Price of the Australian Beef Industry - Case Study Example

The Australian Beef Industry Introduction Beef is one of the agricultural products produced in Australia with demand for beef products emanating from both local and international markets. Australia stands in third place after the United States of America and Brazil in production of beef products .Interestingly, the bulk of Australia’s beef is consumed abroad; demand and supply factors that determine the market for Australia’s beef are varied as much as the different markets where the beef is sold(PWC, 2011). This paper examines the Australian beef industry presenting the factors that influence the price of beef. Firstly, it examines the characteristics of Australian beef that influence its price elasticity. Secondly, it examines the demand and supply for beef products both locally and internationally. Subsequently, this paper discusses the role played by beef cooperatives and councils in influencing the Australian beef industry as far as influence demand, price and supply in concerned. It will also explore policies that govern the Australian beef industry and how they influence demand, supply and pricing trends. Characteristics of Australian Beef The grades of beef produced in Australia are categorized according to the region in which they are produced. Beef is categorized into either those produced from cattle reared in the north or produced from cattle reared in the south. The major difference between the two beef qualities is the ability of cattle reared in either zone to adapt to climatic conditions. Beef produced in the north lacks adequate pasture hence southern meat is usually deemed to be of superior quality than meat from the north. Beef from the north therefore fetches lower prices in the market than their southern counterparts; therefore southern beef attracts more demand than beef from the north. Southern beef is particularly in high demand in high-end markets such as Japan and The Republic of Korea (PWC, 2011) and naturally attracts higher prices (Meat Trade News Daily, 2012). Australian beef is usually considered of high quality and disease-free (PWC, 2011). Breeds such as Bos Indicus are accustomed to beef farmers in the north due to their ability to withstand the heat and resistance to ticks. The northern farmers target Asian markets where they export live cattle. This way they earn better revenues from the exports than when the beef is sold processed. On the other hand the Bos Taurus breed is a favorite for southern farmers who prefer it for its high quality beef that earns handsomely in processed form unlike the northern bred Bos Indicus (PWC, 2011). Beef produced in the northern parts of the country is deemed inferior due to the lack of pasture in the north. Northern farmers opt to export their beef as live cattle by shipping them to the Asian markets. Australia as a beef exporter specifically enjoys shipping advantages when exporting beef to Asia due to their proximity to each other (Linehan et al, 2012). This provides the economic advantage of minimizing transportation costs which places Northern Australia beef farmers at an advantage to their competitors in the USA and Europe as they are able to meet Asia’s beef demands with comparatively significant lower cost. Their beef is priced competitively and they earn more by shipping the cattle alive. On the other hand, the southern farmers who produce the high quality meat sell their beef in high value markets that include Korea, Russia and Japan where they get lucrative returns (PWC, 2011). The bulk of southern beef is processed in Australia before it is shipped to various destinations around the world. However, during periods of drought the market prices shift drastically as slaughters increase. During periods of adverse weather, farmers engage in various strategies such as selling off calves to save on feeds. During these periods prices of beef decline as they fetch lower prices in the market majorly because of increase in supply alongside declining demand (PWC, 2011). Beef farmers in Australia tailor their products in favor of the market requirements, hence, beef products such as Yearling (12 month old cattle), Veal (9 month old cattle), and the Feedlot (18 month old cattle) are reared strategically to meet market requirements in different locations around the world (PWC, 2011, p.8). Depending on the beef requirements of the targeted market the farmers then prepare their heard for that specific market. Factors Determining Demand and Supply of Australia’s Beef Products Figure estimates reveal that about 28 million cattle are reared for beef in Australia; whereas this is a small number in production going by global standards, the relatively small population of Australia can only consume a little over a quarter of the total beef produced in the country. Australia therefore exports up to 60% of its beef products to international markets (PWC, 2011). Thus the bulk of the demand for Australia’s beef products lies in exports to other countries in the world. Statistics show that the consumption of the commodity remains limited within Australia due to a small population size of the country. However, Australia exports most of its beef produce to countries in other parts of the world (PWC, 2011). According to Ulubasogulu et al, 2007) the demand for beef products by Australian households is at an average low of 13%, confirming that beef consumption in the local Australian market is quite minimal. Furthermore, Australian households’ statistics show that Australian households only increased their expenditure on beef products by a 1% point between 2003 and 2004 (Ulubasogulu, 2007). Domestic demand for beef is price elastic as it remains relatively constant despite price changes. Notably, the market for beef produced in Australia largely lies abroad. The major destinations for Australian beef exports are mainly the United States, Japan and Korea with exports to Japan consisting 39% of total exports. The United States accounts for 23% whereas Korea accounts for 14%. The remaining 24% is exported in small proportions to other parts of the world. The pie chart below represents this information. Fig. 1: Australia’s Beef export zones by percentage. (Source: Price Waterhouse Coopers, 2011) According to projections made by Linehan et al (2012), by the year 2050 world beef imports from Australia are expected to multiply to 300%. The bulk of imports are projected to come from China at 66% and from Africa at 28%. Generally, Linehan and colleagues project a 1.3% annual increase in revenue earned from agricultural exports from Australia with beef products contributing the bulk of these revenue earnings due to increased demand, hence prices for beef exports are expected to appreciate. Despite this promising improvement in revenue earnings from beef farming, the Australian beef industry is not immune to competition. While the industry prides itself in producing disease-free beef especially after Japan suspended imports from the USA following an outbreak of foot and mouth disease; the country’s beef industry stands to face stiff competition from other world leaders in beef exports. Japan has since lifted the ban on USA beef imports in 2006 that saw beef imports from USA reinstated (PWC, 2011). Therefore, the Australian beef industry is bound to face stiff competition from other major beef producers such as the USA and Brazil and which may reduce export earnings from beef. The local demand for beef products in Australia is also quite stable. The demand for beef is price as compared to alternative meat products such as chicken, and lamb. Changes in price only marginally affect the demand for beef products. Demand for different meat categories in the local market to is largely driven by tastes and preferences rather than simply changes in prices (Ulubasogulu, 2007, p. 15) thus, demand for beef locally remains relatively constant. In a study to find out the demand elasticity estimates for Australian meat products Griffith et al (2001) found that the own-price elasticity of beef locally was at -0.96 with a cross elasticity of 0.50 which later changed to -1.38 and 0.32 respectively. Therefore no drastic changes are experienced in the demand for beef locally due to the relative price inelasticity of beef in Australia. Lineham et al (2012) project a 140% increase in the exports of agricultural products from Australia by the year 2050. Specifically, they note the increasing value of beef exports as the central factor driving the projected increase in revenues. Price Waterhouse Coopers (2011) explains that the mass of beef product exports are majorly concentrated in the Korean, American and Japanese markets. Therefore, the Australian beef industry is largely export-oriented as the bulk of its market base lies abroad. The demand for Australian beef internationally has also been as a result of chance. Japanese beef consumers select their preferences from many beef suppliers (Kawashima & Shari 2010). The major boost to Australia’s beef exports were driven by the breakout of the foot and mouth disease in the USA that saw the state of Japan suspend imports from USA in favor of Australia (PWC, 2011; Kawashima & Sari, 2010). This action served to increase demand for Australian beef by Japan and thus increased supply of beef from Australia to Japan proportionately. Nonetheless, competition from the USA and Brazil will also mean that beef farmers from Australia will experience major rivalry from other beef exporters (PWC, 2011; Kawashima & Sari, 2010). Such competition may reduce demand of beef from Australia if Japan chooses to import beef products from countries other than Australia. The role of beef cooperatives and councils The role of Australia’s beef industry bodies mainly centers on collective bargaining on behalf of beef farmers in Australia (PWC, 2011). The Cattle Council of Australia (CCA) is one such body mandated with the responsibility of representing and advancing the interests of Australian cattle farmers. Centrally, the CCA is concerned with ensuring the profitability of beef farming in Australia. CCA (2011) denotes that the role of the CCA is dedicated to promoting the interests of Australian beef cattle producers by engaging in consultations with other stakeholders such as the federal government. In this role the CCA ensure that the farmers get competitive prices for their beef in the market that would earn profits. The farmers are therefore price takers although their interests are well represented by the CCA. With regard to international trade CCA is greatly concerned with securing sustainability in more live cattle exports as this translates to better prices and hence better earnings for beef producers (CCA, 2011). Similarly, Meat and Livestock Australia (MLA) is a body mandated with the responsibility of conducting research and marketing on behalf of beef farmers across Australia. In this role MLA ensures that Australian beef gets competitive advantage in the world market by advocating for better prices for exported Australian beef. MLA also makes it its business to ensure the health of the cattle is such that Australian beef is disease free. The MLA does this by conducting extensive research and development undertakings to improve on Animal welfare. This research is done collectively and extensively on all beef farms in Australia to improve on the health conditions of cattle reared for beef in the country (CCA, 2011). Policies governing Australia’s Beef industry The law governs aspects of the Australian beef industry that are majorly banked on the welfare of cattle especially cattle that is exported live. The Export control Act of 1982 and the Australian Meat and Livestock Industry Act of 1997 are among other laws that are specifically made to ensure that the welfare of animals transported by sea during export meets stipulated health standards (RSPCA, 2012). This in turn serves to ensure that beef exported live is of healthy standards securing sustained demand of Australia’s beef in international markets. Permani (2011) points out the seriousness with which the Australian authorities regard the treatment of live animals exported to other parts of the world where the Australian authorities banned exports of live animals to Indonesia due to the inhumane treatment that such exports were subjected to. The ban would serve to adversely affect Australia’s economic performance with negative implications on prices of beef exports given that up to 50% of northern Australia’s beef farmers rely on live beef exports to Indonesia (Permani, 2012). Other policies such as the free trade agreement that saw the relaxation on tariffs levied on Indonesian beef imports from Australia have had the effect of reducing costs of importation and hence providing competitive prices for Australian beef in the Indonesian market thus ensuring a steady market for Australian beef in Indonesia (Tseuoa, Syaukat& Hakim, 2012). Conclusion The Australian beef industry is one that presents several challenges and opportunities alike. Whereas there is minimal demand for its products locally, it enjoys competitive advantage in international trade by exporting beef products to high end markets such as Japan and the United States (PWC, 2011; Ulubasogulu, 2007; Hatasuhut et al, 2011). The international demand for beef products from Australia is largely driven by their reputation of having disease free beef and this has catapulted the industry to succeed in the exports to high value international markets (PWC, 2011). This fact alongside other factors discussed here-in determine the price of Australian beef in both local and international markets. References Griffith, G.R., I'Anson, K., Hill, D.J., Lubett, R. and Vere, D.T. (2001), Previous Demand Elasticity Estimates for Australian Meat Products, Economic Research Report No. 5, NSWAgriculture, Orange Hutasuhut, M., Hui-Shung, C., Griffin, G., O’Donnell, C. and Doran, H. (2001), The demand for Beef in Indonesia Implications for Australian Agribusness. ISSN 1442 190. {Online} Accessed on 24th July, 2013http://www.une.edu.au/febl/EconStud/wps.htm Independent Review into Livestock export trade (July, 2011) {Online} retrieved 23rd July, 2013 http://www.livestockexportrevsiew.gov.au/submission_received/cattle_council_of_australia Kawashima, S. and Sari, D.A.P (2010), Time-varying Armington elasticity and country-of-origin bias: from the dynamic perspective of the Japanese demand for beef imports. Journal compilation2010 Australian Agricultural and Resource Economics Society Inc. and Blackwell Publishing Asia Pty Ltd.doi: 10.1111/j.1467-8489.2009.00477.x Linehan V, Sally T, Neil A, Yeon K & Farah B (2012) Food demand to 2050; Opportunities for Australian Agriculture. ABARES - Australian Government Department of Agriculture, Fisheries and Forestry. Meat Trade News Daily (12th Feb 2012), Australia-The Japanese Beef Market. {Online} Accessed on 24th July, 2013 < http://www.meattradenewsdaily.co.uk/news/310112/australia___the_japanese_beef_market.aspx> Meat Trade News Daily (12th Feb 2012 Permani, R. (2011) Indo-Pacific Governance Research Centre: Policy Brief. Moving beyond the blame game: the ban on Australian Live Cattle Exports to Indonesia; lessons to be Learnt. {Online} Accessed on 30th July, 2013 from http://www.adelaide.edu.au/indo-pacific-governance/policy/ Price Waterhouse Coopers (2011), The Australian Beef Industry; from Family Farm to international Markets. {Online} Accessed on 24th July, 2013 http://www.pwc.com.au/industry/agribusiness/assets/Australian-Beef-Industry-Nov11.pdf Royal Society for the Prevention of Cruelty to Animals (2012) How is Live Export Regulated? {Online} Accessed on 30th July, 2013 from kb.rspca.org.au/Australianknowledgebase/transportofanimals Tseuoa.T., Syaukat, Y., and Hakim, D.B. (2012) The Impact of the Australia and New Zealand Free Trade Agreement on the beef Industry in Indonesia.J.ISSAAS VOL. 18, No. 2: 70-82 (2012). Ulubasoglu, M., Mallick, D., Wadud, M., Hone P. and Haszler, H. (2010), Food Demand Elasticity in Australia. {Online} Accessed on 24th July, 2013 www.deakin.edu.au/buslaw/aef/workingpapers/papers/2010.. Read More