7.1. Australian cattle industry projections - beef exports Japan
As Australia’s largest beef export market, taking almost 36% of all beef shipped in 2011, the condition of the Japanese beef market has a very large influence upon the health of the Australian beef industry. With decades of Japanese influence evident right through the beef industry, from breed preferences, production techniques and feeding regimes, a sustained downturn in this market would be felt right through all sectors.
Given all the issues that faced the Australian export beef trade to Japan in 2011, for total exports to fall only 4% to 342,200 tonnes swt for the year was a better than anticipated result – especially given the state of the market throughout the middle of the year. While exports for the year were the lowest since 2003, some of the decline in 2011 must also be attributed to constrained Australian beef production and increased competition from other markets.
Reflecting the very weak economic conditions and consumer sentiments throughout 2011, Japan overtook the US to became Australia’s largest export market for manufacturing beef. With Japanese consumers deploying cautious buying patterns, the demand for beef from lower priced fast food outlets increased (which favours manufacturing beef), largely at the expense of the higher valued food service restaurants. Australian manufacturing beef exports to Japan in 2011 made up 33.9% of all shipments to the market, compared to 31.5% in 2010.
Further illustrating Japan’s increased demand for lower priced beef in 2011, Australian frozen beef shipments actually increased 2% for the year, to a calendar year record of 203,778 tonnes swt. This just surpassed the previous high of 203,654 tonnes swt sent in 2008. Grassfed beef made up 76% of the total – up 3% year-on-year.
The majority of Australia’s frozen beef exports to Japan in 2011 were made up of manufacturing beef (57%), with the only other major frozen cut being brisket (19.7%).
Reflecting the rising demand for the lower priced frozen beef, average Australian beef export indicator prices to Japan for 2011 increased across most reported frozen categories, with only frozen full briskets declining, down -0.3% on the previous year. Frozen beef prices for topsides, thick flank and chuck and blade increased 6%, 8% and 9%, respectively, on the previous year, with all three categories registering calendar year highs.
In contrast to the record high volume of frozen beef in 2011, the market sentiment for chilled beef was much more subdued, with total Australian chilled beef exports for the year contracting 11% to 138,408 tonnes swt. This was the lowest calendar year total since 1991 and almost 85,000 tonnes swt (or 38%) below the record volume sent in 2005. Chilled grainfed exports declined 12% year-on-year, to 45,558 tonnes swt, while chilled grassfed shipments contracted 11% to 92,850 tonnes swt.
Adding to the reduced demand for Australian chilled beef was an increase in available chilled beef supplies from the US, largely at cheaper prices (assisted by the weak US dollar). For January to November, imports of US chilled beef had increased 38% on the previous year, to 55,949 tonnes swt.
The 11% decline in Australian chilled beef exports for the year was in the cuts that make up the bulk of the trade, with the exception of brisket. The most popular Australian chilled beef cut to Japan in 2011 was brisket, which made up 18.3% of the trade, with total volumes increasing 4% for the year. However, 2011 shipments of blade (12.7% of the trade), chuck roll (11.7%), fullsets (11.2%), silverside/outsides (10.1%) and topsides/insides (7.5%) all declined in volume from 2010. The largest decline for the year was in fullsets, down 43% year-on-year, to 14,366 tonnes swt, while blade and topside/insides declined 12% and 7%, respectively.
In line with the decline in chilled beef volumes was a fall in most average indicative chilled beef prices for the year. Despite a 3% increase in average chilled shortfed fullset prices for the year, indicative chilled export prices for striploin, cube roll and tenderloin declined by 11%, 8% and 3%, respectively on 2010 averages.
Indeed, it has been the lower returns for premium beef cuts that have hurt both Australian exporter margins and processor returns in 2011. This has been a trend in the market since late 2008, and has been evident across most key importing markets – not just in Japan.
For 2012, Australian beef exports to Japan are expected to again face several challenges and issues, especially the increasing competition from the US and high A$. These factors are likely to offset some recovery in consumer demand for beef from the 2011 shocks, with Australian beef and veal exports for 2012 forecast to total 330,000 tonnes swt, down 4% on 2010.
The increased presence of US beef is likely to be the main factor impacting trade to Japan in 2012 – possibly assisted by the change in age requirements. Many are expecting an easing in the age requirements applying to US beef to occur sometime between April and September 2012.
With this in mind, US exports to Japan in 2012 are forecast to reach 150,000 tonnes swt, up 25%. Again, the exact volume of beef that will come through will depend upon the date and conditions of the change from beef being sourced from cattle less than 21 month, to less than 30 months.
Accentuating the impact of a possible change to the US beef age requirements will be the continued weak US currency, aiding the price competitiveness of US beef in the Japanese market. In 2011, the US dollar depreciated 9% against the Japanese yen, while over the same period the A$ appreciated 2%. Additionally, US beef exporters have been actively striving to capture a higher profile for their product throughout the past 12 months.
According to Japanese import figures for January to November 2011, total beef imports increased 4% to 471,630 tonnes swt, solely due to a rise in product from the US. For the same period, while Japanese imports of Australian beef contracted 4%, New Zealand declined 6% and Canada 21%, the importation of US beef increased 35%, to 109,812 tonnes swt.
Given the slight rise in imported beef volumes during 2011, an estimated decline in Japanese beef production and increased beef stocks (to the highest level since 2001), total Japanese beef consumption for 2011 is estimated to have declined 1% on the previous year, to 854,500 tonnes swt – not surprising given the consumer impact of the earthquake and its aftermath.
For 2012, Japanese consumer demand is expected to recover from the 2011 shocks, and with the assumed increase in availability of US beef and fall in stocks, consumption for 2012 is tipped to rise 4.2%, to 890,500 tonnes swt – its highest level since 2003, before the import ban on US beef.
Undoubtedly one of the key factors needed to improve the outlook for Australian beef to Japan is for a sustained economic recovery and an increase in consumer confidence. After improving post GFC through to early 2011, the unprecedented disasters of early March put the Japanese economy onto the back foot for the remainder of the year, with consumer spending and confidence declining. The earthquake, tsunami and nuclear disaster all brought follow on complications, such as power rationing, that hindered the economic recovery throughout the remainder of 2011.
With economic conditions expected to improve in 2012 (according to the IMF), albeit slowly, some positive impact on demand for beef is anticipated. For Australian exporters, this will most likely be more than offset by the additional US product expected in the market. The longer term prospects for Australian beef to Japan, especially for the higher valued chilled product, will depend on Japanese consumers regaining confidence, and returning to spending their disposable income at all levels of food service and retail outlets – not just fast food chains.
Overall, while the short term outlook for Australia’s beef trade to Japan remains tough, largely due to the increased presence of the US, there is still the potential for some demand growth over the medium and longer term.
Regardless of the tough year forecast in 2012, Japan will continue to be Australia’s largest offshore beef customer and thus, have a big influence upon returns to Australian beef producers.