Issue Number: 9 Western Australian beef commentary Newsletter of the Department of Agriculture and Food, Western Australia Date: October 214 Prepared by Kate Pritchett and Kimbal Curtis Partners Summary The Western Australian beef cattle herd has decreased from 2.21 million head in 21 to 1.88 million head in mid-213. In line with the declining cattle herd, slaughter numbers declined to 391 head in 212/13, but rose 5% to 411 in 213/14. Early signs of possible herd rebuilding include the decrease in the number, and the lower proportion of, female cattle sent for slaughter over the last 12 months. Live cattle exports from Western Australia rose by 56% to 35 head in 213/14, largely due to the relaxation of import quotas by Indonesia, supported by an increase in imports by Israel and Vietnam. As a consequence, the total value of live cattle exported from Western Australia to all markets increased sharply in 213/14 to $236 million. Increased imports of live cattle by Indonesia are targeted at restocking their feedlots. Together with beef imports, these measures are aimed at reducing the retail price of beef in that country. Two thirds of Western Australian produced beef is consumed by the domestic market. The remaining third, worth $112 million is exported to over 3 countries. With limited opportunities to expand domestic consumption, future growth of the industry will largely depend on these export markets, particularly in Asia where Japan, Indonesia and Korea together, account for almost two thirds of Western Australia s beef exports.
Contents Current herd situation in Western Australia... 1 Slaughter numbers... 1 Beef production... 3 Boxed beef exports... 4 Live exports... 5 Market indicators... 7 Feedlot sector... 8 Competitor analysis Brazil... 9 Market analysis Indonesia... 11 Insights and opportunities... 13 USA... 13 China... 13 Qld and NSW... 13 Seasonal conditions... 14 Appendix. Western Australian beef cattle turn-off for 213/14... 15 If you would like to receive future issues of WA Beef Commentary, please email kate.pritchett@agric.wa.gov.au with subject Subscribe WA Beef Commentary Important Disclaimer The Chief Executive Officer of the Department of Agriculture and Food and the State of Western Australia accept no liability whatsoever by reason of negligence or otherwise arising from the use or release of this information or any part of it. Copyright Western Australian Agricultural Authority, 214
Current herd situation in Western Australia As shown in figure 1 the size of the beef cattle herd in Western Australia at the beginning of 213/14 was 1.88 million head, down from 2.21 million in 21/11. Since 211/12 the beef cattle numbers have remained lower than in any year since 23/4. Dry seasons in the Pilbara between 29/1 and 211/12, and the drought in the agricultural region across 21/11 were responsible for the fall in the herd size between 29/1 and 211/12. The total turn-off in cattle which includes both live export and slaughter numbers has also fallen since 21/11 reflecting the lower herd size, and the repercussions of the suspension of live exports to Indonesia in 211. Despite a decreasing herd, cattle turn-off in 213/14 increased by 5% over the previous year. Millions 2.5 2. Total Turn off WA herd size Cows and heifers 1 year and over 1.88 1.5 1. 1..5. Figure 1 Total number of beef cattle, number of cows and heifers over one year old (in millions of head) in the Western Australian herd and total turn-off (slaughter plus live export) by year. (based on ABS data analysed by Department of Agriculture and Food, WA (DAFWA)). The diagram in the appendix at the back of this commentary describes the avenues which producers have used when disposing of cattle during 213/14 57% were slaughtered and 42% were exported live with interstate movements accounting for the remainder. Of the cattle that were slaughtered in Western Australia, 66% of the meat produced is used for domestic consumption and the rest is exported to over 3 countries. For the first time in at least four years, there was a modest net in-flow of cattle from other states a total of just under 8 head. This transfer may reflect the difference in seasonal conditions between Western Australia and eastern Australia. Slaughter numbers Western Australian annual slaughter numbers have been slowly decreasing over the last 1 years (figure 2). They have fallen from 462 7 head in 23/4 to 391 3 head in 212/13. In 213/14, there were 411 3 cattle slaughtered, 5% more than in 212/13. Corresponding figures for the whole of Australia show that 8.76 million head were processed in 213/14, a rise of 12% year-on- 1
year. While both widespread drought and increased international demand for beef are behind these increases in slaughter rates, drought is the primary factor in Queensland and New South Wales cattle grazing areas, whereas international demand is driving the increase in Western Australia. Australia WA Australian cattle slaughter (thousands) 1 9 8 7 6 5 4 3 2 1 6 5 4 3 2 1 WA cattle slaughter (thousands) Figure 2 Comparison of annual cattle slaughter for Australia and Western Australia (WA) in thousands of head (based on ABS data analysed by DAFWA). Figure 3 compares the Western Australian cattle turn-off numbers for live export and slaughter cattle. While cattle slaughter has declined gradually, annual live export numbers have been more volatile due to changes in regulations and enforcement of restrictive quotas in WA s major market. Live export experienced a 56% year on year increase in 213/14.This is largely due to the relaxation of quotas by Indonesia, our largest market for live cattle exports, and the increase in demand from Israel. During 213/14, Indonesia imported 173% more cattle and Israel imported 77% more cattle than they did during 212/13. Cattle slaughter Live export Thousands 6 5 4 3 2 1 Figure 3 Western Australian cattle turn-off in thousands of head (figures are based on ABS data analysed by DAFWA). Figure 4 illustrates the number of animals slaughtered by type. In the past, females (cows and heifers) have been slaughtered in larger numbers than males (bulls, bullocks and steers), however 2
since 212/13 there has been a convergence in the male: female ratio resulting in a difference of only 49 head (23 males vs 27 9 females slaughtered in 213/14). Historically the majority of exports are males and the majority of locally processed cattle are females. The recent drop in females sent for slaughter hints that herd rebuilding is underway, contrary to the ABS estimate for the herd size in mid-213. This is supported by preliminary export data showing that about 85% of export cattle in 213/14 were male, little changed from the previous year. Bulls, bullocks, steers Cows, heifers Thousands 35 3 25 2 15 1 5 Figure 4 Western Australian slaughter numbers by animal type in thousands of head (based on ABS data analysed by DAFWA). Beef production The majority of Western Australian produced beef is consumed by the domestic market as shown in Figure 5. Between 25/6 and 213/14, domestic consumption has varied within a tight range of 7 to 81 million kilograms (kg) (carcass equivalents) while export volume has varied between 26.8 to 46.5 million kg. Domestic consumption is largely dependent on the size of the local population of consumers. Any future increase in production will depend on export demand, particularly from nearby markets in the Asia. 3
Millions 14 12 1 8 6 4 Export Domestic 2 Figure 5 Domestic and export consumption of Western Australian (WA) produced beef in millions of kg carcass equivalents (based on ABS data analysed by DAFWA). The domestic consumption of WA beef is calculated as the difference between total production and quantity exported. Actual consumption may be affected by movement of beef both into and out of WA. Beef exports Over the last 1 years Western Australia s largest export markets for boxed beef have been Japan followed by Indonesia and Korea as seen in Figure 6. This has also been the case over the longer term. However exports to these countries have been low in recent years compared to the highs experienced in 24/5 for Japan, 29/1 for Indonesia and 25/6 for Korea. 18 Quantity of beef exported (sum of carcase equivalent qty in millions) 16 14 12 1 8 6 4 2 Japan Indonesia Korea, Republic of United States of America China Other=94 Figure 6 Quantity of Western Australian beef exported by destination in millions of kg carcass equivalents (based on ABS data analysed by DAFWA). 4
beef export value (A$ million FOB) 6 5 4 3 2 1 Japan Korea, Republic of Indonesia United States of America China Other=94 Figure 7 Value (A$ million, FOB) of Western Australian beef exports by year and destination (based on ABS data analysed by DAFWA). Live exports The total value of live exports from Western Australia increased sharply during 213/14. During 212/13 live exports were worth $131 million Free On Board (FOB), lower than in any of the previous 1 years, when the annual average (signified by the horizontal line in figure 8) was $167 million. This fall was largely driven by reduced quotas set by Indonesia combined with markedly lower prices. Following the lifting of the suspension of live exports to Indonesia in 211, quotas were used to reduce imports of live cattle under a policy aimed at developing self-sufficiency. Instead of selfsufficiency, the import quotas resulted in a restriction of supply which led to higher prices for beef at retail, which in turn led to increased and unsustainably high turn-off of Indonesian domestic cattle. In 214, faced with very high retail beef prices, a new policy was adopted that allowed for greater imports of live cattle with the intent of bringing the retail price back to acceptable levels. This has increased the volumes of cattle being exported live to Indonesia giving rise to the steep increase evident in 213/14 as illustrated in Figure 8. Millions 25 2 15 1 5 Figure 8 The total annual value (A$ million, FOB) of cattle exported from Western Australia. The solid line represents the ten year annual average (based on ABS data analysed by DAFWA). 5
Indonesia is the highest value destination for Western Australian live cattle exports. This market relies on the northern pastoral system to provide the majority of its Western Australian sourced supply. Most of these cattle are exported from the port of Broome. Our second largest market for live cattle exports by value is Israel. This market is mostly supplied from southern production systems predominantly shipped out of Fremantle. Millions 18 16 14 12 1 8 6 4 2 Indonesia Israel Malaysia Jordan Saudi Arabia Other=23 Figure 9 Value (A$ million, FOB) of live cattle exports from Western Australia by year and destination (based on ABS data analysed by DAFWA). Jordan has been the fourth largest destination by number for live exports however the value is surpassed by that of Saudi Arabia, who import fewer cattle but at a higher price per head. However, since the introduction of the Exporter Supply Chain Assurance System, Saudi Arabia has been absent from the live trade. 3 Number of cattle (thousands) 25 2 15 1 5 Indonesia Israel Malaysia Jordan Saudi Arabia Other=23 Figure 1 Number of live export cattle from Western Australia by destination and year in thousands of head (based on ABS data analysed by DAFWA). 6
Market indicators 1 Between March and June 214 the price for feeder yearlings steadily increased from 185c/kg in March to 225 c/kg in June. The price for June is higher than the corresponding June prices over the previous three years. Between June and September however it has fallen to 25 c/kg as seen in Figure 11. This trend is similar to that reported for 211. 3 25 cents/kg 2 15 1 211 212 213 214 5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Figure 11 Trend in the Western Australian feeder yearling saleyard indicator since 211 in cents per kilogram (based on data from Meat and Livestock Australia and the National Livestock Reporting Service analysed by DAFWA). Figure 12 demonstrates that the price for heavy cows has been very strong during 214. It has been well above the prices reached in the previous three years. In September it reached 182 c/kg - the highest average monthly price so far in 214 and 41% higher than for the same month in 213. Strong demand for manufacturing beef as evidenced by rising prices in the United States of America (USA) versus a shortage of cull cows is thought responsible for the surging price. 1 The market indicators are based on those reported by the National Livestock Reporting Service (NLRS) and only include saleyards they monitor. These do not include Boyanup sales. 7
cents/kg 2 18 16 14 12 1 8 6 4 2 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 211 212 213 214 Figure 12 Trend in the Western Australian heavy cow saleyard indicator since 211 in cents per kilogram (based on data from Meat and Livestock Australia and the National Livestock Reporting Service analysed by DAFWA). Feedlot sector As seen in Figure 13 the Western Australian feedlot sector is largely under-utilised. The number of cattle on feed is well below the reported capacity of the feedlots. Currently the capacity is on a downward trend, and the number on feed, while seasonal, is neither trending up or down. 2 Thousands 14 12 1 8 6 4 2 Capacity Numbers on feed Figure 13 Feedlot capacity and utilisation in Western Australia in thousands of head (based on data from the Australian Lot Feeders Association analysed by DAFWA). 2 Feedlot data is based on information from the membership of the Western Australian Lot Feeders Association and thus may not capture all feedlot activity. Changes in capacity may reflect changes in membership. 8
Competitor analysis Brazil Brazil has grown in recent decades to become one of the world s largest economies and this is in part due to growth in agriculture. Brazil is the world s largest exporter of beef with the world s largest commercial cattle herd, 213 million head in 212. Large land availability, large feed reservoirs, a large domestic consumer market and liberalisation of trade barriers have allowed large companies to achieve economies of scale making Brazil a major and growing source of beef. The beef cattle industry is based on grass fed animals where the Nellore breed of cattle predominate (Millen, Pacheco, Meyer, Rodrigues, and Arrigoni 211). Nellore cattle are a Bos indicus breed that originated from India. They have a hump over the shoulder in a similar fashion to Brahman cattle. They have good heat resistance and parasite resistance and are quite hardy with the ability to thrive under harsh conditions (Oklahoma State University 1997). The Brazilian herd has increased steadily since 28 to reach 213 million head in 212. A total of 41.5 million cattle were slaughtered in 212 giving beef production totalling 9.4 million tonnes (carcass equivalents). Domestic consumption accounted for 83.5% of total production. The state of Mato Grosso, bordering Bolivia in the central west of Brazil, is the largest beef producing state with 27 million cattle, 14% of the Brazilian herd but equivalent to the whole Australian herd. The state capital, Cuiaba, hosted Australia s first game in the 214 Football World Cup. The expansion of the Brazilian beef industry has supported an expansion in exports aided by a 14% depreciation of the Brazilian currency in 212. Beef exports in 212 totalled 945 tonnes (shipped weight), compared to Australian exports of 999 tonnes. Beef production in Brazil consists of cow-calf, stocker and feedlot operations. As the majority of cattle are grazing tropical pastures they are generally slaughtered later in the life cycle. The production time between birth and market is generally 36 months. The feedlots are generally used to finish cattle to the 4mm fat cover as required for Brazilian markets. Stocker operations are very common and contain cattle from approximately 18kg to 38kg. In order to reduce the length of the stocker phase concentrated supplement is fed during the dry season and intensive grazing throughout the year is implemented. Forage mass production is extremely reduced during the winter season and animals typically lose weight if they are not supplemented with sources of energy and protein. The stocker system provides a bridge between cow calf systems and feedlots. Feed lotting of cattle is generally short at about 7 days. Most beef produced in feedlots is bound for external markets. Feed lotting cattle is a relatively new industry which has only become a reality during the last decade. This new industry has grown substantially in the last 8 years as external demand for fed beef increases. Despite this, Brazilian cattle are mainly fed in feedlots during the dry season when there is a reduced amount of pasture available. Figure 14 shows the market share of Brazil s US$5.4 billion beef exports in 213 on a value basis. Russia is Brazil s largest market for beef accounting for 26% on a weight basis and 22% by value in 213 (UN commodity trade statistics). 9
Lebanon 2% Saudi Arabia 2% Netherlands 3% Italy 3% Chile 5% Iran 7% Other markets (n=84) 13% Russian Federation 22% China, Hong Kong SAR* 18% Egypt 9% Venezuela 16% Figure 14 Main markets for Brazilian beef exports in 213. (www.comtrade.un.org accessed on 24 June 214) *Special Administration Region (SAR). Brazil has been Russia s largest supplier of beef since 24, but Russia placed a partial ban on Brazilian beef imports in 211. Despite this, Russia remains the largest market for Brazilian beef exports. Hong Kong is a major market for Brazilian beef including large volumes of offal. During 21 there was a positive case of atypical Bovine Spongiform Encephalopathy (BSE) or mad cow disease in the Brazilian southern state of Parana which has resulted in restrictions in some export markets. There has since been another case diagnosed in the state of Mato Grosso during 214. It was also atypical and found in an older cow (MLA, Prices and Markets). Foot and Mouth disease (FMD) has been a big problem in Brazil. Out of 27 states only 16 are classed as FMD free and 15 of them are only free with vaccination. Another factor that inhibits exports is the lack of a carcass grading system (Millen et al 211 from Current outlook and future perspectives for beef production in Brazil). 1
Market analysis Indonesia Australian red meat exports to South East Asia surged 85% year on year in 213 with Indonesia one of Australia s key cattle and beef markets in this region. Indonesia has a population estimated to reach 253 million in 214 and it has had strong GDP (gross domestic product) growth in recent years. This has resulted in a growing population with increasing income levels and increasing demands for protein. Following the suspension of Australian live cattle exports to Indonesia in 211, the Indonesian government imposed quotas to restrict cattle imports with the stated intent of achieving selfsufficiency in beef production, and hence increased food security. As the supply of imported cattle dried up, the retail price for beef increased, leading local farmers to take advantage of the high prices and sell down the domestic herd. In 214, the Indonesian government signalled a new policy that aims to regulate the retail beef prices by managing the volume of live cattle and beef imported. Indonesia has indicated that the level of imports of beef and live animals will be dependent upon the price of secondary cuts throughout Indonesian markets. The Indonesian Ministry of Trade has set a bench mark price of Rp76 per kg (approximately A$6.7-6.8) however the average wet market prices for most secondary cuts have been well over this at around Rp95 to Rp1 in mid-213 (MLA Australian Cattle Industry Projections, 214). The government has indicated that as prices fall below the benchmark, import quotas will be tightened once again. As seen in the figure below Indonesia makes up a large part of Western Australia s live cattle exports. It is currently our largest market. The number of live cattle exported to Indonesia fell dramatically between 29/1 and 212/13. During 213/14 the volume of live exports has increased rapidly as quotas were relaxed and Indonesian feedlots sought cattle to overcome the shortage caused by the limited availability of local cattle. Millions 25 2 15 1 other Indonesia 5 Figure 15 The annual value (in A$ millions) of Western Australian live exports to Indonesia compared to all other markets (based on data from the Australian Bureau of Statistics analysed by DAFWA). While the export of beef to Indonesia is worth less in total value than the live export trade, Indonesia remains an important market for Western Australian beef (Figure 16 below). 11
Western Australian shipments of beef increased significantly during the last three months of 213 due to the easing of quotas. The total volume for 213/14 was 53 8 tonnes (shipped weight), an increase of 82% year on year. Exports of frozen product made up over 9% of Western Australia s beef exports to Indonesia. Millions 16 14 12 1 8 6 4 other Indonesia 2 Figure 16 The annual value (in A$ millions) of Western Australian beef exports to Indonesia compared to all other markets (based on data from the Australian Bureau of Statistics analysed by DAFWA). Traditional or wet markets are the main outlet for beef in Indonesia. However as incomes rise and the consumption of red meat increases this is expected to decrease as more consumers gain access to, and seek the convenience of, modern supermarkets. Traditional wet markets generally have lower prices than retail stores which is partly why they are still the main method of purchasing beef, though this is expected to change over time (MLA Red Meat Market Report Aug 212). Indonesia s beef cattle production is dominated by small holder producers fattening domestic native feeder cattle purchased from small holder breeders. Cattle breeding farms that hand feed are located in many parts on Indonesia especially where there is also a high level of cropping. Dried rice straw has been a major feed supply in the past. Once this becomes scarce during the dry season farmers collect grass. The quantity of family labour and the financial ability to hire labour to collect grass is a major limiting factor on the size of cattle holdings. Total turn-off of cattle in Indonesian in 212 was estimated at 2.3 million head resulting in beef production of 55 478 tonnes. 12
Insights and opportunities USA The USA has been experiencing drought conditions in the south west which has resulted in reduced beef production when compared to previous years. In 212 beef production was 25 913 million pounds (11 8 million kg); however it is only projected to reach 24,48 million pounds (11 1 million kg) in 214. If the drought breaks slaughter may be further reduced as herd rebuilding occurs. US beef production is not forecast to increase next year as herd building will take several years. Lower US beef production has increased demand for imported beef. Total imports are forecast to reach 2.68 billion pounds in 214, 19% higher than in 213. Imports from Australia between January and July 214 are nearly 4% higher than in the corresponding period in 213. This is in part due to the drought in the Eastern states as it has caused higher than usual cattle slaughter. The price in the US is also strong and the exchange rate has worked in Australia s favour. US exports are forecast to decline by 3% in 214 due to reduced production. Higher prices in the second half of 214 are expected to further reduce exports. (Source: USDA) China Demand for beef in China has increased steeply in recent years and local producers are unable to keep up with demand. The Chinese domestic herd is also declining driven lower by attractive prices, and urban spread into cattle grazing land. Over recent months there has been a shift in the Australian-Chinese trading relationship from mineral based to an increase in agricultural trade and investment. The Australian Government continues formal negotiations with China on non-breeder live export protocols. Recently, technical delegations from China have visited Australia focussed on animal health issues and logistics. These negotiations are complex and are not time bound. However, the potential impact of China emerging as a new live cattle market could see a significant shift in live export and domestic market dynamics. Recently, Western Australian processor V&V Walsh and Chinese processor Grand Farm Group signed an agreement which involves the processing of up to an extra 3 head of cattle per year in WA. The deal involves a two way investment plan with China, specifically Inner Mongolia, and should see an increase in Western Australian beef production and processing. Having made substantial investments to increase plant capacities V&V Walsh currently have an application pending with Chinese authorities to gain export accreditation. Queensland and New South Wales The continuing drought in Queensland and New South Wales, Australia s largest cattle producing states, has caused increased slaughter and saleyard through put over recent months as producers liquidate stock. As the eastern herd decreases in size this may open up new opportunities for Western Australian producers to meet domestic and international demand for Australian beef. When good seasons eventually return to Queensland and New South Wales, there is likely to be a tightening of supply as producers retain stock to rebuild their herd and to utilise the feed. This can be expected to lead to rising prices and reduced exports out of those states. 13
Australian dollar Continued softening of the Australian dollar, now seemingly entrenched midway between 85 and 9 US cents, will be appreciated by exporters as it assists their competitiveness in international markets. Seasonal conditions The Bureau of Meteorology map (Figure 17) shows the rainfall deciles 3 for the six months to the end of September 214. Red areas indicate that rainfall has been well below average and blue areas indicate above average rainfall, for that period. Figure 17 Rainfall decile map for Australia for the six months from 1 April to 3 September 214. A large proportion of the south west has received below average rainfall so far for 214 and some parts have received very much below average rainfall. The agricultural region in southern WA received little to no rain between January and March and in June, while most areas received average or a little above average rainfall in April and May. The timing of this rain has meant the season has been better than would appear from Figure 17. Much of the interior of the state has received average to below average rainfall with only parts of the Kimberley recording above average rainfall. Apart from some recent rain across the gulf, Queensland and the upper half of New South Wales remain in drought. 3 Deciles split the historic data into 1 groups from the smallest readings (decile 1) through to the highest measures (decile 1). 14
Appendix. Western Australian beef cattle turn-off for 213/14 15