Discussion piece – Where will the Brazilian beef come from?

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Brazil has recently been granted conditional access to China, with eight abattoirs approved for export, which was soon followed by the announcement that they would have access to the US as well. This is good news for the Brazilian beef industry, but some questions arise: where will the beef come from; and what does this mean for Australia?

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 (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 Brazilian market intelligence group, CEPEA).

This will lead to increased beef production over the next three to five years – yet it is not expected to be as marked as the growth that 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 than beef for consumers.

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 Real.

Interestingly, frozen beef typically makes up the overwhelming majority of Brazil’s beef exports, last year accounting for 89% of the total.

So yes, there is an increased volume of Brazilian beef forecast to be produced, and yes, there is more forecast to be exported – but not by overwhelmingly large amounts in the short-term.

Taking a look at where the beef for China and the US may come from creates an interesting analysis. 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.

The US is a little more complex. There are strict protocols on Brazilian product entering that market, which must meet USDA sanitary and food safety requirements, but it’s yet to be determined how many Brazilian plants meet these standards.

The 64,805 tonnes swt US “global quota” is where Brazilian beef is likely to be destined in the first instance, most likely displacing product from existing suppliers if it is price competitive. Furthermore, there will be a 26.5% tariff imposed on Brazilian beef exported outside quota volumes, so larger volumes could enter the market outside quota if the Brazilian beef price is low enough.

It should be noted that the “global quota” is currently mostly supplied by Central American countries and Ireland, while Australia, NZ and Uruguay all have their own quota arrangements into the US, which are separate.

It seems likely that there will be some redirection of Brazilian beef to the US that would have previously been destined for Russia (the largest Brazilian frozen beef market in 2014, taking 310,264 tonnes swt in total).

In addition, there may be some taken from neighbouring South American countries, like 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 the oil market, with each country reliant on revenue from the oil trade.

The complicated aspect here is that none of these countries are currently primary destinations for Australian beef. However, there is potential in some of these markets, 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. Also, Russia was Australia’s fourth largest export market in 2008, prior to market access interruptions and the surge in demand from China and US.

Regardless, considering the net overall Brazilian beef export is forecast to increase 61,000 tonnes swt next year, it will likely only have a minimal impact on 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 plant access to China, and quota/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 over-quota.

Ben Thomas

Manager, Market Information and NLRS