Australian Beef Industry - Case Study Example

Australian Beef Industry Name Course Tutor Date Australian Beef Industry The Australian market is structured largely as a products exporter economy; though over the recent years this has taken another direction towards knowledge-based economy. ABARES, (2006) claim that in the previous 15 years, this economy has changed from largely an agricultural-based economy, having agricultural commodities and other products controlling the exports, to a balanced economy. In 2003 agricultural exports contributed A$30.6 billion to the country economy (ABS, 2010). This number clearly demonstrates that Australia agricultural industry is emerging as a key player in the international market, exporting refined manufacturing commodities. Beef production is one of the major contributors to the economy of Australia which has put the country in the world map. The sector is now competing with the industry leading players such as Brazil, the US, and the European (Union Hassall & Associates Australia 2006). Although the sector may be doing well at the present in terms of world ranking, it has never escaped challenges. To put this discussion into perspective, the main concern of this essay is to analyze Australian beef domestic and export market, assess the commodity characteristics, demand and supply elasticities and market interdependence. To contextualize the discussion the essay will also assess how institutional policies in the domestic and international affect beef trade. The beef sector is the leading agricultural business in Australia, and considered the second major beef exporter, after Brazil all the world (ABARES, 2006). All conditions and geographical factors of Australia encourage cattle rearing in a wide number of climates. Cattle production regarded as a key sector which covers an area estimated to be 200 million hectares (ABS, 2010). In the last five years, beef prices have gradually decreased. Similarly, the lasting impacts of drought cases, that have raised the cost of rearing cattle and beef processing, have squeezed sector profit considerably. A favorable weather that returned in late 2010 meant a start of good times for the sector; however revenue remained under strain as farmers concentrated on building herds. In the years through to 2013/14, sector profits are predictable to decline by an annualized 3.3 percent to attain $5.6 billion. The beef sector is reliant upon export markets, with more than 60 percent of beef production exported from Australia, mainly to the US, Japan and Korea (Hassall & Associates Australia 2006). The sector attained an advantage following the finding of BSE also referred to as mad cow disease in United States, Canada and Japan, while Australia is free from the disease. The domestic market is one single leading market for the Australian beef, estimated to be 35 percent of beef production in the 2010/11 (ABS, 2010). However, there was a decrease in the volume of beef that was consumed in Australian market by 3% in the same year (2011) which was mainly characterized by the strong global demand, especially in emerging markets like Russia, the Middle East and South Africa. Cattle or beef prices have increased over the last one year (2012) year in what Australia consider foreign markets on the back of increased demand and lower supply. These increases have reflected the same rises in other producer nations. Rise in supply from eastern Australia can be anticipated after drought seasons and herd re-building. Until now Western Australia market is yet to recover fully. Western Australian beef sector is smaller than some other parts of Australia. Entire value of the beef from Western Australian production is approximated to be $487 million back in2007/08 (Niethe & Quirk, 2008). Beef from Western Australia side is both exported and used for local consumption and also for live export. It is also estimated that 65 percent of Western Australia beef production goes to the local domestic market while 35 percent is exported (Niethe & Quirk, 2008). This figures contrast the rest of Australia in which these figures are actually reversed. The beef industry (as well as live cattle) constitutes 17% of overall Australian farm exports (ABS, 2010). The major markets of focus to the Western Australian beef sector in relation to their value are Israel, Indonesia, Turkey, Japan and Korea. O’Loughlin (2008) argues that Western Australia considers Indonesia as its most important market for live cattle and beef. The Indonesian administration has shown the need to be self-reliant with regard to beef. The country imported 99% of its cattle and beef from Australia between 2006 and 2010 (ABS, 2010). There are also various factors that influences the beef export market. These factors include social, political and economical factors Vansickle (1999). However these can be narrowed down to climatic conditions, trade policies and exchange rates. Exchange rate has a major effect on Australian beef export. The rise in Australian dollar and a growing stiff competition in major markets have continued to challenge this export-based business by squeezing profit margins Schroeder, C., (Marsh & Mintert, 2000). Live export market reforms is the most possible solution that can result to transformation in the balance of trade in various countries (O’Loughlin, 2008). The trade policies set by Australian administration and other governments dealing in beef influences the competitive nature of the Australian beef sector. Particularly trade policies in key importing and exporting countries hold a significant impact on prices of the product and market access. Australia does not have support for price or other beef sector support structure. Although the sector many challenges, it remains competitive. (Norton, M. 2005, p.33)The competitiveness of the sector is impacted by government plans that bring about microeconomic reforms, extensive macroeconomic policies and government structures created to enable beef sector research, market and promote the product. Protective trade policies enforced by both exporters and importers influences prices of the product, market access and the competitive nature of every country that participate in the global beef market. Kidane (2003) postulates that Protectionist trade policies of European, US, Korea and Japan have been a concern for Australian beef sector in a number years. However, these protective quotas and tariffs apply generally within the market. For instance majority of countries in which Australia exports live livestock enforce tariffs. There are two major macro level challenges for the beef sector, a sector reliant on export market. Firstly, the continuing Australian dollar strength offers a major concern to exporters experiencing fierce competition from other nations. This is pressing margins making it hard to maintain price-awareness markets. Kimbal (2012) claim that the general economic situations are dictated by challenge concerning sovereign debt challenges that the Euro zone nations are experiencing and the US debt size burden. Whilst both the United States or the European Union are not a top tier markets for the Western Australian beef, a decline in their economies could be anticipated to an effect in other nations (Kimbal, 2012). Higher beef prices across the globe are a sign of and a reaction to the rising demand and decreasing supply which has an effect on the standard balance of trade. For instance, the European Union, which usually imports beef, is reported to have imported a low volume as in 2011 quoted at 237,000 tons compared to what they had imported in 2007 quoted at 308,000 tones (Kimbal, 2012). The stocks of cattle in the US are very low but the prices is said to be high owing to severe drought experienced in southern states, especially Texas. Turkey is also a fairly new and powerful market for Australian live cattle; however it is known to be a major destination for cattle and beef from European Union. The Korean beef share imports from Australia has been declining from the time of the re-entry of US beef industry. From 2003, nearly 75% Australia’s share has declined to under 50% in 2011 (Kimbal, 2012). The anticipated entry of Canada into the Korean markets is also expected to affect negatively the Australian exports to Korea market. However, this may just be for quite sometimes because of the reputation of Australian beef in terms of quality and disease free. ABS (2010) state that until now, the sector's product segmentation is carried out with regard to a range of cattle characteristics like sex, reproductive traits and age. Australia boasts of producing better quality beef which is free from infections and also the first nation to create National Livestock Identification System (NLIS) (ABS, 2010). The NLIS needs cattle to be offered an identification ear tag of electronic nature when still young. This system significantly assists Australia to maintain their name of a disease free beef place. A leading player on global markets, Australian beef dealers are positive concerning the opportunities, strength and challenges which are ahead. Gans (2011) argues that the consistent increase in demand for high-quality and safe beef, together with Australia's emphasis on fulfilling consumer demands, has enhanced the service of the industry both at domestic home and foreign level. Australia is considered a global leader based on the value of the products the country exports; this makes the industry to outdo its rivals. O’Loughlin (2008) asserts that the country has achieved this status through quality differentiation, both on the basis of supplying a safe and tasty beef, in addition to the other quality reassurance measures that make sure Australia remain a leader in the international beef market. The Australian’s national bureau of statistics estimates that Australia has 43,763 farms which produce beef cattle and having a countrywide herd of 26.5 million head (ABS, 2010). Australia predictable record volume and profits from its live cattle and beef export between the financial 2000/2001(Kimbal, 2012). This was due to high demand from the US, low global supply of beef, the Australian dollar decline and disease free condition in Australia. The outbreaks of FMD and associated restrictions have compelled Argentina to move out the US market and rejection of the European beef because of the disease created demand for beef. These situations caused low supply in the world market. This created opportunity for Australia beef industry which is disease free to take over the world markets, particularly the US and Japan (ABS, 2010). The price increase is demonstrated by a shift of the perfectly elastic global demand curve upwards in the Australia’s beef sector. Because of the higher price, domestic customers purchased less beef. In the contrary, local suppliers supplied much more to the international markets. Gan (2011) claim that the Australian dollar depreciation made the global demand curve to shift upward; this gave Australian suppliers an extra comparative gain on exports (check Figure 1). Hence the volumes of beef exported by Australia kept going up. Domestic and foreign beef demand, drought, exchange rate volatilities and international trade barriers are some factors affecting the Australian beef industry (Gans, 2011). Australia has experience rise in the demand for pig and poultry meat as some people move away from beef consumption. This is attributed to the shifts in relative prices of the various meats. The beef prices have gone up since the late 2000s, in relation to the pig and poultry meat prices (Norton, 2005, p.33). There also could be some shift in customer tastes and preferences over a certain period of time. In spite of the decrease in domestic demand for beef, Australia consumption continues to remain high compared to consumption in several other nations. The outcomes of various researches demonstrate beef demand to changes in price have been decreasing with time in Australia (Griffith et al. 2001). Rise in demand for beef is mostly influenced by population and income growth. Reflecting on this, there has been a growing demand for beef in the developing countries considered to have higher population and income growth rates compared to developed countries. The demand for beef in developed nations has been fairly stable. Whilst key markets in Australia, especially for beef, are largely developed countries; markets in the developing countries are becoming more significant with the increase export volumes (Gans, 2011). Figure 1: effect of global demand (the curve shift upwards) Source: (Gans, 2011) For Australian beef industry to make maximum profit, it has to depend on both domestic and global market. However, this industry has also experience up and downs caused by economic and political factors both in its own market and its trade partners. The most important concerns in recent years have almost all been associated to the foreign market conditions such as the prices which are normally determined by world markets (Norton, 2005 p.37). In recent years the Australian beef sector has been viable on the basis of capability to attract and sustain output and investments. Market developments for live cattle and beef have had contribution to this competitiveness. Increasing productivity has assisted the sector to sustain its domestic supply base. The major question for future competition concerns the degree to which animal feed sector can maintain beef sector for the industry to continue with the good reputation it has received over the years. References ABS. (2010). Agricultural commodities, Australia. Australian Bureau of Statistics. Canberra. ABARES. (2006). Agricultural commodities. AAP General News Wire. Gans, J. (2011). Principles of economics. South Melbourne, Vic: Cengage Learning. Griffith, G. et al. (2001). The US catlle cycle and its influence on the Australian beef industry. Retrieved 7th August 2013 from http://www.livestocklibrary.com.au/bitstream/handle/document/pdf Hassall & Associates Australia . (2006). The Live Export Industry: Value, Outlook and Contribution to the Economy, Melbourne. Kidane, H. (2003). Australian meat industry: Challenging issues and prospects on world export markets. Journal of Food Products Marketing, 9(2), 69-89. Kimbal, C. (2012). Western Australian Beef Commentary. Department of Agriculture and Food, Western Australia. Norton, M. (2005). Factors affecting beef and cattle producer prices movements. Monthly Labor Review, 128(5), 32-40. Niethe, G. and Quirk, M. (2008). A scoping study an potential beef production from the northern rangelands of Western Australia in relation to the supply chain. A report to the Department of Agriculture and Food, Western Australia, October. O’Loughlin, E. (2008). Issues in the Western Australian Beef industry, (2) Summary f reports on the Beef Industry in Western Australia 1995-2006. Department of Agriculture and Food, Western Australia. Schroeder, C., Marsh, L. & Mintert, J. (2000). Beef demand determinants: A research summary. Retrieved 7th August 2013 from http://www.agmanager.info/livestock/marketing/document/pdf Vansickle, J. (1999). New factors affecting cattle prices. Retrieved 7th August 2013 from http://www.animal.ufl.edu/extension/bee/shortcourse/document/pdf Read More