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Jul 12, 2017 | 09:00 GMT

9 mins read

Changes Steer Beef Markets Toward the U.S.

Circumstances are looking positive for U.S. beef exports, as major producers such as Brazil and Australia struggle with constraints on their supply. But questions hang over the bilateral trade deals the United States must negotiate under the Trump administration.
Forecast Highlights
  • Adverse developments among major beef-exporting countries have created an opportunity for the United States.
  • This opportunity is aided by the recent resumption of U.S. beef exports to China, which could lead to large increases over time.
  • Some of the U.S. ability to take advantage of the new opportunities in the beef trade will depend on its ability to sign bilateral trade deals after its withdrawal from the Trans-Pacific Partnership. NAFTA renegotiations also will be important.
The global beef trade is going through a major shake-up. The largest producer, the United States, has just opened the fastest growth market, China, to its products for the first time in 15 years. One of the top exporters in 2016, India, has passed legislation that could severely constrain its supply. Meanwhile, two other major producers, Brazil and Australia, are struggling with their own constraints. With so much dust in the air, much is still unclear, but the one obvious winner from these developments appears to be the United States.

Few Producers, Growing Demand

A few major players dominate the global beef trade. On the supply side, there are two key factors: first, how many cattle the country can produce, and second, how much of the resulting beef will be consumed domestically. If the first number is much larger than the second, the country is likely to be an important exporter. This is the case with Brazil (tied for first in the world with India with 19.6 percent of global exports) and Australia (third, 14.7 percent), two countries with great expanses of pasture suited to cattle farming. It is also the case with India, where the huge human population might crimp the space a little, but the predominance of the cow-friendly Hindu religion limits beef consumption domestically.

A few major players dominate the global beef trade. On the supply side, there are two key factors: first, how many cattle the country can produce, and second, how much of the resulting beef will be consumed domestically.

On the demand side, the largest import markets will be those in which production is limited and the appetite is large. Japan (third, 9.3 percent of world imports) and South Korea (fifth, 6.7 percent), for example, are two societies in which space is limited, but the taste for beef has grown as they have developed. This is a trend which repeats: As a country moves up the rankings of gross domestic product per capita, its citizens develop an increasing preference for beef. China is the latest demonstrator of this trend. While it has the world's third-largest cattle population, China also has the world's largest human population, which is growing increasingly wealthy, and beef is thus becoming an increasingly important import good (second, 10.8 percent of world imports).

For its part, the United States sits somewhere between the supply and demand poles. It possesses abundant farmland, but its population is also crazy about beef, and not only the high-quality beef it mainly produces. U.S. cattle are predominantly grain-fed, producing premium beef that is cut into steaks and the like, but the U.S. consumer also has a taste for ground beef, which can contain much lower-quality beef. The result is the United States is at once one of the world's major exporters of beef (fourth, 11.9 percent) and its leading importer (first, 17.9 percent).

The European Union, by contrast, does not figure into the global beef trade as much as might be expected. Even though the union is the third-largest producer of beef, it is also the second-largest consumer, and much of the beef trade happens within the internal market itself.

The world beef market thus contains a relatively small number of major producers, while more potential consumers continue to enter the market as countries develop and escape poverty. In such circumstances, access to the key markets is important for each producer, while anything negatively affecting another producer can also create sizable benefits.

Obstacles and Opportunities

Several major events recently have disturbed this picture. The most striking has taken place in India. Ever since the Bharatiya Janata Party came to power in 2014, Indian society has been showing increasing signs of Hindu nationalism, creating a growing undercurrent of sentiment against the mistreatment of cows. India's beef trade historically has avoided offending Hindus by focusing on buffalo. Because the buffalo are raised primarily as dairy cows, they are slaughtered for meat at the end of their life. The beef is low quality and sold predominantly to developing countries such as Vietnam, Malaysia and Indonesia. But in May, India's central government banned the sale of cattle and buffalo at auction houses, where 90 percent of India's cattle for slaughter are sold. The situation is still evolving — on July 10, India's Supreme Court put the ban on hold after howls of protest from various states, and new rules were to be issued by the central government by the end of August — but in broad terms, the vast majority of India's beef exports, almost 20 percent of the global total, are in danger of being removed from the world market overnight.

Two other major exporters are also struggling with their own problems. Brazil has been plagued by legal issues. In March, a federal police investigation into meat inspections led Brazil's major export markets to put a hold on its beef, and in May, Brazil's largest beef-processing company was caught up in a political scandal. The combined result has been a 10 percent drop in Brazilian exports (year on year) in the first five months of 2017. Australia, meanwhile, is emerging from a drought that saw its cattle herd drop from 29 million to 26 million since 2014. The country is rebuilding its cattle stocks, but the process takes time, meaning Australia is poorly placed to benefit from any weakness in the market among its producer peers.

While the other major beef exporters are facing difficulties, the United States is enjoying positive news. The first shipment of U.S. beef to China was delivered in June. Fifteen years ago, the United States had a damaging brush with mad cow disease, causing most of its major markets to cut off U.S. beef imports. China has been one of the last to withdraw its restrictions.

Late last year, steps had been taken to resume the beef trade, but U.S. President Donald Trump's meeting with China's President Xi Jinping in April finally kick-started it again. China is the world's second-largest market for beef imports. And the United States will have to jump through some hoops before it can compete in China with Australia and Brazil — for example, China places restrictions on all beef imports related to growth hormone usage and where cattle are born and raised. But the United States is expected to be able to develop a strong presence there over time.

China is the world's fastest-growing beef market. With a swiftly developing middle class, Chinese consumption of beef is expected to grow from 7.25 million metric tons in 2015 to 8 million metric tons in 2020. With new domestic production already losing pace to imports, this presents a huge opportunity for outside exporters. There are potential risks ahead, however. China has a history of politicizing issues around agricultural imports, and with the United States and China likely to be entering a phase of increased confrontation, barriers to the beef trade may return in due course.

Questions Linger Without Trade Deals

Circumstances are looking positive for U.S. beef, but a couple of major question marks hang over the trade deals the United States can negotiate under the Trump administration. The first concerns the renegotiation of the North American Free Trade Agreement and what new arrangement emerges from it. Mexico and Canada are the United States' second- and fourth-most important export markets, respectively, and the status quo entails duty-free access with few non-tariff barriers. If the renegotiation of NAFTA leads to increased export barriers into Mexico and Canada, U.S. beef exporters could be greatly affected.

The second question mark hangs over the fallout from the Trump administration's decision in January to withdraw the United States from the Trans-Pacific Partnership (TPP), a trade pact negotiated between the United States and 11 other countries flanking the Pacific Ocean. Negotiations were particularly intense with Japan on the subject of beef. Japan is the top importer of U.S. beef, but in 2014 Japan signed a free trade agreement with Australia that gave Australian beef exporters an edge over their U.S. counterparts, as they successfully managed to negotiate tariffs down on a relative basis. U.S. negotiators of the TPP pact were highly motivated to bring down Japanese beef tariffs in the same way, and they were largely successful, negotiating, for example, a cut in chilled beef tariffs from 38.5 percent to 9 percent over the next 16 years.

Trump's TPP decision thus undoes the progress made by U.S. negotiators, and as long as the United States is outside the trade pact, the question remains what it will arrange to replace the TPP agreement. This question is compounded by the fact that the pact would have given U.S. beef exporters reduced-tariff access to Vietnam, one of the key importers of Indian beef.

Trump's TPP decision thus undoes the progress made by U.S. negotiators, and as long as the United States is outside the trade pact, the question remains what it will arrange to replace the TPP agreement. This question is compounded by the fact that the pact would have given U.S. beef exporters reduced-tariff access to Vietnam, one of the key importers of Indian beef. A halt to Indian exports could create opportunities in the Vietnamese market (though U.S. and Indian beef occupy different value quadrants of the market). The United States has made clear that its post-TPP policy will be to arrange bilateral agreements, rather than large regional ones, and U.S. representatives have said that the terms of the TPP pact present a good basis for such agreements. If the United States can successfully negotiate new bilateral deals that mirror the terms of TPP negotiations — and Japan appears open to pursuing such talks — the issue of beef tariffs could be resolved successfully for U.S. beef exporters.

Some urgency is apparent because the remaining 11 TPP members are exploring options for implementing the deal without the United States. The worst-case scenario for the United States would involve competitors such as Australia and New Zealand gaining access to fast-growing Asian markets and Japan in ways that remain unavailable to the United States. One aspect that plays into the United States' favor, however, is that some TPP-11 countries, notably Vietnam and Malaysia, are dragging their feet on signing a regional deal without U.S. involvement, because access to the U.S. market was one of the key motivators of their getting involved in the first place.

Thus, while much is changing in the international beef trade, many of the changes are playing into the hands of one country — the United States. Whether the outlook is entirely rosy will depend on how long and how deeply the problems in other beef-exporting countries persist, and on how successful the United States is at signing beneficial new trade deals in a post-TPP, renegotiated NAFTA world.

Changes Steer Beef Markets Toward the U.S.
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