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Exporters on horns of Indonesian permit dilemma

James Nason, 14/09/2015
TUM drone 4

Uncertainty over pending cattle permit allocations and tightening cattle supplies in northern Australia means exporters are having to gamble on how many cattle to pre-contract ahead of the fourth quarter.

 

SHRINKING supplies of cattle and continued uncertainty as to when and how many import permits will be released by Indonesia for the fourth quarter has cattle exporters stuck on the horns of a dilemma.

With cattle supply tightening and talk of big permit allocations ahead, exporters are facing a gamble as to whether they should buy as many cattle as possible now, before permit allocations are formally confirmed, to ensure they will be able to secure the cattle their clients will need, or to hold off until they know how many permits will be available. That would avoid the risk of being caught with more cattle on hand than they will have orders to sell, but by the time that is known, they may no longer be any suitable cattle left to buy.

As the permit allocations for this third quarter demonstrated, exporters operate in a vacuum of uncertainty.

Leading into the current quarter, with Indonesian beef prices climbing ahead of the Ramadan/Lebaran period, Indonesian importers collectively requested permits for around 200,000 head. Expectations were high that a number close to this level would be allocated, given the Indonesian Government’s stated desire to keep beef prices at affordable levels for consumers, which effectively means ensuring the market has adequate supply relative to demand.

But in a significant surprise the Indonesian Government caught the trade off guard by issuing permits for just 50,000 cattle.

That left many exporters, who had banked on larger permits and had pre-contracted thousands of cattle forward to satisfy their customer’s anticipated needs, holding more stock than they had orders to supply.

Even exporters who pre-contracted just half of their customer’s anticipated Q3 cattle requirements were still caught with many more cattle than they could sell.

Where possible those cattle were redirected to Vietnam, or placed on grass or in feedlots by the exporters for backgrounding for other markets.

Exporters are now facing a familiar dilemma as we get close to the start of the fourth quarter on October 1.

There are lots of mixed messages but absolutely nothing exporters can be assured of.

For example, Indonesia’s new trade minister Thomas Lembong told the Indonesian media soon after he was appointed to the position in mid-August that the government will import 200,000 to 300,000 cattle in the final months of the year.

In another article last week, the Trade Ministry secretary Suhanto was quoted as saying the Government now estimates Indonesia will need to import a massive 390,500 cattle (including 100,000 breeders) and 38,400 tonnes of frozen beef to satisfy demand in the fourth quarter.

At the same time a number of trade sources have told Beef Central in recent days that importers have been privately advised by the Indonesian Government that the figure will be 200,000 head (a level which is considered a more achievable balance between Indonesia’s demand needs and available supply from northern Australia this quarter).

These conflicting signals are set against the very fresh memories of what happened just three months ago when the Indonesian Government shocked the entire trade by issuing permits for just 50,000 cattle.

Australian cattle exporters well know that statements from Indonesian Government representatives about possible permit volumes prior to each quarter, both publicly and privately, can often differ markedly from the actual volume that is finally released.

Just as they were forced to do before the third quarter, the tight supply environment means exporters must now gamble on how many cattle to pre-contract ahead.

One exporter who asked not to be named told Beef Central over the weekend that exporters should be maneuvering ships to go elsewhere until they have the confidence to know what Indonesia will do with Q4 permits.

Exporters firmly believe that shifting to an annualised permit allocation, which would enable the supply chain to plan ahead, would benefit Indonesia by ensuring increased supply can be effectively matched to periods of increased demand, and would remove the additional costs that come with having to rush to meet sudden demand spikes without notice, or to redirect cattle when anticipated permit allocations don’t materialise.

With the start of the fourth quarter now just over two weeks away, exporters say import permits would need to be in hand today to allow cattle to be shipped to the market at the start of the quarter on October 1.

“It is precarious, there is still no permit,” the exporter said.

“If you are going to load a ship at the start of the quarter on October 1, work back from there – you want those cattle in quarantine for four to five days, then you want at least 10 days notice for mustering and trucking prior to that.

“So you would need permits in hand now to be talking to people for delivery to quarantine by September 25 (for shipping on October 1), but still no one knows what the permits will be.

“Exporters should be maneuvering shipping to alternate markets from Indonesia in the short term until we get a clear picture, because no one can rely on what is going to happen, there is no trust.”

Supply void fuelling Indonesian diversification push

In the meantime one result of the smaller-than-expected allocations for Q3 is that many Indonesian feedlots are now running very low on cattle.

Even if a mountain of permits is issued for feeder cattle imports in Q4, those cattle will not reach suitable slaughter weights until the first quarter of 2016, pointing to a continued supply void ahead for Indonesia in the months ahead.

The tightening supply situation in the north has seen feeder steer prices from the port of Darwin rise to around 275-280c/kg in recent weeks. Slaughter steer prices are at similar levels, but slaughter-weight cattle are now said to be in very scarce supply in the north.

Another consequence of the supply void created by the erratic Indonesian import permit allocations is that it continues to fuel internal support for Indonesia to diversify its import sources away from Australia and to consider taking beef and/or live cattle from potentially cheaper supply sources where Foot and Mouth Disease is an issue, such as India – as documented in this recent Jakarta Post article.

In fact articles reporting discussions between the Indonesian Government and other potential beef and cattle suppliers are now featuring more regularly in Indonesian media, such as this example involving Argentinian cattle interest, and another involving investors from Brazil.

Answer lies in “getting the data right”

One Indonesian import source said the key challenge for Indonesia is simply to “get the data right” on how much beef Indonesia needs each year and how much it can supply itself, and then to have all ministries within the Government accept that data and work together to formulate good policy to ensure adequate supplies.

Such an approach would eliminate any perceived need that exists to put Indonesia’s own cattle industry at potential risk (and indeed Australia’s nearby cattle industry) by importing beef or cattle from FMD-affected areas.

 

 

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