Wet market prices in Indonesia are easing under the big volumes of live cattle and boxed beef that have been pouring into the market since late last year.
More than 300,000 cattle were shipped from Australia to Indonesia between November and March, and exporters are currently scrambling to fill import orders for another 273,000 cattle this quarter.
The first cattle shipped to Indonesia under its new “reference price” import policy last November have now left feedlots and entered the supply chain, along with increasing volumes of frozen boxed beef shipped from Australia.
A range of Indonesian market sources have told Beef Central that wet market prices, after a sustained period above 100,000 Indonesian Rupiah per kilogram level, have eased by 5pc-8pc in the past three weeks in response to increasing supplies and are now averaging in the low 90,000 IR/kg range.
This matches a 5pc to 8pc drop in cattle prices ex-Indonesian feedlots, but sources say the full effect of this price drop is yet to filter through to the wet markets.
The price of beef in Indonesian wet markets has become an indicator of key importance to the northern Australian cattle industry since the Indonesian Government replaced its previous quota system for determining cattle and beef import volumes with its new “reference price” system.
Under the new arrangements, when the price of beef in Jakarta wet markets is higher than the “reference price” level – currently set at 76,000 Indonesian Rupiah per kilogram – the Indonesian Government will allow increased volumes of imported cattle and boxed beef to enter the market until supply is sufficient to allow prices to soften.
Indonesian officials have previously indicated that when prices fall below 76,000 IR/kg, they will reduce import permits or possibly stop issuing import permits altogether, until such time as prices climb again and more supplies are needed to bring prices back down to the desired level. However, nobody really knows how that will play out, because Indonesia’s trade ministry has not yet released official guidelines to explain what will happen when prices move below the reference price.
Prices of beef in Indonesian wet markets are still a long way from getting close to the 76,000 IR/kg trigger point, but there are signs the massive recent injection of supply is starting to have an affect on prices in Indonesian wet markets.
Various sources have told Beef Central that prices have dropped to 92,000 IR/kg in some wet markets in recent weeks, and even lower according to at least one report.
Whether the easing constitutes a short-term dip which will be countered when demand for beef during the Ramadan period kicks in, or the start of a fundamental price downturn is the big question.
With permits already allocated for the import of another 273,000 cattle before the end of June – which will be close to the largest volume of cattle Australia has ever shipped to Indonesia in a single quarter – and increasing volumes of boxed beef exports now hitting the market, supply pressure is clearly growing.
Second half implications
If prices continue to ease during the peak Ramadan demand period, that trend could influence Indonesia’s plans for imports in the second half of the year.
At the start of this year senior Government officials said Indonesia planned to import 750,000 cattle in 2014. Import permits for 433,000 cattle have already been allocated for the first two quarters, leaving roughly 317,000 cattle for import during the final two quarters, if those plans proceed without change.
Another factor that could affect Indonesian import volumes in the second half of the year is the squeeze on profitability currently gripping importers.
Under the new price reference import policy, importers are required to nominate the number of cattle they would like to receive import permits for, ahead of each quarter. They must then deliver at least 80 percent of the numbers they are allocated to the market as finished cattle within a 12 month period.
Some importers have told Beef Central in recent weeks that negative trading margins could result in importers applying for less permits in the final two quarters of the year.
At the supply end they are paying higher prices to secure cattle due to the relatively tight supply environment that exists in northern Australia. At the demand end, the Indonesian Government is desperately trying to lower the price of beef for consumers, and imposing downward pressure on selling prices for finished cattle out of feedlots. Importers are currently the meat in the sandwich.
This is how one cattle importer, who asked not to be identified, described the view from his sector to Beef Central this week:
“The market is awash with beef, and this includes very cheap offals which have the ability to erode the beef price in its own right.
“Ex-feedlot prices are falling rapidly as a result of the beef tsunami that has struck. Certainly cattle importers are well and truly in ‘negative trading margin’ territory now. We have to feed cattle very well to get out of them with the shirts on our back. We are predicting for prices to slip another 5 and maybe 10pc by Lebaran.
“I suspect the full impact will not be seen until the third quarter as its then that the high volume Q2 imports begin exiting feedlots. Its highly likely therefore that some importers will not undertake to import their allocated permit due to the market situation. We’re predicting about 200,000 cattle only for Q2 imports. As a result we may well see export prices drop off 20c+.”
Indonesia’s decision to increase import permits last year has also led to increased competition in the sector. An additional 10 live cattle importers and 20 beef importers have joined the industry this year to compete for the increased permit volumes currently available.