Quality over Quantity? Live Cattle Exports a Positive Move amid Growing Brazilian Competition

15 February 2017 Ben Walsh, Research Analyst, Global Food and Water Crises Programme

Background

Australia’s first sea-bound live cattle shipments have left for meatworks in Eastern China. Over the coming weeks, Elders’ Northern Australia Cattle Company (NACC) will supply 1,200 live cattle from Portland, Victoria to Shidao Port, China. The passengers in question are mainly Black Angus cows aged between 18-24 months weighing an average 500kg. This historic shipment is one of the many products of the China-Australia Free Trade Agreement (CHAFTA), which aims to cut tariffs on beef imports (that range from 12-25 per cent) by 1 January 2024 and eliminating the 12 per cent tariff on offal beef by 1 January 2022. Despite this agreement, aimed at increasing market competitiveness, analysts are worried that Australian beef exports to China could recede in the face of South American competition, most notably from Brazil. In late 2016, Brazil surpassed Australia as the leading beef supplier to China, but does this actually signal an Australian inability to compete? While Australia cannot compete with Brazil volume-wise, market access and product quality are Australia’s competitive advantages that will continue to set it above the rest over the long term.

Comment

There are many commentators who argue that increased beef exports from countries like Brazil are likely to smother Australia’s position as a principle exporter of beef. They have reason to argue so. Australia’s share in China’s beef industry has dropped from 54 percent in 2013, to 45 percent in 2014, to 34 percent in 2015 and is now, as of 2016, at 26 per cent. Meanwhile, Brazilian agricultural practices have improved. Adolfo Fontes, a Brazil-based senior analyst with Rabobank, says that Brazil is shifting to a more intensive production system. By 2025, he argues that 20 per cent of beef will be produced through feedlot systems. Genetic improvements could also further Brazilian production. Incorporating Hereford and Angus cows through crossbreeding is intended to improve the quality of Brazil’s exports. In 2017 Brazil is also set to penetrate new markets. In mid-2016 Brazil was granted access to the United States market following the determination that their health standards met those of the US. Rabobank’s senior analyst Angus Gidley-Baird argues that there is now space in the US market that Brazil, with its ability to deliver large volumes of beef, can take advantage of.  Australia is unable to compete with Brazil in terms of volume, which, simply put, means that it is able to produce more cattle than Australia. Brazil’s population is around 207 million, relative to Australia’s 23 million, and its percentage of arable land is around 9.5 per cent to Australia’s 6.1 per cent. Australia has suffered from droughts and a constrained local supply that has left farmers over the last year trying to replace their cattle inventory. Though Brazil can be seen as outcompeting Australia at the lower-value end of the market, Australia is set to shine so long as it utilises its competitive advantage: its appeal to China’s wealthy and increasingly health-enthused populace.

Even though Brazil has overtaken Australia, Australia enjoys a competitive advantage in a field it has had over ten years’ experience in: quality premium beef cuts. Craig Aldous, CEO of Elders China, admits that while many of the hundreds of millions of people lifted out of poverty cannot afford premium Australian beef, those that can (the upper-middle class) still number in the hundreds of millions. Australian beef is regarded as extremely high quality in China. For Australian beef exporters to prosper, businesses need to be thinking long term. Australian beef suppliers need to differentiate their product from competitors by emphasising the quality of the product and the ease in which it slots into the ‘clean and green’ message being espoused by the Chinese Communist Party. In the Party’s National Program for Food and Nutrition (2014-2020) food quality, quantity and nutritional content are the three focus points the Party will target to address the nutritional status of the food its people consume. A 2016 study by McKinsey found that 72 per cent of Chinese are worried about the food they eat and the harm it is/may be having on their bodies, up from 60 per cent in 2012, 50 per cent prefer making healthy food choices and 73 per cent of interviewees said they would be happy to pay more for premium produce. Australia is likely to lose some of its market share as competition increases, but to stay competitive Australian beef farmers must narrow their target market and focus on their competitive advantage: premium, fresh beef.

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