South American beef juggernaut rolls on

The export market offers economies of scale and the opportunity to better maximise returns on the whole carcase but it also remains a dynamic, constantly changing global business model.

One of those changing global variables is South America, especially the big three beef exporters, Brazil, Argentina and Uruguay but also Paraguay.

Together they have a cattle herd size of over 270 million head, an exportable beef surplus in 2022 of almost 3 million tonnes and a cost of processing substantially below Australia.

In the last decade South America has almost doubled their beef exports as demand has remained strong and new markets emerged. Market access has increased as they have brought Foot and Mouth Disease under control with vaccination although USDA reports some states in Brazil have stopped their vaccination programs, a potentially risky strategy.

We have seen the volume power of Brazil in the US market since they regained access back in 2020. They have swamped the small 'Other Country' quota of 65,005 tonnes that they are suppose to share with at least five other countries.

When that quota was full at the reduced in-quota rate of 4.4 US cents/kilogram after three months in 2022, they showed their ability to continue to ship at the out-of-quota tariff of 26.5 US cents/kg compared to Australia's zero tariff and still put in over 98,000 tonnes.

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One emerging parameter is that South America has become increasingly dependent on China. Over 50pc of beef exports of all three Mercusor ( South American economic and political trading bloc) member countries, Brazil, Argentina and Uruguay are now destined for China.

For Argentina, it is 65pc in value and close to 75pc in volume. When access issues in China occur, as happened for Brazil between September and December 2021 after a BSE scare, the meat has to go somewhere.

The Australian industry has certainly learnt the hard way about having a diversified export market base and what can happen when all your eggs are in one basket.

China however is also becoming dependent on South America for its beef.

Chinese beef imports have increased continuously over the last decade as consumption growth in the country has continued. That growth has largely come from imports as China does not have the natural resources to increase its own beef production. South America has now become its major supplier.

The growing dependence on South America also has its problems as all three Mercosur countries still pay the full import duty of 15 to 22pc while countries like Australia and NZ with free trade agreements are on a transition to pay zero.

The world has watched as Mercosor as a trading bloc has been in negotiation with the EU for over 20 years seeking an FTA.

They reached in-principle agreement in 2019 but political and environmental issues have plauged the outcome and it has never been ratified.

Problems for China in negotiating a four-country FTA with Mercosur will only encourage them to seek individual agreements starting with Uruguay.

The growing dependence on Brazil for a range of agricultural products now puts an individual FTA with Brazil also on the cards.

A transition from 15-22pc import tariffs on beef to a zero tariff for Brazil and Uruguay would only enhance their competitive position in the country.

One problem for Argentina is that its government still imposes export bans on certain beef items that restricts what opportunities Argentine beef exporters can take advantage of. A 9pc tax on all exports also applies.

Argentina is also experiencing one of its worst droughts in decades. The export bans are part of a complicated macroeconomic situation with domestic price controls on beef unlikely to change in the near future given the runaway inflation rates of over 90pc at present.

One issue that worries even the smaller players in South America is Brazil's growing influence in beef production in other countries in the region.

Brazil's Minerva Foods issued a note to the market recently that they had purchased state-of-the-art beef processing operation Breeders and Packers Uruguay for US$40 million. BPU is a subsidiary of the NH Foods Group and is reportedly one of the most modern plants in South America.

Some local analysts estimate that this purchase means that a majority of Uruguay's meat processing operations will be under the control of the Brazilian meat processing giants Minerva and Marfrig.

Minerva is now the leader in meat production in Uruguay according to Merco Press.

It also appears their attention may now be turning to Australia with recent media coverage that Brazil's Minerva Foods is seeking to purchase major beef processing capacity in Australia after Minerva Foods Australia, a 65/35pc joint venture with the Saudi Agricultural and Livestock Investment Co recently purchased the Australian Lamb Co facilities in Colac and Sunshine in Victoria along with the sheep processing facilities in Shark Bay and Tammin in Westen Australia.

The House of Lords in the UK has again delayed its deliberation on the UK-Australia FTA with its next meeting in the "report stage" of the ratification process not until March 14.

The Bill covering the agreement then has to complete a third reading before seeking Royal assent.

On the home front, as the Australian cattle slaughter increased again in the latest week it appears that large processors are seeking to maintain if not increase levels of production in an attempt to cover overheads and drive efficiencies in the face of uncertainty over labour availability. They will welcome any downward pressure on livestock prices in an effort to restore some balance between market prices, processing costs and implied negative margins.