Thursday, February 6, 2014

China's Tight Beef Supply Boosts Prices

An Economic Daily report says tight beef supplies in China and rising consumption add up to heated competition for cattle and rising prices. Imported beef is now relatively cheap and filling the gap between supply and demand.

In the second week of January 2014, the average price of beef in 480 markets monitored by the Ministry of Agriculture was up 16.2 percent from a year earlier. The price has gone up 346 percent since 2000, "reflecting the country's bleak beef supply" said the paper.

Graphic from Economic Daily: "Beef price rise reflects beef cattle supply situation"

A beef industry official said consumption of beef in China has been rising 2.3 percent per year [that would be a third of the rate of income growth and less than a fourth of the GDP growth rate] while supply of beef has dropped from 7.12 million metric tons (mmt) in 2010 to 6.62 mmt in 2012 [official statistics say beef output grew marginally from 6.5 to 6.6 mmt during those years]. The official says the drop in cattle numbers in traditional beef-producing areas has been especially prominent.

A beef industry scientist told Economic Daily that China's beef consumption has room for growth. Its per capita beef consumption is 50 percent below the world average. He estimates that beef production would have to double to bring per capita consumption up to Japan's level.

Industry experts cite low returns to raising beef cattle as the fundamental problem. Traditionally, most beef came from cattle used as draft animals, but mechanization of farming has reduced this traditional source of supply. Now raising cattle for beef is a specialized operation in which heifers give birth to calves that are fattened to market weight. Compared with slaughtering spent draft animals, this is a long process with high costs and a long wait to realize modest returns, estimated at 2000 yuan (about US$ 330) per head. Most production is on very small-scale operations: 57 percent of cattle come from farms raising 10 or fewer head. Farmers raising just a few cattle per year can't achieve economies of scale. Even larger-scale farms have crude facilities and management.

Other constraints cited include the government's grassland protection policy which calls for reducing animal numbers to restore grasslands and soaring labor costs. The article says heifer numbers have been declining since the 10th five-year plan (2000-2005).

With tight supplies of cattle, meat companies have to scour the countryside to fill slaughter facilities. The competition for scarce cattle drives up costs which causes under-utilized slaughter facilities to lose money. Economic Daily reports that slaughter capacity utilization ranged from 42 percent in the central plains (this usually means Henan Province), to 33 percent in the northeast and just 19 percent in the northwest. Like farming, slaughter is also predominantly done by small facilities. China has an estimated 2000 beef slaughter facilities and only 206 have over 6000-head capacity; none have a capacity of 300,000 head.

This highly-dispersed industry layout contrasts with the long-established interregional movement of cattle in the U.S. industry and highly concentrated feedlot-finishing and slaughter of cattle. Also in contrast to the United States, feedlot-fattening of Chinese cattle on corn is much less common. The hot competition for cattle and low returns also work against improvement in the quality of beef. Slaughter facilities have to take whatever animals they can get.

Imported beef has a clear price advantage as domestic prices rise. In 2013, some companies imported frozen beef at just 36 yuan/kg, lower than domestic fresh beef prices. In one large supermarket in Beijing, the Economic Daily reporter found Australian beef shoulder was just 60 yuan/kg, lower than the 63.5 yuan/kg average reported by MOA's market-monitoring.

Imports surged during 2013. The volume in the first four months surpassed the total for all of 2012. Frozen beef imports for the calendar year 2013 reported by Chinese customs statistics reached 283,000 metric tons, a more than four-fold increase from 2012.
Source: Chinese customs statistics analyzed by dimsums.

Chinese industry experts react with the usual knee-jerk reaction of recommending government subsidies to encourage larger-scale beef farming, including subsidies for heifers, subsidized insurance and beef cattle risk funds. However, the article also mentions that all levels of government had increased their support for the beef industry without reversing the declining trend in heifers.

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