USMEF China’s Beef Industry Analysis: Consumption Growth, Production Challenges

By Michael Pareles, trade manager, USMEF-Beijing

It’s no secret that with rising disposable incomes, Chinese eating habits are changing. Since China started urbanizing 30 years ago, more Chinese are eating more beef – far more than they produce domestically – sending import volumes and domestic prices to record highs.

In 2012, Chinese government statistics show China imported 70,574 metric tons (155.6 million pounds) of beef, a rise of 164 percent year-on-year. Domestic beef prices increased an average of 13 percent per year between 2005 and 2011 and, according to data from the Chinese Ministry of Agriculture, the average price of beef in February this year was up 38.6 percent over year-ago levels. Experts predict there is little relief in sight, and prices will remain high throughout 2013.

But will these record high prices and import volumes cause the Chinese government to invest more in domestic production and discourage imports to protect the budding domestic industry? USMEF Beijing Director Jianwen Liu doesn’t think so.

“Despite the seeming attractiveness of high prices to would-be entrepreneurs, intractable supply challenges, production bottlenecks and poor economics make domestic Chinese beef production a losing bet for investors and policymakers alike,” said Liu.

First of all, China’s total cattle inventory is low (104.1 million head, according to USDA estimates) and even China’s experts will admit privately that it would be exceedingly difficult to increase the beef cattle inventory after many years of continuous decline. The Chinese government does not release information on how much of its farmland and waterways are polluted, but even under the best circumstances limited natural resources, including pasture land and forage to feed cattle, are the biggest constraint to expanding or even maintaining domestic beef production. This constraint in fact has made alfalfa exports from the U.S. a growing business for American hay producers. Although the Chinese government does subsidize improved beef cow genetics in order to support domestic beef production, subsidizing imported forage is likely beyond the pale.

On the industry side, the current structure of the beef cattle industry provides further disincentives for Chinese beef producers to increase production. Cattle production in China is generally extremely small-scale and family-based to the extent that most producers would not be considered commercial operations by American standards.

China’s beef slaughter is similarly decentralized. According to a report by Frost and Sullivan-China, in 2010 only 1 percent of the 47 million head of cattle harvested in China was slaughtered in the factory system, with the rest taking place in household-sized abattoirs across the countryside. The sheer number and distribution of these facilities is a large barrier to properly inspecting and licensing all of them, let alone creating a nationwide livestock identification/traceability system that could ensure international quality, hygiene and environmental standards. Small scale slaughter also complicates efforts to create markets for individual beef cuts.

In addition, the long production cycle and large initial investment required for cattle breeding make it difficult for producers to make a living by engaging and staying in cattle production exclusively. Low profits have created high opportunity costs for would-be producers compared to urban migrant work, thus young and middle-aged farmers have largely left the countryside to find higher wage working opportunities in the cities and coastal provinces. While some small cattle producers have exited the market, with few exceptions large, modern cattle production facilities have yet to rise to fill the void. This is markedly different from the growing consolidation that has occurred in China’s booming poultry and pork sectors.

It’s also worth noting that China’s beef cattle are mostly Chinese breeds whose quality, productivity and efficiency are considerably lower than their foreign cousins. Cattle farmers are thus increasingly purchasing calves to replenish their inventories or rebuild the herds, but domestic cow-calf farms that are able to produce enough calves or feeder cattle for beef production are underdeveloped. This has created a brisk business for the import of genetics and live cattle from Australia, New Zealand and Uruguay (90,000 head of cattle in 2011, according to the USDA), but the absence of dominant players in the market make it difficult for these purchases to have a large impact on the nationwide industry. To be sure, there are new but mixed messages from the Chinese government on its interest in promoting domestic beef production moving forward. For a number of years, the government has been touting and providing incentives for the expansion of its domestic livestock industry. China’s 12th five-year plan for the meat industry sets the goal for beef and mutton production to reach 6.9 million tons and 5 million tons, respectively, by 2015. If realized, this would translate into an increase of 5.7 percent for beef and 25.6 percent for mutton above 2010 levels.

Additionally, China’s Ministry of Agriculture at the beginning of this year issued its “2013 Agriculture and Rural Economy Working Recommendation.” This document urges the promotion of nationwide beef and mutton production in 2013, but signals indicate that greater emphasis will be placed on the promotion of mutton. To the extent that the Chinese government does support increased domestic beef production, it will be toward transitioning the industry from unprofitable and hard-to-regulate small producers to large-scale, modern cattle-breeding and beef production capacity-building.

On the trade side, almost every American cattle raiser and processor – from Montana to Texas – suffers from the lack of access to the China market. The U.S. and China have failed to ink an agreement allowing even partial access for U.S. beef into China at a time when many of China’s neighbors are opening up. In February, Hong Kong, a special administrative region of China, expanded its access to include boneless U.S. beef cuts from animal of all ages and bone-in cuts from animals 30 months or younger.

In the meantime, the principal competitors of the U.S. – including Australia and New Zealand – have ramped up export volumes, promotion and consumer imaging activities. In 2012, Australian beef exports to China increased 186 percent over 2011 while New Zealand’s increased 145 percent.

An issue that may impact China’s beef industry is softness in its dairy market. Dairy bulls are a key source of cattle for Chinese beef production, and if recent unprofitability in the dairy sector continues, it could put stress on already low Chinese livestock supplies. Chinese consumers continue to question the safety of domestic dairy products, leading to extreme measures such as a recently implemented export controls placed by the Hong Kong government on shipments of infant formula to the mainland.

Another contentious issue in China is the use of beta agonists. Although resource constraints suggest Chinese producers could benefit from use of safe beta agonists, these compounds have been banned for more than a decade due to illegal misuse and past food poisoning episodes involving compounds that are banned in countries around the world. China’s implementation in early March of new ractopamine testing requirements for U.S. pork imports is evidence of the current resolve on the issue. Beta agonists and their residues are banned for all livestock species.

A few things, however, are certain: in 2011, per capita beef consumption in mainland China was 4.8 kilograms (10.6 pounds) compared to more prosperous neighbors Taiwan, Japan and South Korea with 6.4 kilograms (14 pounds), 9.6 kilograms (21.1 pounds) and 12.9 kilograms (28.4 pounds), respectively. Food service (particularly the rise of beef-centric fast food, barbecue, hot pot and even steak restaurants) has driven consumer demand for beef, particularly among younger Chinese. While premium cuts of imported beef end up in the high-end restaurants of China’s first-tier cities, McDonald’s controls up to 16 percent of China’s burgeoning $29 billion fast-food market with more than 1,500 restaurants around the country. From 2005-2009 the sector grew an average of 12.6 percent per year, faster even than China’s GDP.

By some estimates, Chinese per capita meat consumption has risen 2.5 percent per year for the past 15 years. While beef may never unseat pork as the “People’s Protein” at its current annual growth rate of 1.8 percent, with China’s beef consumption set to account for 13.5 percent of global beef consumption by 2016 (up from 11.6 percent today), China’s beef industry dynamics will move global markets.

The country has become a voracious consumer of foreign beef, and Australia, Uruguay, Brazil, New Zealand, Canada and Argentina all are aggressively positioning to satisfy Chinese demand. In January alone, Australian customs reported that exports to China reached 4,437 metric tons (9.8 million pounds), a 1,654 percent increase over last year, while the Global Trade Atlas reports an even more robust 9,547 metric tons (21 million pounds) going from Australia to China. As the Chinese beef pie is growing, other countries are rising to the occasion and the longer the United States stays out of the market, the more difficult it will be to retake market share from our faster-moving competitors.

Australian Beef Exports Jan. '12 Jan. '13 Year over year change Japan 16,799 16,964 1% United States 11,651 11,884 2% South Korea 6,722 7,790 16% China 253 4,437 1,654% Middle East 1,527 3,280 115% Taiwan 1,440 1,781 24% Philippines 773 1,407 82% Indonesia 1,182 1,086 -8% EU-27 520 830 60% Russia 1,215 811 -33% Canada 571 703 23% Hong Kong 402 218 -46% Central/South America 470 192-59%   Total 47,168 55,147 17%

Source: Australian Dept. of Agriculture, Fisheries & Forestry (metric tons)