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Industry starts to take stock of likely EU quota change impact

James Nason and Jon Condon, June 12, 2019

IN volume terms the European Union ranks as one of Australia’s smaller beef export markets, taking just 15,500 tonnes in 2018 – less than two percent of the 1.15 million tonnes Australia exported to all markets during the year.

But it is in value terms where the real significance of the EU market lies for Australia’s beef industry.

Specialist Wagyu and organic markets aside, the EU is the highest paying market of all of Australia’s export markets, and effectively sets the price benchmark against which other premium programs such as Pasturefed Cattle Assurance System (PCAS) are priced.

Much of the beef the EU market takes is in high value cuts, constituting around 15pc of the carcase, which means that despite the relatively small export tonnages, the market still directly affects as many as 200,000 eligible cattle each year. Department of Agriculture data shows there are around 3500 Property Identification Codes all over Australia accredited to supply the EU market.

While highly restrictive, the EU represents the type of market Australia’s export dependent beef industry has staked its future on supplying.  As a small producer on the world stage, and one with higher costs than many of its larger competitors, Australia has invested in world leading traceability and integrity standards and eating quality-focused production and processing systems to tap into higher paying markets exemplified by the EU.

But at a time when Australia is seeking to expand access to premium markets like the EU, it has just learned it is likely to lose a significant amount of access to the EU market itself.

The Federal Government and industry organisations confirmed to Beef Central last week (click here to view original story) that, as was flagged last year, the EU has agreed to a US request to granted an exclusive share of 45,000t tariff-free annual 481 grainfed import quota, which will reduce the amount of the quota other suppliers like Australia, Uruguay, Argentina and New Zealand can compete for.

The 481 grainfed quota was initially established for the benefit of the US industry, after the EU was forced by the World Trade Organisation to ‘make good’ following a successful US challenge against an earlier EU decision to ban imports of hormone-treated beef. The WTO found in the US’ favour that the EU’s ban was not underpinned by sufficient scientific evidence.

The EU continued to ban the import of beef containing hormonal growth promotants but established the 45,000t grainfed quota to give US beef producers continued access to its market. However, WTO rules also required the new quota be non-discriminatory and open to other countries able to comply with its specifications. In response to representations by Australia to the WTO Dispute Settlement Body in 2009, the EU and the US offered reassurances the quota was non-discriminatory on country of origin. (for further details on WTO site click here)

With a large percentage of US beef production not meeting the requirements of the EU quota – which does not permit HGP-treated beef or beef exposed to chlorine wash during processing – other countries including Australia have gained an increasingly large slice of the quota in recent years.

Start date still undecided

It is still not clear precisely when the new arrangement will kick in, but the European Commission which governs access to the EU market has agreed to grant the US exclusive access to 18,500t of the total 45,000t, increasing to exclusive access to 35,000t in seven years’ time.

Australia will maintain access to the remaining quota balance of the quota, which will be 26,500 tonnes in the first year, reducing to 10,000t by year seven. (Australia’s supplied 11,153t to the 481 zero-tariff grainfed quota in 2018 – the remaining 4400t of Australian beef exported to the EU in 2018 was exported under the 7150t Hilton High Quality Beef quota, which attracts a 20 percent tariff).

Australia’s share of the non-US portion of the EU grainfed quota will depend largely on how competitive it is against the other two large suppliers, Argentina and Uruguay. (Worth noting here is that the South American nations are jointly negotiating a Free Trade Agreement with the EU at present – the EU Mercosur FTA – which is reported to be well advanced. If and when that FTA is ratified, it is possible the South American nations may choose to export under their FTA quota rather that the current GF quota – but that remains speculative at this stage).

Has industry/Govt lobbied hard enough?

Discussions Beef Central has had with several beef producers accredited to supply the EU market in recent days has revealed a level of concern that the Australian Government has not fought harder to defend Australia’s existing share of the market, in favour of hoping for a better deal when Australia’s own free trade agreement with Europe is secured, which still could be some years away.

What is the point of Australia having a higher regulatory burden that adds cost and  diminishes price competitiveness, if the higher quality attributes do not translate into an enhanced access to high quality, premium-paying markets like the EU, was a common theme of producer frustration.

Australia’s high hygiene and food safety standards and the world-leading shelf-life of its beef has given Australia a strong advantage in the European market in the past. The first-come, first-served quota is released quarterly and the supply for each quarter has typically been filled within the first two weeks of each quarter.

Importers could buy Australian beef imported in the first two weeks of the quarter confident it would last longer than beef from anywhere else. However, the new tariff deal will allow the US to continue to ship fresh beef to the market throughout each quarter, negating Australia’s shelf-life advantage.

Is there realistically much Australia as a small player can expect to do to affect the outcome of trade negotiations between two comparative giants like the EU and US?

Faced with the choice of challenging the EU and US deal through a likely protracted WTO dispute process, potentially risking repercussions in its major export market to the US at the same time, versus agreeing to the deal and hoping for a better outcome in a future Australia-EU FTA, Australian Government trade negotiators opted for the latter.

Seven year transition

In defending the outcome, some industry groups have pointed to the seven year transition period now included in the deal, rather than the US suddenly jumping to exclusive access 35,000t from day one, as a positive for Australian beef, and one that will provide time for an Australia EU FTA to be negotiated.

But against that, some producers raise the example of New Zealand’s success as a small player in having secured superior low-tariff arrangements in key markets like China, while Australia still struggles to gain access for more chilled plants two years after an announcement suggesting that was imminent.

Concern was also expressed that in agreeing to not oppose the new EU-US 481 access arrangement, the Australian Government has effectively given up Australia’s ability to challenge the deal in future through the WTO, leaving all of its eggs now in the uncertain basket of a yet-to-be-negotiated Australia-EU trade deal likely to be some years away.

Rather than acquiesce to the deal, opting to provide a “ceasefire” on pursuing the discriminatory allocation in the WTO, and retaining that right to a future WTO challenge in the event of the FTA negotiation breaking down, was seen by some producers as a strategy that could have left Australia with more negotiating power.

EU protein export competition

Further bugging some producers is the apparent lack of equity demonstrated by the European Commission reducing Australia’s beef access to the EU, while the EU exports more than 80,000t of low priced, subsidised pork products to Australia with no tariff barriers, also raising fears of a potential biosecurity risk now that African Swine Fever has been detected in the European pig industry.

Under the Andriessen Arrangement signed in 1985, and reaffirmed as part of the GATT Uruguay round 1993, the EU agreed not to market its beef produced with the support of subsidies to Australia’s major pacific trading partners including Korea and Japan. However, having just signed an FTA with Japan and in the process of signing one with Korea, the presence of EU beef is likely to become an increasing competitor to Australian beef on its own doorstep in future.

Producer view

EUCAS-accredited Central Queensland cattle producer Ian McCamley predicts that as Australia’s access to the 481 grainfed quota gradually shrinks down over the next seven years, more grainfed beef will flow across to the 7150t, 20 percent tariff Hilton quota.

Ian McCamley

“So we will be back to the old days when we used to fill that quota early and then that will affect the rest of us who supply into that quota, it is pretty bad news right through,” Mr McCamley said.

Adding further basis to these concerns for Australian grassfed producers have been statements from the EU to the effect that if Brexit occurs in October, Australia’s Hilton Quota will reduce from 7150 tonnes to 2481 tonnes.

He said the premium priced EU market influenced the price paid for PCAS cattle.

“The rising tide floats all boats, it really is the market that we aspire to.”

Mr McCamley said he would have liked the Australian Government to go in to bat for the Australian beef industry and taken the issue through to a WTO negotiation.

“But people get nervous about any repercussions and obviously people arguing about repercussions have won in this case.

“I think we tend to get a little bit soft with that sort of thing these days.”

MLA International Business Manager for Europe and Russia, Josh Anderson, said it would very difficult to predict what effect the proposed changes would have on Australia’s performance under the grainfed beef quota, and the outcome would depend on a few major factors.

Firstly, it remained unclear when the proposed changes will come into force. There is an internal EU process that has to unfold to have the proposal ratified requiring the EU Member States and Parliament to endorse before it takes effect.

Secondly, as mentioned above, Australia will maintain access to the remaining quota balance of the quota, and its performance will largely depend on its competitiveness against the other two large suppliers, Argentina and Uruguay.

Australia is able to export grainfed beef under the 20pc tariff, 7150t Hilton high quality beef quota which provides another avenue for grainfed beef. The last year Australia fully utilised its Hilton quota was 2015-16.

“The Australian Government has strengthened its commitment to seek meaningful beef and sheepmeat access as part of the Australia-EU FTA,” Mr Anderson said.

“The industry is working closely with government to progress this as quickly as possible to counter any potential adverse impact.”

Australia has under-utilised quota access

While some Australian EU export stakeholders are clearly alarmed about the impact of the changes announced on Friday, others are much less concerned, pointing out that Australia has not gone close to utilising the tonnage into the market that it currently has access to.

The issue of the need for certainty kept coming up this week in discussions about future market access to the EU.

“People involved in the trade may become a little uncertain, taking some measures to either cut back EU-eligible production or modify their production windows to try to tie-in better with quota availability,” one stakeholder told Beef Central.

“It’s going to be important to make sure that if you are putting an EU animal on feed, that you get the timing right, to coincide with the quota period. With the HGP sacrifice and the EUCAS cattle premium, they get very expensive if you miss the quota window, and cannot send the beef into the market,” he said.

“Certainty is the key in future trade, and that’s what an FTA between Australia and the EU would provide more of, if it was a country specific volume,” the contact said.

He said in reality the grainfed beef trade that had emerged was a product of a ‘kickback’ that the EU had directed at the US over the HGP dispute, that Australia had managed to leverage off.

“Effectively, it was pretty clever of Australia to work out a way to access the grainfed quota, but if you were an American, you would be pretty annoyed that Australia had done it,” he said. “The US in fact tolerated the situation for five or six years, but if the boot was on the other foot, Australia would have been a lot more extreme in its response,” he said.

Three big players dominate EU export space

Inquiries around the industry suggest that three big players – NH Foods, JBS Australia and Teys Australia – currently dominate Australia’s export grainfed beef trade to the EU, accounting for an estimated 90 percent of annual exports.

It’s important to note, however that neither these companies, nor Australia as a whole, controlled the HQ grainfed quota – it was the importing customers themselves, who were at liberty to trade with whoever they choose.

While some exporters consign only a limited number of cuts from EU eligible cattle (typically cube roll, striploin, tenderloin and perhaps some rumps) other companies continue to trade in fullsets, consigning up to 12-14 cuts from each carcase.

Feedlot accreditation grows

There are currently 61 NFAS-accredited feedlots in Australia with EU accreditation, according to the AusMeat website.

That number has grown from single figures back in the days prior to the launch of the HQ grainfed quota. While some of those feedlots service the HQ grainfed quota, others apparently feed EU-eligible cattle to go in only under the old Hilton quota.

Typically, accredited feedlots have a small portion of their overall yard capacity reserved for EU feeding programs. Few, if any, appear to rely heavily on the business, Beef Central was told.

Additionally, some EU-accredited yards, especially custom feeders, may only occasional feed for EU requirements, or may simply hold accreditation in case a cattle customer wants to feed a pen or two of EU steers.

While Australian Wagyu beef is becoming increasingly popular in the EU market, Beef Central was told that large quantities of the product cannot be exported under the HQ grainfed quota, because the 400-500 day grain feeding regimes used with Wagyu push the animals outside the EU’s 30-month/four tooth age limitation.

 

 

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Comments

  1. Julian Carroll, June 14, 2019

    Is this a typo (now vs not)?

    “…which does now permit HGP-treated beef or beef exposed to chlorine wash during processing…”

    Thanks for bringing this to our attention Julian,that error has now been corrected in the article.

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