Trade

Is China the new US for world beef trade?

Simon Quilty, March 4, 2019

 

Simon Quilty

It was once accepted that the US market set global beef prices, but strong evidence is starting to say that China is now dictating global pricing and the US is losing its mantle as the number-one driver of global beef demand and supply, reports independent meat analyst Simon Quilty.

 

 

 

CHINA is now the number one importer globally of beef – a mantle that the United States once coveted.

Once upon a time, the first question a meat trader would ask when starting work each day was – What have US beef prices done overnight? Today, the first daily question asked by traders and meat processors is, What is China bidding today?

The rise and rise of demand from China has made many of us wonder if China is the new US in terms of being the global dominant player for beef imports. It was once accepted that the US market set global beef prices, but strong evidence is starting to say that China is now dictating global pricing and the US is losing its mantle as the number-one driver of global beef demand and supply.

China imports record beef volume in 2018, surpassing all other countries

In 2018 China imported a record volume of beef, surpassing any other year prior, and in August became the largest global importer of beef, surpassing the US. This has seen China’s beef imports for both November and December at record levels of greater than 104,000 tonnes of beef for each month.

The factors driving these large import volumes into China include:

  • In Q4, the lack of protein due to African Swine Fever mass pig liquidation
  • Consumer preference for beef over pork commenced in early 2018 and was acerbated due to African Swine Fever after August.
  • The clamping down of the grey trade into China via Hong Kong and Vietnam which has seen strong imports directly into China, and not via a third party/country like Vietnam or Hong Kong.
  • The fall in US beef imports in Q4 is a seasonal factor which coincided with large Chinese beef imports that occur due to Chinese New Year which started on February 5.

The USDA has forecast a mild 0.5 percent increase in US beef imports for 2019, compared to a potential 21pc increase in China’s overall beef imports. China beef demand has showed no signs of slowing.

Click on graphs for a larger view

China has been the largest unofficial importer of beef globally for some time

When assessing the record volume of China imports it is important to remember that China has been unofficially the largest importer of beef globally for many years, when the grey trade between Vietnam, Hong Kong and China is taken into account. In recent times, we saw in 2015 the largest volume of imported beef by the US of 1.12 million tonnes (shipped weight) which was matched by Greater mainland China two years prior.

Realistically, China has unofficially held the mantle for six years, with the grey trade up until 2018 dominating the bulk of these beef imports. In 2018 the Chinese government clamped down on this trade, which has seen for the first time in many years direct imports being now the largest majority of the trade at 52pc.

China looks to expand beef imports further

The forecast for greater beef imports into China is on track for 2019, as the switch to beef grows and it would be fair to say, at the expense of Chinese domestic pork.

Some key points to note:

  • China is on track to increase direct beef imports in 2019 imports by 21pc to an estimated 1.3 million tonnes (shipped weight).
  • The trend of a fall in grey trade beef imports is likely to continue and direct imports to expand.
  • China has approved 269 offshore beef plants to export to China from 17 different countries and expanding its supply base.
  • Last December Brazil was given approval for an additional 78 new meat establishments into China which included 26 pork plants, 22 beef plants and 30 poultry plants. So far these have not appeared on the official approval list, from within China and Brazil so I can only assume they must still be pending for approval.
  • I am informed 16 facilities (11 meat works and 5 cold stores) in Australia are still waiting for China approval and have been for two years. Politics I believe is the real issue that has prevented these approvals.
  • When assessing US and China’s similar supply countries, Australia and New Zealand have the joint strongest presence in both markets. South American countries have close to 70pc of China’s market share, while Central and North American countries namely Canada, Mexico and Nicaragua make up 48pc of US imported beef market share.
  • Australia and New Zealand have played a unique supply role for both China and the US. Their combined volume accounts for 27pc and 43pc respectively for each market. It could be argued that due to the growing number of approved suppliers from other countries for China, it is likely to see Australia’s future influence and role getting less due to no new plant approvals in Australia for the last two years.

* List includes both processing and cold storage facilities. Other smaller suppliers include Serbia, Costa Rica and Hungary (three each); and Naminia, Belarus, France and Mexico (two each).

China’s global impact on individual beef items

China’s influence I believe is most pronounced at the lean end of the meat market where cow and bull boneless beef is now being value-added and sent as individually wrapped (IW) cuts into China which might have once gone to the US as grinding meat for hamburgers.

Points to note:

  • The impact of value adding to cow and bull cuts is most pronounced in New Zealand, which once upon a time saw 60pc of its beef exports go to the US each year (comprised mainly of grinding meat and to a lesser extent 100 VL items). This trend no longer exists, and in the last four months, China has taken more NZ meat than the US. Since October 2018, China has on received 34pc and the US received 29pc of total New Zealand beef exports.
  • Based on Australian export data, China’s needs are 83pc cuts and only 17pc grinding meat, whereas the US needs are almost the opposite – taking 61pc grinding meat and 39pc cuts. Effectively, China is value-adding to the cow and bull market.
  • Australian briskets, shin/shank and silverside exports ranked as the top three export items to China, while to the US, the top three export items are 90 CL, 95 CL and 85 CL grinding meat.

Australia’s 2018 top beef export items to the US and China

Does China lead the US on market on price?

The answer to this question, I believe, is yes, when it comes to cow and bull items from both Australia and New Zealand.

When assessing NZ beef prices over the last three years, it shows there is a genuine seasonal price trend developing, whereby September is the low in China’s demand cycle and the peak occurring during Chinese New Year in January/February (depending on when it falls each year). There is normally a gradual decline in beef prices that in recent years has been on average NZ40c/kg until April, before a pickup in May, June and July.

US pricing almost seems counter-cyclical to China, with the low in pricing in February, followed by an improvement leading up to the northern hemisphere summer. It does not apply to all items, but it does explain why there has been a significant volume of NZ meat exported to China in preference to the US recently.

The China price dip in April is most likely due to the large New Zealand cow run traditionally peaking in early May, and the decision by most NZ exporters to forward sell in April to manage the cow meat volume. In the past this has been seen by US importers as a strategically key time to buy large volumes of NZ frozen imported cow meat to put away for the northern summer demand period. The question is: Does this strategy still work given half of NZ’s US beef exports now go to China?

I believe this strategy will be truly tested in coming months and is likely to see imported 90 CL meat in the US trade at parity with US domestic 90’s, as opposed to the usual discount that would have occurred in the past. This is simply because of the lack of volume of both imported 90’s and 95’s. What was once a significant strategic advantage for importers owning cheap lean meat will possibly be no longer the boon it once was.

Conclusion

The impact of China’s demand is very different for both Australia and New Zealand and plays a crucial role for several South American countries.

New Zealand’s beef production is heavily weighted towards lean meat, due to NZ’s high bull and cow production which combined make up 61pc of the country’s total kill, due to the strong influence of the dairy industry.

This makes China a natural fit for New Zealand, both in terms of China’s desire for lean meat but also because of the timing of production with the NZ bull run dove-tailing nicely into the Chinese New Year demand period.

Australia’s role in China I see as different, and is regarded by some processors as still an immature market – namely because of the uncertainty of the Chinese market and the unpredictable nature of the country requirements.

In short, there is too much politics that impacts Australian beef exports which creates a degree of uncertainty about ongoing access to the China market. This was best seen back in July 2017 when six meatworks were banned from shipping to China due to supposed labelling issues, that lasted for five months.  In recent times that political dynamic  has been reflected in ongoing lack of approval for 16 meat establishments in Australia that have been on the waiting list for two years, even though China continues to keep approving other countries and plants all over the world.

I believe the Australian meat and livestock industry is being dogged by federal politics as Australia’s China relations remain strained.

As long as this continues, it creates doubt in this trade and prevents Australia from reaching its full potential into this market. Conversely other countries are increasing their export footprint in China unfortunately at Australia’s expense.

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