Debunking the Brazilian beef debate

04 January 2016

Brazil has recently been granted conditional import access to China, with eight abattoirs approved for export. This was closely followed by the announcement that Brazil would also have access to the US. This is good news for the Brazilian beef industry, but some key questions arise, including where will the beef come from and what does this mean for Australia’s beef industry?

Brazil’s beef industry

Firstly, looking at the volume of Brazilian beef available, Brazilian beef production is expected to increase slightly (0.5%) year-on-year in 2015 to 9.8 million tonnes cwt (based on the latest USDA forecast). In the wake of drought conditions and high cattle prices, Brazilian producers are retaining females with the aim of rebuilding herds over coming years (according to the Brazilian market intelligence group, CEPEA).

This will lead to increased beef production during the next three to five years, although this growth is not expected to be as marked as that which occurred throughout the 1990s.

At the same time, domestic Brazilian beef consumption is forecast to remain stagnant, given the difficult economic environment and significantly greater pork and poultry production, which is cheaper for consumers than beef.

Offsetting the decline in domestic beef consumption is a forecast increase in exports, expected to grow 5% (or 61,000 tonnes swt) to 1.3 million tonnes swt in 2016 assisted mainly by the weak Brazilian Real.

Interestingly, frozen beef typically makes up the overwhelming majority of Brazil’s beef exports, last year accounting for 89% of the total volume exported.In summary, while an increased volume of Brazilian beef is forecast to be produced and exported, the increase is not expected to be overwhelming in the short-term.

Destinations for Brazilian beef

Investigation of the origins of beef in China and the US reveals some interesting observations.

Hong Kong has rapidly become a major destination for Brazilian beef, with shipments increasing 153% in just two years to 252,000 tonnes swt in 2014. It is likely that some of the beef destined for that market will be redirected to China, having a minimal net impact on beef volumes in the region.

Meanwhile, the US has strict import protocols for Brazilian beef, requiring the product to meet USDA sanitary and food safety requirements, and the number of Brazilian processing plants that meet these standards is yet to be determined.

The US has a ‘global quota’ of 64,805 tonnes swt for imports and it is probable the Brazilian beef industry will target this in the first instance, most likely displacing product from existing suppliers if it is price competitive. There would be a 26.5% tariff imposed on Brazilian beef exported outside quota volumes, so if the price of Brazilian beef is low enough, larger volumes could enter the market above this quota volume.

It should be noted that the US ‘global quota’ is currently mostly supplied by central American countries and Ireland. Australia, New Zealand and Uruguay each has its own separate quota arrangements with the US. It seems likely that there will be some redirection of Brazilian beef from Russia to the US, acknowledging that the largest market for Brazilian frozen beef in 2014 was Russia, taking a total of 310,264 tonnes swt.

Some Brazilian beef may also be taken by neighbouring South American countries, such as Venezuela and Chile (although mostly chilled), Egypt and even the domestic Brazilian market. The resulting change in the trade balance will mean a shortfall in these markets. Interestingly, the competitiveness of both Russia and Venezuela for beef will be influenced by the strength of the oil market, with each country reliant on revenue from the oil trade. None of these markets are primary destinations for Australian beef although there is potential in some of these markets for Australian product, particularly for Australian grassfed beef.

Brazil has been a steadily growing market for Australian rump caps in recent years and last year shipments reached a record 4,005 tonnes swt. Chile also showed a strong appetite for chilled grassfed Australian beef in 2012, when Paraguay was banned from the market, taking 14,619 tonnes swt.

Australian shipments to Egypt have fluctuated in recent years, doubling year-on-year to 4,347 tonnes swt in 2014. In addition, Russia was Australia’s fourth biggest export market in 2008, prior to market access disruptions and the surge in demand from China and the US.

In summary, it is likely that the expected increase in exports of Brazilian beef next year will have only a minimal impact on the global beef trade and any product directed to the newly opened markets will create shortfalls elsewhere. Two key limitations for Brazilian beef will be limited approved plant access to China and quota and tariff restrictions into the US.

While the impact on Australia’s beef exports is not currently expected to be significant, Brazilian market access into two of Australia’s leading export destinations is something for the industry to monitor closely, especially over the medium to long-term.

Given time, Brazilian beef supplies could build substantially, China could greatly expand the list of approved Brazilian plants and, if competitively priced, substantial quantities of Brazilian product could enter the US above the quota volumes.

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