Bullish outlook for beef to China

Some of those supply chains will be built out from China, as is happening with recent Chinese investments in Australian agriculture. But there remains considerable opportunity for foreign interests to build supply chains into China to capture rising consumption of beef.

That opportunity is built into Chinese government policy, observes Chenjun Pan, a Rabobank senior analyst who has produced a new report assessing the Chinese beef market.

As China has become more affluent, and developed a taste for beef along the way, the domestic Chinese cattle herd fell by 14 million head (about half Australia’s entire herd) in the decade to 2015.

China’s herd still numbers about 105 million, and that is expected to supply about 80 per cent of China’s beef over the next decade.

The Chinese government is supporting a herd rebuilding and modernisation program, but Ms Pan explains that without a coordinated program of genetic improvement, domestic production is unlikely to ever make China self-sufficient in beef.

Last year, the Chinese government made it official policy to support beef and sheepmeat imports to address the long-term supply shortfall. Rabobank’s expectation is that imports will make up 20 per cent of China’s beef consumption in 2025.

That equates to 2.04 million tonnes, more than double Australia’s long-term average annual beef exports to all its markets.

Chinese interests are capitalising on this policy environment by investing in beef supply chains in Australia and South America.

While that investment has notably included land, Ms Pan thinks the legislative hurdles that Chinese nationals must clear before buying land in countries like Australia is turning investors towards post-farmgate areas of the supply chain.

In this environment - Chinese business looking to link with beef production in other countries, other beef supply chains looking to link with China - the right partnerships are all-important, Ms Pan said.

She advises Australian companies looking to build into China to seek partners with experience in the target market sector.

“Traders are taking a commodity to sell it - they don’t really understand the market,” Ms Pan said.

“For Australian companies, if they can find a partner who is already in processing, or who understands retail, that would be perfect.”

China has three main “channels” through which beef is sold - the food service sector, institutional buyers (such as canteens in the workplace and food processors) and the retail market - but within each of these channels lies a great deal of diversity.

The food service sector was, and remains, the main growth market for beef. In a country with little tradition around the home-cooking of beef, most people discover beef’s delights while eating out.

That ongoing discovery is etched into the commercial record of steakhouse restaurant specialist Wowprime.

“Owning more than 200 steakhouses across mainland China via the brands of Wang Steak and Tasty, Wowprime has seen its revenue rise more than 30 percent annually in recent years,” Ms Pan wrote in the Rabobank industry note.

“This compares with the six percent decline for high-end restaurants in 2014.

“As restaurants like Wowprime mainly serve private consumers, such contrast suggests that the purchasing power of the affluent class remains strong despite the economic slowdown.

“Going forward, steakhouses and quick service restaurants will continue to have great growth potential, while hot pots, which are already well developed in China, will witness steady growth.”

The challenge for beef exporters will be to balance rising Australian cattle prices, now deep into record territory, with a ceiling on how much most Chinese consumers will pay for beef before switching back to the traditional proteins, pork and poultry.

Ms Pan doesn’t think there is much room left for beef prices to inflate in China, as the Chinese economy cools down from the blistering pace of the last decade.

And while welcoming the idea of live-exporting cattle from Australia to China, she forsees challenges.

The first is whether there are enough beef cattle in Australia at a competitive price - “because in China, price is still the top consideration”.

Second, whether it is feasible to ship cattle from non-bluetongue areas - meaning southern Australia - to China at a price that will make live cattle attractive on landing.

“If those problems can be solved, it will make a lot of sense to import live cattle. In China, you can fully utilise every part of the animal, and maximise the value.”

The high cost of beef sold through traditional Chinese retail or food service channels has opened an opportunity for a distinctly modern alternative: e-commerce sales.

E-commerce retailers like 1haodian, Womai and SF, which built their businesses on non-perishable sales, are now starting to offer perishable foods, Rabobank senior analyst Chenjun Pan wrote in an industry note dealing with the Chinese beef market.

“Items including beef, sheepmeat, imported seafood and imported fruits, which share issues with conventional channels, have been chosen to be the focus for online perishable food sales.

“Online shops currently offer much more variety of beef products than supermarkets and hypermarkets.

"The majority of the products are well packaged and branded with competitive pricing, due to far lower marketing expenses. The freshness is well recognised, as the cold chain logistics are highly emphasised by e-commerce players.

“In addition, online shopping enables consumers to start cooking steak at home, as the steak products are offered at more affordable prices, come with cooking instructions and ready-to-cook preparation.

“However, it needs to be stressed that online shoppers are still a niche market, and steak-at-home cooking is just at beginning to take off in urban areas.

“The beef cooking and eating habit is far from mature, and consumers need more education to know how to cook and eat beef. There is a potentially big market to be unlocked in the coming decades.”