Last month, I wrote an article suggesting that the Indonesian live cattle importers would have a tough time this year with higher buy-in prices and restrictions on finished cattle price increases driven by plentiful and cheap imported box beef. Please find that article, highlight it and click DELETE. The new import permit policies have changed everything.
After extensive consultations between the Indonesian Ministries of Trade and Agriculture, the Trade Ministry has finally issued the new live cattle permits for the first Quarter of 2015 and the effect will be dramatic. If the first quarter is anything to go by, the numbers of live cattle imports permitted for 2015 will probably be significantly less than permitted in 2014 while the processed beef volumes are also expected to be reduced (but no confirmation as yet). In addition, it has been unofficially announced that box beef imports have been restricted to the high value loin cuts with no secondary cuts (knuckle, topside, etc) or offals but some manufacturing beef (for bakso ball makers).
The new policies will remove any opportunity for high volumes of discounted boxed beef to keep a lid on prices in the wet market which represents 95% of all retail sales. When a dramatic reduction in both imported box beef and imported live cattle are combined with a shrinking domestic herd, supplies of beef for domestic consumption around the nation will be severely restricted. The strong Indonesian economy means that demand will remain with the inevitable result of steadily increasing prices. This is a very similar scenario to 2012/2013 when restricted import quotas forced domestic prices to record highs.
New policies mean a brand new line-up of winners and losers.
And the winners are ….
- The very small number of Western style abattoirs will suddenly find their products in great demand from the supermarket and food service sectors as imported supplies shrink or in the case of offals and secondary cuts, simply vanish. Their prices are already on the rise.
- Those feedlots which have received a share of the new live cattle import permits will be the recipients of steadily rising margins, albeit from lesser numbers, as was the case in 2012/13.
- Those feedlots with large inventories today will now slow down their sales programs in order to try to ration out their remaining supply to butchers to ensure that their favoured customers don’t run out of product. Higher prices will be the inevitable result.
- Local butchers will get a much better return from the purchase of the live slaughter animal as the offal and secondary cut components will be worth much more than when the market returns were depressed by discounted supplies of frozen imports.
- Wet market retailers will also have the opportunity to demand healthier margins as supply volumes shrink and discounted product suddenly disappears.
- Box beef importers with substantial inventories in their Jakarta freezers will no longer need to consider discounts to move their product. The remaining stocks of offal and secondary cuts will be rationed out at increasing prices with the knowledge that they represent the last of this type of product in the country until policies are reviewed.
- Indonesian cattle owners (mainly small farmers) will see the value of their cattle rise in line with the increases in imported live cattle and wet market beef prices. As of today, the price of domestic slaughter cattle is already in the order of 15% higher than imported cattle because they are able to be slaughtered outside the ESCAS supply chains and usually have a better dressing percentage (less fat).
- Smugglers of frozen Indian buffalo beef will suddenly see their demand and margins rise when they bring product across the Malacca Straits from Malaysia.
The new losers are …..
- Those feedlotters who failed to get a Q1 import permit will see their cash flows crash to zero. Now that they don’t have any throughput, how do they get back into the business? What can they do in order to gain new permits for Q2?
- Indonesian beef consumers who will see prices steadily climb and volumes slowly decline. This will be especially evident during Ramadan and Lebaran as supplies are likely to be totally inadequate for this usual period of peak annual demand.
2015 Ramadan begins on the 18th of June and ends on the 17th of July followed by the Lebaran annual holiday. Despite relatively large feedlot inventories at the present time, by the end of March 2015 most of these will have been sent to slaughter and the new, reduced number of Q1 imports will struggle to satisfy normal demand for Q2 consumption. This leaves Q2 imports which can’t begin to arrive until mid-April at the very earliest, to supply the peak demand period of Ramadan and Lebaran from mid June to late July. With the 350 kg live weight limit back in force, it will be virtually impossible to grow light weight Q2 feeder cattle to the required slaughter weight between late April and mid July. The actual average imported weight with at 350 kg limit turns out to be around 310 kg or less. Mid April to mid July is 12 weeks or and absolute maximum of 84 fattening days which is simply not enough time to turn 310 kg into the optimum slaughter product. And many Q2 imports wont arrive until May and June. The reduced supplies of imported processed product will be of little help.
All governments around the world, including Indonesia, are keen to ensure that their citizens are provided with consistent and secure supplies of food at reasonable prices. In addition, Indonesia has made it very clear that self-sufficiency (in beef and many other products) is a very high priority. But the brief analysis presented above would suggest that imported supplies are being restricted, that the domestic herd will be under further pressure to sell females for slaughter and prices to consumers must rise. The preliminary conclusion is that the new policies are not compatible with the desired outcomes. There is however, a school of thought that offers an alternative explanation that might provide the logic behind the recent announcements.
If prices are driven to extreme levels, as is likely by the end of Lebaran in July, then the political will to import processed beef from Foot and Mouth Disease infected countries with Regional Freedom might well get a much more favourable review. Indonesian voters and lobby groups may well be more easily persuaded to authorize their government to find an alternative source of beef that will allow them to escape from their effective monopoly supplier, Australia. The obvious alternative source in this case is Brazil. But beef prices from Brazil are similar to those from Australia. Once imports of processed beef from Brazil are approved then the next step is the ultimate prize of cheap and plentiful buffalo beef from India. The new policies that have been released last week could well be the first move in a much bigger chess game that might provide the Indonesian government with broad domestic political support to achieve its aims as stated above – to supply consistent and secure supplies of food (beef) at reasonable prices. From India. It’s a game of risk and reward and both are huge. Perhaps the new government thinks that massive rewards will outweigh the risk. When it comes to ensuring 250 million citizens obtain the food they need at a price that is acceptable, the required moves around the chess board are complex and time consuming so if the goal is to be achieved then there is no time to lose. Game on?
In the unlikely event that this hypothetical scenario should ever come to pass, it still does not need to concern Australian producers because by the time any of these big moves take place, Australian beef and live cattle will be enjoying tighter supply conditions at the same time as demand is increasing from a much broader range of international customers. Australian producers will never again be short of buyers and forced to dump the best beef in the world into the global market place at bargain basement prices.