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With the red meat industry in Australia heavily export oriented, there are a range of factors which affect the industry. These include seasonal conditions, domestic and foreign demand, exchange rates, welfare issues and barriers to trade. Another factor that may affect the industry in the future is the Carbon Pollution Reduction Scheme aimed at reducing greenhouse gas emissions in Australia. The scheme is yet to be agreed in Parliament.
Drought can influence feed prices, the supply of meat, the demand for sheep and cattle for restocking, and saleyard prices. Poor seasonal conditions generally lead to a reduction in pasture availability and an increase in feed grain and fodder costs. These factors influence producers’ decisions about stocking rates, matings and livestock sales and purchases.
Since 1990-91, there have been at least three years with widespread drought across Australia. In each of these years feed grain prices increased significantly (figure g).
In times of drought, as pasture quality deteriorates and the need for supplementary feeding increases, producers tend to reduce stock numbers. Consequently, beef cattle numbers, which have been increasing over the past 30 years, tend to decline in drought years (figure h). This has been less obvious in sheep numbers, with the national sheep flock reducing steadily since 1990, largely as a result of lower returns from wool relative to competing on-farm enterprises such as grain cropping.
Usually in the year following a drought, slaughterings decline as producers retain cows and heifers to begin rebuilding herds, and retain breeding ewes to rebuild flocks. Slaughterings of cattle and sheep declined after each of the four major droughts over the past 30 years (figure i).
In Australia there has been an increase in the demand for poultry and pig meat and some shift away from red meat consumption. This is partly because of the changes in the relative prices of the different meats. The prices of lamb and beef have increased since the late 1990s, relative to the prices of poultry and pig meat. There may also have been some change in consumer tastes and preferences over the period.
Despite the decline in domestic demand for red meat, beef and lamb consumption in Australia remains high compared with consumption in many other countries.
Over the past 30 years there have been many studies estimating meat demand in Australia. Even though most of these studies were done more than 15 years ago, the results still provide some useful information. The results from such studies suggest that the sensitivity of both beef and lamb demand to price changes have been declining over time in Australia (Griffith et al. 2001).
It is worth noting that the results do depend on the model chosen and vary considerably between studies. However, results from one of the more recent studies (Piggot et al. 1996) suggested that a 1 per cent increase in the retail price of beef led to a 0.4 per cent fall in the quantity of beef demanded. Most studies suggest that the demand for lamb is more sensitive to changes in prices, with Piggot et al. suggesting that a 1 per cent increase in the retail price leads to an average 1.26 per cent decline in the quantity of lamb demanded.
Growth in meat demand is largely driven by income and population growth. Reflecting this, there is increasing demand for meat in developing countries where income and population growth rates are higher than in developed countries. Meat demand in developed countries has been quite stable (Agriculture and Agri-Food Canada 2006). While Australia’s major markets, particularly for beef, are mainly developed countries, developing country markets are becoming more important as export volumes increase.
Major markets for Australian beef are Japan, the Republic of Korea and the United States. Exports of Australian beef to north Asian markets increased following the discovery of BSE in the United States in December 2003, after which bans on US beef imports were imposed (figure k).
However, the Republic of Korea relaxed its import restrictions on US beef in 2008, resulting in some reduction in demand for Australian beef. US beef (including bone-in product) from cattle under 30 months of age is again allowed into the Republic of Korea. Despite widespread farmer protests in the Republic of Korea when this agreement was reached in April 2008, imports of US beef have increased.
When Japanese restrictions on US beef imports are relaxed, the demand for Australian beef in this market is also expected to fall. However, Japanese imports of US beef continue to be constrained by a restriction allowing only US beef from cattle less than 21 months of age to be imported, and it is not known when this restriction will be removed.
There are also other emerging markets for Australian beef, including the Russian Federation and Indonesia. In 2007-08, exports of Australian beef to the Russian Federation (which comprise the large majority of exports to the Commonwealth of Independent States (CIS)), increased by more than 400 per cent (figure l). The large increase in demand for Australian beef in the Russian Federation reflects declining domestic beef production, strong economic growth and higher prices of South American beef. Australian beef exports to Indonesia have also increased (figure l), as the demand for beef increased.
Demand for Australian lamb in export markets has been increasing. This reflects trade liberalisation in the United States, falling production in key lamb markets (particularly the United States and the European Union), limited growth in exports from New Zealand, and rising demand in Asia as consumers look for alternative meats in the wake of disease outbreaks affecting beef and poultry.
Export markets for Australian lamb are highly segmented with the largest single market, the United States, accounting for 26 per cent of total exports in 2007-08. Other important markets include the Middle East, the European Union and China. Strong export growth to these and other smaller markets has been maintained in recent years (figure m).
There are also a large number of export markets for Australian mutton (figure n). Major markets include the Middle East, Asia, South Africa and the United States. While the demand for mutton has remained strong, Australian mutton export volumes are largely driven by supply. Mutton is a lower value meat than lamb and in developed countries it is largely used in manufacturing.
For live sheep, export demand has emanated principally from the Middle East. Most sheep exported by Australia are destined for markets in the Middle East, particularly Saudi Arabia, Kuwait, Oman, Bahrain and Jordan. Exports to these markets represented 86 per cent of the total value of Australian live sheep exported in 2007-08. Increasing incomes in importing countries have been a main factor affecting the growth in demand for live sheep from Australia.
The largest market for Australian exports of live cattle is Indonesia, taking more than 50 per cent of total shipments since 2003-04. In 2006-07, Israel and Malaysia became the second and third largest markets for Australian live cattle exports, accounting for 9 per cent and 8 per cent of exports respectively.
Relatively low prices for imported cattle and a favourable exchange rate underpinned the steady increase in Indonesian demand for Australian live cattle. However, in 1997, the sudden devaluation of the Indonesian rupiah caused a steep increase in the relative price of imported cattle, and Indonesian feedlots closed or opted to source cattle domestically. This drastic decline from pre-1997 levels reflects the sensitivity of Indonesian demand to changes in import prices. As the rupiah regained its value, import demand for cattle from Australia and other sources resumed (Drum and Gunning-Trant 2008). By 2002-03, Australian live cattle exports to Indonesia had recovered to a record 486 000 head.
The exchange rate is an important economic variable that influences the sale and purchase of agricultural commodities which are internationally traded. Exchange rates between the Australian dollar and the currencies of Australia’s major trading partners influence the cost of imports, the demand for Australian exports and domestic saleyard prices.
While imports of red meat into Australia are negligible, exchange rate fluctuations influence the red meat sector because a large proportion of Australia’s red meat is exported. A stronger dollar translates into relatively more expensive Australian exports in other countries. A currency appreciation will reduce the quantity of Australian meat demanded in export markets as it represents a price increase.
An appreciation of the Australian dollar puts downward pressure on domestic saleyard prices, as seen over the past year. Figure o shows the inverse relationship between saleyard prices and the $US/$A exchange rate.
Changes in the Australian dollar have a direct effect on the financial bottom lines of producers, since much of what is exported is priced in US dollars.
There are a number of barriers to international trade in beef and sheep meat that affect Australia’s red meat industry. The most notable barriers include the country specific EU import quotas on sheep meat and beef.
Under the current EU tariff rate quota, 18 786 tonnes (carcass weight equivalent) of sheep meat can be imported from Australia each year, with volumes above this subject to a high above-quota duty. There is a similar tariff rate quota on beef, with up to 7150 tonnes (shipped weight) of Australian high quality beef able to be imported into the EU at a reduced tariff rate.
The United States also has tariff rate quotas on imports of Australian beef. However, these are being eased or removed under the free trade agreement (FTA). All US tariffs on imported Australian beef will be eliminated under the FTA over time. The previous in-quota tariff of 4.4 US cents a kilogram was eliminated from 1 January 2005 and the 26.4 per cent over-quota tariff will be reduced to zero over 18 years. The quota volume is increasing each year under the FTA and for 2009 is slightly more than 400 000 tonnes (shipped weight). In recent years Australian exports to the United States have been below the quota volume.
There is a tariff on beef imports into Japan, a major market for Australian beef. There is a 38.5 per cent tariff on all beef imports, which can be increased to 50 per cent under a special safeguard provision. There are also tariffs in a number of other countries that Australia exports red meat to, including import tariffs on sheep meat entering China, the Republic of Korea and Papua New Guinea. There are tariffs on beef imports in the Republic of Korea, China, Mexico, Canada and many other countries.
Trade barriers between other countries can also have an indirect effect on Australian exports and the red meat and livestock industries in Australia. For example, the restrictions on US beef imports that were implemented in Japan and the Republic of Korea following the discovery of BSE, led to an increase in demand for Australian beef.