Can our Asian customers pay more for beef if the price suddenly goes up?
Short answer : Absolutely.
The long answer is a mixture of complex pricing structures combined with radical differences in supply chain arrangements, cultural perceptions, social eating habits, input costs, waste management, meal preparation styles and the unparalleled reputation of Aussie beef.
I have been watching prices of beef and other food items rise around Asia for some years now and there is a clear pattern in the way they happen, specifically the lag phase between the initial resistance as the beef price rises followed by gradual but inevitable customer acceptance and return normal buying practices.
I also understand why Australian producers have grave doubts that any of our export customers have the capacity to keep buying if there is a significant spike in cattle prices. For two generations, beef producers have been told that the price of their cattle must be kept as low a humanly possible while every other provider of goods and services in Australia has naturally been entitled to constantly rising prices. This denial of a fair go for beef producers is about to come to a happy ending.
Here is a summary of some of the reasons why Asia can afford to pay more for Australian beef:
1. Asians are already used to paying a very high price for their beef.
Incomes throughout Asia are in most cases substantially lower than those in Australia but the price of beef in Asian markets is generally not much lower than the price paid by Aussie mums at the Woollies meat cabinet.
The price of slaughter cattle in S. W. China is more than AUD $5 per kg live weight, the price in Phnom Penh, capital of Cambodia is AUD $4 per kg, the price in Bangkok is AUD$3.50. And yet demand for fat cattle is strong and rising. Why wouldn’t these customers have the capacity to pay AUD$3 farm gate in Australia plus about $1 freight and on-costs for first class live cattle?
2. Indonesians in particular, but Asian economies generally have been experiencing strong economic growth which has been accompanied by significant food inflation so these economies are very familiar with the steady upward climb of food prices. If you are short of cash, buy food first, then cut back on luxuries like entertainment and hardware that you can live without. After the price goes up for the first time, buyers shrink back to cheaper alternatives (like chicken) hoping that the lower prices for beef will return. The time for buyers to give up and start buying again in Indonesia seems to be around 2-4 months depending on the magnitude of the price hike.
Indonesian fat cattle prices have roughly doubled in the last 5 years. Every time they went up by 20 cents per kg live weight the cry was “that is the end of sales for Australian cattle”. Sure enough, a few months’ later sales were back to normal volumes.
3. Live exports of feeder cattle allow for significant, in-country value adding through efficient feeding of agricultural waste products which reduces the cost of the final fat cattle in-spite of much higher initial import prices. A feeder steer landed for $3.25 can be sold finished from the feedlot for a lower price per kg and still deliver a profit for the importer because the last 200 kg gained in the feedlot cost a lot less than the selling price and allowed the feedlot to offset the initial trading loss and sell the finished animal with an acceptable profit margin.
4. Slaughter, transport, energy, compliance and labour costs for Australian live cattle processed and sold in Asia are probably in the order of one tenth of those costs born by Australian processors and retailers. Total slaughter costs in well-operated ESCAS approved abattoirs would average around $20 to $30 per head. Energy (fluorescent lights) and freight cost of meat to the wet market (10 km in the back of an open ute) are insignificant. Retail outlets consist of a table, knife, chopping block and kitchen scales.
5. While Australian processors must expend a great deal of money to convert the waste products of beef processing into fertilizer and other loss-making items, Asian processors can make money from every single gram of the animal, down to using gut contents for saleable compost and kill floor blood effluent for fish food and biogas production.
6. Food service industries in Asia have much lower costs than Australia at almost every level (except for imported beef) so they are able to offset the high costs of the beef by low labour, compliance, rent and energy overheads. The monthly salary of an experienced waitress working 50 hours a week in Jakarta would be about $200. Rent for a 100 seat restaurant in the Jakarta suburbs would cost about $500 per week including fit-out. See the “Holycow” steak dish below.
7. Asia has a culture of eating out. Everyone from rich to poor find it more cost effective and convenient to eat out. Production of vast quantities of meals by professional service providers is generally much more efficient than when families or individuals purchase ingredients and prepare their own meals.
8. Most meat in Asia is marketed in small quantities quoted as price per 100 grams not per kilogram. The majority of product is eaten in dishes where the meat component is quite small resulting in the end price of the dish being very low even though it contains some expensive components. See the Vietnamese Beef Soup below.
9. It is very hard for most Australians used to small numbers of people, to get a mental grip on what it means to have a product that is highly desired by one thousand, five hundred million people. If this population contains only 10% that are rich enough to buy the best, it still represents 15 million eager customers who can pay a fair price to the producers of the best beef in the world.
10. In China there is a well-recognized social attraction for high priced luxury products, from handbags to food items with similar attitudes in the richer end of the populations of other Asian countries. If something is really expensive, it must be good and therefore the rich person needs to reward themselves, their families, friends and business associates by publicly enjoying the most expensive food available. Beef is definitely in this category and ironically becomes even more desirable as the price rises. You don’t go to a flash restaurant to impress your mates by buying the cheapest item on the menu.
11. The nutritional value of beef is very well understood by Asian customers. They all see westerners towering, head and shoulders over the locals and want their kids to grow up big and strong like them. The massive rise in consumption of beef and dairy products is part of the very high priority placed on the health and future growth potential of children by parents who can suddenly afford to spend more on nutrition than their parents did. When it comes to feeding the kids the best products to make them grow tall and healthy, then the price of the product becomes a secondary consideration. Consider China where the majority of families have only one child. Do you think they will stop buying their precious child the best quality beef because the price just went up?
12. Australia (and NZ) stands out above the rest of the world in terms of their reputation for clean, wholesome, uncontaminated and nutritious products. This is not just a patriotic claim but a common and sincere opinion that is reinforced almost everywhere I go. Consumers in China, where their food producers have an appalling reputation for mischief with the production of all manner of food products, are eager to find safe and wholesome alternatives to their suspect domestic supplies. This well-justified Australian reputation is a priceless asset and as long as we are able to maintain it, will ensure that when the price goes up that our product will continue to retain its demand because it’s simply the best there is.
Holycow steakhouse restaurant chain in Indonesia.
This 5 year old, rapidly expanding steak restaurant chain (currently about 10 outlets selling over 100,000 wagyu steaks per year) sells only Australian and US imported beef and lamb. Steaks range from 200 grams of US Premium Black Angus sirloin for AUD$10.80 to Rangers Valley 200 grams Wagyu Sirloin for $12.20 and my favourite which is an Aussie imported 200 gram Rib Eye for $7.80. All steaks are served with vegetables, choice of steak sauce and mash or chips. Wholesale prices for the imported beef in Indonesia are similar to the rest of the world while the labour, rent, power and other operational costs are a fraction of what an equivalent enterprise would have to pay anywhere else in the world outside Asia.
Vietnamese Beef Soup
A favourite for breakfast in Vietnam, beef soup, despite the name, contains mainly vegetables, noodles, spices, water and stock with about 50 grams of finely sliced beef. This very large bowl of soup costs AUD$2 despite the cost of beef (knuckle) in the wet market being AUD$12.50 per kg. Filling, nutritious and delicious.