What's your beef China?

What's your beef China?

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Australian beef exports to China in the first half of this year were nearly 91 per cent above the five-year average.

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The pull of Australian beef to China has gained strength since the beginning of 2018. Average monthly Australian beef exports to China in the first half of this year were nearly 91 per cent above the five-year average.

Even though demand has been consistently rising for some time, the remarkable jump in volumes this year are a clear signal that ongoing issues surrounding the Chinese pork sector are beginning to impact on alternative protein supply markets.

While Japan has long been Australia's number one customer for beef product since 2016, the solid demand this season from China is continuing to narrow the gap between the beef export market share of the second-placed US and China.

In April we reported that China was holding third place in terms of market share with 19.6pc, compared to the US's with 21.8pc.

Beef export volumes to the half year now show that China is closing in on capturing second spot with a market share of 20.7pc to the US's 21.5pc.

When assessing offshore markets, we often focus on US dollar prices but given that China now takes more than 20pc of our export beef, shining the spotlight on the Chinese yuan provides an interesting insight.

Domestic Australian saleyard prices for the national heavy steer are our best indication of export values to China as they remove the influence of domestic restocker and feeder buyers.

During the period 2000 to 2015 the national heavy steer traded within a 270-370 range on a carcase weight basis.

Since the 2014/15 drought and the subsequent cattle price rally, heavy steer prices have settled within a 450-550 range, in Australian dollar terms.

In contrast, an elevated Australian dollar to the Chinese yuan (CNY) during the mid-2000s and particularly during 2011 (when the A$ also went above parity against the US$) meant that the market looked very different from the perspective of Chinese customers.

In Yuan terms, there was a pronounced step up in heavy steer prices during the 2000 to 2015 period.

Indeed, the heavy steer in yuan went from a 10-15CNY range during 2000 to 2003, to a 17-23CNY range between 2003 and 2008.

Graph 1: Australian national heavy steer prices. Source: MLA's NLRS

Graph 1: Australian national heavy steer prices. Source: MLA's NLRS

After a brief dip post the global financial crisis the heavy steer reached over 25CNY in late 2011.

However, the rally in domestic Australian beef prices since 2015 has coincided with the AUD/CNY exchange rate depreciating 32pc from its peak in 2011 above 7.11 to around 4.81.

The falling AUD/CNY has insulated the Chinese beef importer from increased domestic prices in Australia for finished cattle.

While favourable currency movements have assisted the Chinese importer in recent times, the African Swine Fever epidemic has seen pig prices skyrocket in some Chinese regions.

Pig prices in Shanghai are about 80pc higher than they were in May 2018, just before the outbreak of ASF.

In contrast, Australian heavy steer prices look comparatively good in CNY terms. They have only increased 20pc since May 2018.

In Chinese yuan terms the national heavy steer is currently sitting close to 28 yuan/kg cwt, which is nearly 20pc off the historic highs recorded after the 2015 drought.

Within the past five years, Chinese importers of Aussie beef have paid more per kilo in yuan to secure product.

In relative terms compared to pig price movements since the outbreak of ASF, the price gains in imported beef from Australia isn't excessive, and unlikely to create strong headwinds on Chinese demand.

This should remain the case while the AUD/CNY levels remain favourable for Aussie beef exporters, coupled with Chinese concerns around the supply/health for the Chinese pork industry. This is encouraging Chinese consumers toward alternative protein sources.

ASF is a viral disease of pigs that has close to 100pc mortality rate. Since the first reported case in China in August 2018, it has spread rapidly, causing an estimated loss of at least 30pc of Chinese hog numbers.

In terms of pork production, China is still the world's biggest, but the higher efficiency in Europe and US means that last year it accounted for 48pc of world supplies, as opposed to 55pc of total numbers.

Based on the progress of the disease, there is reason to assume that 40pc or more of the sow herd will be lost over the remainder of the year, with a corresponding decline in domestic production.

While short term impacts have already filtered through to the global protein market, the impact is likely to persist for many years to come.

The sow herd recovery is likely to be a slow and lengthy process. A full recovery could take four to five years, assuming the disease is brought under control.

In an optimistic scenario for disease containment, it is estimated that supply shortages of animal meat in China would be 29.4 million tonnes over the next three years.

In contrast, a bearish outlook for the control of ASF would put the figures at 45.7 million tonnes according to Goldman Sachs analysis.

Australia isn't the only country to benefit from China's woes. Total beef imports into China have increased 61pc on the year.

New Zealand has also reported record volumes of beef exported to China. Their first half volumes in 2019 are 89pc higher than the exported volumes over the same period in 2018.

Brazil may be in line to supply more into the opportunistic market in the future. An extra 25 beef plants in Brazil are reported to be under review by China for authorisation to trade by the end of the year.

Growth in demand from China has not been unique to beef markets. Alternative proteins including poultry, sheepmeat and seafood have also moved to fill the protein hole left by the depleted pork supply.

This significant increase in imported protein products won't come without challenges though. China will need to manage cold storage for the growing volumes of imported product as their domestic supply continues to contract.

  • www.mecardo.com.au

The story What's your beef China? first appeared on Farm Online.

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