Recognition that Australia’s northern beef industry can no longer rely upon Indonesia and needs to diversify its market options was an overriding theme at last week’s Northern Territory Cattlemen’s Association conference in Darwin.
An expert on Australian agribusiness opportunities in Asia, Rabobank’s Singapore-based head of food and agribusiness research in Asia, John Baker, told producers that significant growth opportunities exist in the region beyond Indonesia, and particularly in China.
His message for Australian producers, processors and exporters was not to sit back and wait for those opportunities to happen, but rather to travel to the market now and lead with their expertise.
The world’s most populated country has carefully planned the evolution of its pork and poultry industries, and that market opportunity has now shifted to beef.
China had a relatively undeveloped beef supply chain and a production system dominated by small holders.
It was also welcoming of foreign expertise to improve its management practices, herd productivity and processing competencies, he said.
“Stretch your vision and go and jump on a plane and take a look at China,” Mr Baker said.
“Your vision is always limited by what you can see, and if you extend what you can see then you will extend your vision as well.
“Australia needs to think about how it can translate its expertise (into commercial opportunity), whether it is an enhanced relationship, whether it is an entry point into an equity investment, whether it is a joint venture from a service perspective, there are many different alternatives that are available there.”
Australia in pole position
In a positive assessment of the outlook for beef, Mr Baker said a global contraction in cattle supply was likely to support higher beef prices worldwide in the short to medium term.
Australia and Brazil were the only two major incremental producers of beef in the world, or in other words the only countries with the production capacity at present to supply major increases in global demand as they occur.
However, unlike Brazil, Australia was not limited by Foot and Mouth Disease in its ability to supply export markets.
Another competitor in the region is India, which has 185 million head of buffalo and has developed a strong export trade in buffalo meat to the Middle East, Malaysia and Vietnam.
However, like Brazil, India's herd is also affected by Foot and Mouth Disease, which is likely to limit its ability to access larger Asian growth markets such as China, Mr Baker said.
With a large beef herd of its own, China was unlikely to embrace Indian buffalo meat to the same extent as Asian countries with lesser cattle populations.
“China has close to 100m head of beef. Would they want to put that at risk? I don’t think so, which means there is a strong opportunity for Australian beef there.”
Asked about the likelihood of Australia developing a live export trade in feeder cattle to China, Mr Baker said there was little reason to believe it would not happen at some point.
The supply chain was already in place via Australia’s healthy trade in dairy cattle to China, and the necessary protocols for feeder cattle exports were also already signed.
“Certainly as further industrialisation occurs and when you see more feedlots evolve in China and they need that continuous flow of product, there is an opportunity there.”
‘Far east premium’
The far east premium is a little known concept but one that has big implications for Australia in terms of capitalising on future growth within Asia.
Put simply, demand in Asia is growing, and Australia and Brazil are the two countries best placed to supply it.
Australia’s beef industry is as competitive as Brazil’s, but better located to Asia.
As a result the pricing of Australia’s product will be able to be slightly higher than Brazil’s, because Brazil has a higher freight cost to move its product from the west to the east.
The Far East Premium was occurring in sugar and Australia, as the supplier with the closest proximity to Asia, was well placed to capitalise on the same pricing dynamic as beef demand in Asia grows.
Mr Baker has recently returned from a week in Indonesia meeting with industry representatives and Government officials.
He said he encountered universal recognition at all levels within Indonesia of Australia's importance as a producer of low cost beef and a critical part of its supply requirement.
However, Indonesia was also determined to diversify its options, which was a sound fundamental of business.
“If you look at any good business, anywhere in the world, whether it is from a procurement standpoint or from a marketing standpoint, they’re always looking to diversify their options,” he said.
“The more options you have, the better you can buy, the better you can sell.
“If we can bring the same principals to the Australian industry, increasing market optionality for our cattle in the north is ultimately going to lead to the best premium we can achieve.”
Despite the current challenges in Indonesia, there are reasons for optimism in the market.
Indonesia’s economy was growing strongly, with direct foreign investment surging from $2.7b in 2009 to almost $10b in 2010. With a growing economy came increasing consumption and rising demand for beef.
The Indonesian Government maintains that its local herd now contains 14.8 million cattle, while industry sources suggest the figure may be closer to 6-10m.
The country does have a track record of achieving self-sufficiency, having done so in poultry production.
However it clearly faced number of unique challenges in its bid to achieve self-sufficiency in beef production, Mr Baker said.
The working capital cycle in particular is a key challenge for its smallholder-based production system.
In poultry production small holder farmers were able to receive a return on their investment within 45 days. Beef production was based on a far longer cycle, which was difficult for small holders to sustain.
Herd security outside feedlots was another issue. “If you’re going to rely on a broadacre grazing model in Indonesia then security of cattle is another issue that needs to be addressed in order for outside investment to flow.”
Ultimately the key message for Australia’s northern cattle industry was to increase its market optionality in Asia and to reduce its dependency on Indonesia.
“Asian markets are where the future action is, harness these opportunities, but play to your core strengths, and ultimately be a winner,” Mr Baker said.