abare.gov.au - Australian commodities – March quarter . volume 16 . number 1 2009

Beef and veal

Outlook to 2013-14

Sally Fletcher

Saleyard prices for cattle are forecast to average slightly higher in 2009-10 than in 2008-09 as a result of stronger restocker demand, the depreciation of the Australian dollar and continued low cattle turn-off. The Australian weighted average saleyard price for cattle is forecast to rise by around 2 per cent in 2009-10 to 305 cents a kilogram. This follows a forecast 4 per cent increase in prices in 2008-09.

The above-average rainfall in much of northern Australia in late 2008 and early 2009 is expected to lead to an improvement in pasture conditions. This, combined with lower forecast feed grain prices, is expected to increase the incentive for herd rebuilding in 2009-10, which will place upward pressure on saleyard prices. An assumed lower Australian dollar in 2009-10 will increase the competitiveness of Australian beef in many export markets, including Japan and the Republic of Korea.

However, lower export demand for Australian beef in some markets as a result of the global financial crisis is expected to limit the rise in Australian saleyard prices. Demand for Australian beef in the Republic of Korea is forecast to weaken in 2009-10 as competition from US beef increases. Assumed economic contractions in the Republic of Korea and Japan in 2009, and weak economic growth in 2010, are expected to place downward pressure on the demand for beef as consumers substitute toward cheaper protein sources.

Saleyard prices are forecast to remain high in 2010-11, with a recovery in export demand forecast to offset the downward pressure on prices resulting from slightly higher turn-off. With global economic growth expected to improve in 2009-10, the demand for beef in Japan, the Republic of Korea and other smaller markets, such as South-East Asia, the Middle East and the Russian Federation, is expected to strengthen.

Prices (in 2008-09 dollars) from 2011-12 onwards are projected to decline, partly as a result of increased slaughterings. Nevertheless, prices are expected to be supported to some extent by a recovery in export demand.

Beef herd projected to increase

Improved pasture conditions in northern Australia and lower forecast feed grain prices are expected to increase the incentive for herd rebuilding in 2009-10. The proportion of females in the beef cattle herd has reached the highest in the past 20 years, which will enable a quicker recovery in herd numbers.

However, the recent floods in northern Queensland are likely to delay herd rebuilding efforts in those regions. There have been stock losses and damage to infrastructure such as roads and fences. This is likely to adversely affect production and operations on northern Queensland properties in the short term.

Beef cattle numbers are forecast to increase by 2 per cent in 2009-10 to 25.9 million. The herd is projected to continue increasing gradually over the medium term, with beef cattle numbers forecast to reach 26.6 million by June 2014. Most of this growth in cattle numbers is expected to be in the northern states.

Since 1990-91, Australian beef cattle numbers have increased by more than 10 per cent. Most of the increase has been in Queensland, the Northern Territory and Western Australia. Over this period, beef cattle numbers in the southern states have been relatively stable.
The growth in cattle numbers in northern Australia has been made possible through improvements in management practices and infrastructure such as fencing and watering points. Development of the live export trade has created an additional market for cattle and has increased the demand for cattle from northern Australia.

With the demand for live cattle expected to remain strong over the medium term, and assumed further improvements in management practices and infrastructure, herd numbers in northern Australia are expected to continue increasing.

Production to increase over the medium term

Slaughterings are forecast to increase by 1 per cent in 2009-10 to 8.8 million, despite producers rebuilding herds. This increase from 2008-09 reflects the expectation that there will be more young cattle available for slaughter, particularly toward the latter half of the year. Higher slaughterings will translate into higher beef and veal production, which is also forecast to rise by around 1 per cent in 2009-10.

Over the medium term, slaughterings are forecast to increase, particularly towards the end of the outlook period, in line with rising cattle numbers and higher slaughter rates. Slaughter rates are forecast to be lower over the next two years as producers withhold stock to rebuild herds. From 2011-12 onwards slaughter rates are projected to increase. Between 2008-09 and 2013-14 slaughterings are projected to increase by 8 per cent to around 9.4 million. When combined with higher forecast slaughter weights, beef and veal production is projected to reach 2.34 million tonnes by 2013-14.

Export demand to strengthen over the medium term

Australian beef exports are forecast to fall in 2009-10 to 920 000 tonnes, as a result of lower demand in export markets. However, the assumed depreciation of the Australian exchange rate is expected to provide support for export earnings. The value of beef and veal exports is forecast to remain around $4.6 billion in 2009-10, with the small decline in volumes being offset by higher export prices denominated in Australian dollars.

Increased competition from US beef in the Korean market, and to a lesser extent the Japanese market, is expected to reduce the demand for Australian beef in 2009-10, although the adverse effect is expected to be mitigated by the assumed depreciation of the Australian exchange rate against the US dollar. With the global economic downturn expected to affect the demand for beef in many countries, exports to some smaller markets, such as the Russian Federation and South-East Asia, could also be weaker.

In contrast, Australian beef exports to the United States, largely comprised of low-quality manufacturing beef, are forecast to rise in 2009-10 as consumer demand moves away from more high value cuts. This will partially offset lower export volumes to other markets in the short term.

Over the medium term (to 2013-14), Australian beef exports are projected to increase, as demand strengthens. Greater overall demand for beef in Japan and the Republic of Korea, as health concerns surrounding BSE (bovine spongiform encephalopathy or ‘mad cow disease’) recede, are expected to largely offset increased competition from US beef. The assumed economic recovery from 2009-10 onwards is also expected to increase the demand for beef in these and other markets.

Exports to Japan rebound over the medium term

Australian beef exports to Japan are forecast to fall by 4 per cent to around 345 000 tonnes in 2009-10, as assumed economic contraction in Japan dampens the demand for beef. An increase in competition from US beef is also expected to put downward pressure on the demand for Australian beef. However, a significantly weaker Australian dollar against the US dollar is expected to limit the effect of this competition on the demand for Australian beef.

Current Japanese import restrictions, which limit US imports to beef from cattle slaughtered under 21 months of age, are not expected to be relaxed in the short term. Despite the restrictions, imports of US beef have increased since mid-2008 as the availability of beef suitable for the Japanese market increased. The increase in export volumes could be the result of a greater range of cuts being sent to Japan, which has been an initiative of the US Meat Exporters Federation, combined with a rise in the number of age-verified cattle slaughtered under 21 months of age.

While the competition from US beef is expected to increase over the medium term, the adverse impact on Australian beef exports to that market is likely to be offset by a gradual strengthening in the overall demand for beef in Japan.

Beef consumption in Japan has been declining, particularly since 2000-01. This is the result of a combination of factors including heath and safety concerns following the discovery of BSE in the Japanese herd; and higher prices for beef relative to alternative protein sources. Since the early 2000s, Japanese consumers have increased their pork consumption, while per person consumption of beef has declined.

Beef consumption in Japan is expected to recover gradually over the medium term as income growth improves. Health concerns surrounding beef are also expected to gradually recede. In line with the increase in demand, Australian beef exports to Japan are projected to increase gradually, reaching 370 000 tonnes by 2013-14.

As discussed above, an assumption underpinning this outlook for Australian beef exports to Japan is that the 21 month age restriction imposed by Japan on US beef imports will remain. If the 21 month age restriction is relaxed, competition from US beef in the Japanese market would increase, which in turn could lead to greater competition for Australian beef exports to Japan.

Increased competition from US beef in the Republic of Korea

Exports of Australian beef to the Republic of Korea are forecast to fall by 6 per cent in 2009-10, to 105 000 tonnes, as competition from US beef increases. Imports of US beef into the Republic of Korea are expected to increase as a result of the easing of Korean import restrictions on US beef over the past year.

In December 2003, the Republic of Korea banned imports of US beef following the discovery of BSE in the United States. This ban led to an increase in the demand for Australian beef in the Republic of Korea. However, in April 2008 an agreement was reached between the Republic of Korea and the United States to allow US beef to again be imported. Following street protests in the Republic of Korea, a new agreement was reached on 26 June 2008.

Under the new agreement, the preferred bone-in rib cuts can again be imported. US beef imports to the Republic of Korea are currently restricted to beef from under 30 months of age. However, this is not expected to be a significant constraint on US exports to the Republic of Korea as the majority of cattle slaughtered in the United States are under 30 months. Higher US beef exports to the Korean market is expected to lead to increased competition for Australian beef.

Competition from US beef in the Korean market is expected to continue over the outlook period, although the effect of this competition on Australian beef is expected to be partially offset by the assumed relatively low Australian exchange rate and a gradual increase in the demand for beef in the Republic of Korea. Reflecting these factors, the export volumes of Australian beef to the Republic of Korea are forecast to remain at around 100 000 tonnes over the medium term.

Demand in the United States to remain strong

Australian beef exports to the United States are forecast to increase by around 11 per cent in 2009-10 to 300 000 tonnes. As the economic downturn in the United States worsened during 2008, consumers changed their meat consumption patterns. Away-from-home meat consumption fell, and the demand for less expensive beef cuts and ground meat products for home consumption increased.

With assumed economic contraction in the United States in 2009 and relatively low economic growth in 2010, the demand for manufacturing beef, which accounts for the majority of Australian beef exported to the United States, is expected to remain strong. The assumed depreciation in the Australian exchange rate in 2009-10 will make Australian exports markedly cheaper in the United States, further assisting export volumes.

Cow slaughter in the United States remained high throughout 2007 and 2008, largely as a result of dry conditions in many regions, high feed costs and declining feeder cattle prices. As a result, US cow and heifer numbers declined by around 1.6 per cent in 2008. This suggests there is likely to be lower US cow slaughter in 2009 and into 2010, further increasing the demand for Australian manufacturing beef.

Over the medium term, the demand for Australian beef is expected to remain strong as the United States enters a herd rebuilding phase and cow slaughter falls. Australian beef exports to the United States are forecast to increase, reaching 345 000 tonnes by
2013-14.

Live exports

Australian live cattle exports are estimated to fall by 3 per cent in 2009-10, to around
760 000 head, as a result of demand for beef in Indonesia and other South-East Asian countries weakening, in line with sharply lower economic growth.

Over the medium term, live exports are projected to increase as global economic growth recovers, leading to a strengthening in beef demand in South-East Asia. Australian live cattle exports are forecast to reach 830 000 head by 2013-14.

Australia’s largest export market for live cattle in recent years has been Indonesia. Exports to Indonesia fell in the late 1990s as a result of the Asian financial crisis and the sudden devaluation of the Indonesian rupiah, which caused a steep increase in the relative price of imported cattle.

Over the past five years the Indonesian rupiah has depreciated further. However, despite Australian live cattle becoming more expensive in Indonesian currency, exports to Indonesia have continued to increase, reaching a record of more than 540 000 in 2007-08. This suggests a strengthening in the demand for Australian live cattle in Indonesia on account of rising incomes and a growing population.

In 2009, economic growth in Indonesia is assumed to slow, leading to a weakening in the demand for beef, and therefore live cattle, from Australia. However, economic growth in Indonesia is assumed to improve in 2010. Reflecting this, the demand for beef is expected to recover. Australia is geographically well placed to export live cattle to Indonesia to be finished in feedlots to meet this demand.

One downside risk to Australia’s live cattle trade is the possibility of increased competition from Brazilian beef, following an announcement from the Indonesian Government they would again import beef from Brazil. However, it remains uncertain at this stage as to when Brazilian beef will be imported and the extent to which this could affect the demand for Australian beef.