattle over the past few years have reduced the profitability of commercial farms and feedlots. As a result, Philippine demand for imported live cattle from all sources has declined. Australian live cattle exports fell to around 21 000 in 2005.

Reflecting the declining profitability of commercial farms and feedlots and the small scale of backyard farms, beef production in the Philippines increased by only 2 per cent to 225 000 tonnes between 2000 and 2005. This is in contrast with the 59 per cent growth in production over the previous five year period.

The reduction in beef supply as well as rising input and transport costs served to increase the retail price of beef in the Philippines. Consequently, beef consumption has declined. Consumers have since shifted to other low priced protein substitutes such as pork, chicken and buffalo meat (figure g).

In 2005, total beef imports declined by 15 per cent as meat processors substituted lower priced mechanically deboned chicken and turkey meat for manufacturing grade beef. According to the Philippine Bureau of Statistics, Philippine imports of frozen chicken increased by 28 per cent to 26 000 tonnes over the same period (Philippine Department of Agriculture 2007).

Malaysia

Cattle production systems in Malaysia are very similar to those found in many parts of south east Asia. The majority are comprised of smallholdings of fewer than ten cattle. Production is mainly scattered over more rural areas of the country, particularly Kedah and Kelantan, which are principally rice producing regions. The animals are reared under low input extensive systems on areas of land not planted with rice (Jalaludin and Halim 1998). They selectively graze on whatever grasses exist, which can be poor quality. A feedlot system was developed during the 1990s, supported by imports of feeder cattle from Australia.

Calves produced under the subsistence conditions of smallholders are generally of variable age, size and health. In addition, the small size of the native breed Kedah–Kelantan means that abattoirs and feedlots incur higher labour and feed costs per kilogram of meat produced, with many of the slaughter processes requiring the same amount of labour regardless of animal size. Consequently, as both population and incomes have increased, the domestic cattle industry has been unable to meet the increasing demand for high quality feeder cattle, increasing the demand for imported cattle. In addition, as the feedlot sector in Malaysia has been developed, cross breeding with breeds from subtropical and temperate countries such as Australia has been used to upgrade the indigenous Kedah–Kelantan cattle for better growth performance. Reflecting the expanding feedlot industry in Malaysia and low Australian saleyard prices for cattle, Australian live cattle exports to Malaysia increased significantly during the 1990s, peaking in 2002 at around 91 000, an increase of 68 000 since 1992.

Since 2002, Australian live cattle exports to Malaysia have declined, underpinned by a 33 per cent depreciation in the Malaysian ringgit against the Australian dollar (figure d). In 2006, Australian live cattle exports were around 56 000, 38 per cent below 2002 levels. In response to the loss of one of their major suppliers because of relatively high prices, Malaysian imports of low priced Indian beef have increased significantly. Malaysia imported around 100 000 tonnes (shipped weight) of Indian beef in 2006, 36 per cent more than in 2002 (figure h).

Israel

Until 1995, beef production in Israel was limited primarily to fresh meat derived from domestic dairy cattle culls and beef cattle. The arid climate of much of Israel combined with high population density in the nonarid regions constrained the size of Israel’s beef industry (USDA 2004). In 1995, however, the Government of Israel lifted barriers on live feeder calf imports. This served to increase beef production and stimulate the development of a feedlot industry.

Imported feeder calves account for about a third of the cattle destined for beef production in Israel, with the majority of calves imported from Australia and Hungary. Prior to the discovery of bovine spongiform encephalopathy (BSE or ‘mad cow’ disease) in Poland in 2002, Poland had been a major supplier of small calves to Israel (USDA 2004).

Calves imported from Australia arrive at an average live weight of 220–250 kilograms. They are fattened for 200 – 235 days until they reach slaughter weights of 500–600kilograms. The majority of calves imported from Australia are mixed angus and brangus bulls. Bulls are preferred by Israeli feedlotters and consumers as they produce a greater proportion of forequarter meat (kosher meat generally comes from forequarters). Bulls also gain weight more rapidly and effectively than steers, producing leaner carcasses that are less variable in tenderness.

Most of the cattle from Hungary are air freighted at live weights of 60–70 kilograms. They are fed for 300 – 350 days to attain slaughter weights of 450–580 kilograms.

In Israel, beef consumption per person increased by 29 per cent to 18 kilograms between 2000 and 2006 (FAOStat 2007), reflecting an increase in demand for beef from a growing and more affluent population. In 2006, a self imposed ban on beef exports by Argentina reduced frozen beef supplies significantly. Prior to the ban, imports from Argentina accounted for 48 per cent of Israel’s frozen beef imports in 2005. The ban ultimately benefited Australia as demand for live cattle from Israel increased. In addition, a 7.5 per cent depreciation of the Australian dollar against the Israeli shekel during 2006 further increased the attractiveness of Australian live cattle to Israeli feedlotters (Bank of Israel 2007). Australian live cattle exports to Israel more than doubled between 2005 and 2006, to around 80 000. As a result, Israel displaced Malaysia as Australia’s second largest market for live cattle.

Middle East

Exports of live sheep from Australia are principally destined for markets in the Middle East, including Saudi Arabia, Kuwait, Jordan, Bahrain and Oman. Saudi Arabia and Kuwait imported more than half of Australia’s live sheep exports in volume terms in 2006-07 (figure i).

While Kuwait has been a continuous market for live sheep over the past ten years and currently imports 22 per cent of Australian sheep shipments, Saudi Arabia only emerged as an important market for Australian sheep after 2000. In 2003, Saudi Arabia imposed a ban on sheep imports from Australia but imports resumed in 2005. It currently accounts for nearly a third of Australia’s exports (figure i). In 2006-07, Saudi Arabia imported almost 1.4 million sheep, 16 per cent more than in 2005-06, worth an estimated $105 million.

The Middle East is an oil rich region whose population enjoys a high standard of living. Demand for live animals in the Middle East stems from religious and cultural preferences (Shiell 2003), in contrast with many south east Asian countries where it is a consequence of the lack of refrigeration.

Demand for live sheep imports by the Middle East has been very strong over the past decade. Despite investment in intensive breeding units, domestic production is limited by the arid conditions of the region. While fresh water is plentiful as a result of heavy investment in desalinisation plants and subsidised supply, feed is largely imported. As a result, domestic production has been limited by the availability and cost of imported feed and the domestic supply of animals has been unable to satisfy demand.

Demand for live sheep is principally met through live imports from Australia, north Africa and Iran. Sheep from north Africa are cheaper than those from Australia and have therefore been more attractive in the past few years given the increasing price of Australian sheep. When adjusted for inflation, the Australian export price per animal increased by 35 per cent between 2000-01 and 2006-07 (figure j). One of the disadvantages of sheep from Africa, however, is that they are less likely to be free of disease. In the past this has led to short term bans on livestock imports from the Horn of Africa because of transboundary disease risks, including rinderpest, foot and mouth disease and rift valley fever (MLA 2007). Thus, while the recent lower price for sheep from Africa has shifted demand away from Australian livestock, the consistent quality of Australia’s product on the world market, along with its low disease status, has helped to maintain Australia’s presence in Middle East markets.

Over the past decade the governments of Bahrain and Kuwait have shielded consumers from the increasing price of imported live sheep by subsidising the price of sheep meat. Thus, the increasing price of imported Australian sheep has been absorbed and the demand for live animals has continued to grow. However, only meat produced from animals slaughtered domestically are eligible for the subsidy. It does not apply to imported sheep meat. In Bahrain, imports of live sheep from Australia increased by 30 per cent between 2000-01 and 2006-07. Much of this increase occurred because of the proximity of Bahrain — where sheep meat is subsidised — to Saudi Arabia —where it is not. Saudi Arabians able to drive to Bahrain to purchase sheep meat have taken advantage of the price subsidy (Johar 2007).

The principal method of selling live sheep in the Middle East is in the ‘souk’, or traditional market, where animals are sold and slaughtered for their buyers. The animal is slaughtered in full view of the client and the meat from that animal is returned to the client. The client is assured that the meat they are receiving comes from their animal, that it has been slaughtered according to religious customs and that it is disease free (Johar 2007). Meat souks are found in larger cities and sell both fresh and frozen (imported) meat (Sunderman and Johns 1994).

Meat is also sold through smaller, local butchers who slaughter and sell fresh meat from animals they themselves purchase daily. The practices of local butchers ensure that the carcasses and cuts being sold have been sourced from animals slaughtered on the day of sale. Such marketing characteristics are important to a large portion of consumers in the Middle East. Demand for freshly slaughtered sheep meat peaks during times of religious festivals such as the Muslim Hajj pilgrimage (MLA 2007).

As the demand for live sheep in the Middle East has increased in the past ten years, so too has the demand for sheep meat. The urban populations of many of the main importing countries are increasingly westernised and do not have the same demand for freshly slaughtered meat as do their rural counterparts. The demand for sheep meat has been met to a large extent by imports of frozen and chilled sheep meat from Australia, New Zealand, China, India, Pakistan, Uruguay and Sudan. Australia and New Zealand have historically been the largest two source markets for chilled and frozen sheep meat to the region (figure k), with sheep meat exports of $186 million and $63 million respectively in 2006. Exports of sheep meat to the Middle East from source countries are reported in lieu of imports because of incomplete reporting to UN Comtrade by Middle East countries. Values are converted to Australian dollars using an annual average exchange rate.

Growth in frozen sheep meat from China to the Middle East has been particularly strong in the past five years (figure l), mainly because of the price difference between Chinese and Australian product. In 2006, China was the third largest exporter of sheep meat to the region, with exports valued at $56 million . Sheep meat exports from China to the Middle East are destined principally for Jordan (figure l), whereas Australian exports of sheep meat are destined mainly for Saudi Arabia and the United Arab Emirates.

Another factor affecting demand for sheep meat in the Middle East is the proportion of expatriates living in countries such as Saudi Arabia, Kuwait and Bahrain. In the United Arab Emirates (UAE), for example, only 10 per cent of the population are citizens. The citizens of the UAE have a preference for Iranian goat meat, whereas expatriates will buy sheep meat and are largely satisfied with imported frozen product (Johar 2007).