Sam White says he feels fortunate for now. An eastern Australian cattleman, he, like thousands of his Aussie counterparts, is riding a five-year wave of prosperity. When asked why the beef business has been so good lately, he points across the Pacific Ocean.

The absence of U.S. beef in Pacific Rim markets for the last couple of years, and record-high American beef prices buoyed by strong U.S. beef demand, have played a large role in his good fortune. Smack dab in the middle of a drought, White's Guyra, New South Wales (NSW) property is a microcosm of Australia's beef industry.

White has followed the trend in the Australian beef industry, increasing productivity, producing more beef, and improving its quality. He's done this despite the impact of prolonged and widespread drought plaguing most of Australia.

“The Japanese market — and to a degree the American market — have sustained our beef prices while we've been in a period of abnormal drought,” says the family operator of Bald Blair Angus.

He says beyond the normally occurring global supply and demand situation, the current export situation is creating a 20-30% “price premium” for Aussie beef producers.

Does he expect that to continue?

“Absolutely not,” White says. “It's very short term.”

But he does expect the anticipated re-entry of U.S. beef into Pacific Rim markets to affect the Australian beef business. Herd rebuilding in the U.S. makes it a certainty, he says.

No worries yet

The official line from Meat & Livestock Australia (MLA) is the Australian beef- and cattle-price peaks probably occurred in mid-late 2005, but few producers are complaining.

“Cattle farmers who survived the drought with herds largely intact and without high debt are enjoying some of the highest incomes to date,” says MLA spokesman Damon Whittock.

Larger “specialist” family farms and corporate operations have generally maintained reasonable incomes despite seasons of drought. The high incomes are also reflected in an unprecedented level of domestic and international investment in the beef industry.

Overriding drought worries, the price of grazing land in northern Australia nearly tripled the past five years — from AUD$30/hectare (ha) to $80. Southern beef land increased from $300/ha to $450.

MLA predicts the Aussie cattle herd will grow by 1.1 million head this year, reaching nearly 29 million head — 30% the size of the U.S. herd.

Much of the industry's recent growth can also be attributed to investment in the “lot-feeding” sector. MLA says there are now 650 “accredited” cattle feedlots in Australia, with a total one-time capacity of 1.1 million head. While lot feeding has increased steadily since the mid-1980s, there's been a 27% growth spurt from 2003 to 2006.

“Lot feeding has become an important value-adding component of the Australian beef industry,” Whittock says. And, Japanese food conglomerates are a significant source of capital in Australian lot feeding.

Grain sorghum, wheat and barley are the main ingredients in finishing rations. About 47% of Australian lot-fed cattle go for export — mainly to Japan and Korea.

A bloody dry country

How dry is it in Australia? For the Reynolds family, which for six generations raised pedigreed Hereford cattle on the Rosalie Plains station near Toowoomba, Queensland, there's been no end to drought. At one time, the northeastern Australia station was among the largest in the Darling Downs region. Still holding Australia's record price for a Hereford bull, their seedstock was recognized worldwide.

The property is run by Roy and Judy Reynolds, their sons Berry and Andrew and their wives, and Roy's mother Laurette. In 1987, the family downsized its purebred Hereford herd, totally dispersing it in 2002, and founded a smaller Red Angus stud herd. Today, Rosalie Plains sells around 50 bulls each year to local commercial cattleman.

But persistent drought is making it tough for the Reynolds' to manage even that smaller operation.

“To combat drought, we replaced the stud herd with cattle more easily liquidated,” Berry says. “We now buy feeder cattle that can be fattened on grass. If the season turns dry, as it seems to do on a very regular basis, these cattle can be sold off immediately.”

To help make ends meet, the Reynolds women developed a “farmstay” enterprise (bed-and-breakfast). They also provide a wide range of farm recreation activities.

“Drought is part and parcel to life in Australia,” Roy explains. “By all measures, this is simply bloody dry country.”

In fact, the 1990s saw formal government acknowledgement that drought is a function of the natural variability of the Australian climate. Today, federal and state drought relief for farmers and agricultural communities is restricted to times of so-called “exceptional circumstances.”

“In other words,” says Graeme Mitchell, an Armidale, NSW, beef production consultant, “the agricultural sector is expected to cope with the occasional drought, and relief will come only for droughts of unusual length or severity.”

The North American markets

U.S. customers account for nearly 40% of Australia's beef exports. In contrast to the Japanese and Korean markets though, a majority of the beef sent to the U.S. is lean trimmings for hamburger.

“It's blended with higher-fat U.S. trimmings,” Mitchell says, noting that Aussie producers are currently facing fierce competition from Uruguay for a share of that U.S. market.

“We're also very happy cattlemen groups in the U.S. are blocking the import of cow beef from Canada,” he says. “But, we're not holding our breath for relief from our free-trade agreement with the U.S.”

The U.S.-Australia Free Trade Agreement (FTA), effective January 2005, provided increased access for Australia under a separate tariff rate quota (TRQ) for manufacturing beef. Australia's share is 378, 214 metric tons (mt) of the total U.S. “all countries” TRQ of 696,621 mt.

The most immediate outcome of the FTA was the elimination of in-quota chilled/frozen beef tariffs of 2¢/lb. and the 4-10% tariff on processed beef beginning Jan. 1, 2005. But total import volume from Australia in 2005 was 300,406 mt, at a value of US$917 million — a decline of nearly 20% from 2004.

Australia last filled its TRQ for fresh, chilled and frozen beef in 2001. It came close again in 2004, at 97.68% of its TRQ.

Other FTA outcomes include:

  • Australia will receive an additional 70,000-mt, duty-free TRQ to be added incrementally over an 18-year period to its existing 378,214 mt quota.

  • The over-quota tariff of 26.4% will be phased out from years 9-18.

“Any benefit of the agreement will be felt a long ways down the track,” Mitchell says. “A whole lot of things can change in the meanwhile.”

Cost of doing business

Last August, following an industry-wide ballot, Australia's version of the U.S. beef checkoff, its cattle transaction levy, increased from AUD $3.50 to $5/head for every head of cattle sold.

Producers, feeders, processors and live-animal exporters pay into the levy. The money raised assists in livestock production research and development, marketing and market-access activities. MLA is primarily funded by the levy. Income from the levies is also distributed among Animal Health Australia and the Australian National Residue Survey.

“Low-cost producers such as Brazil, and the return of the U.S. and Canada into the international marketplace, could cut into Australian exports and reduce the prices paid to our beef producers,” says Queensland, Australia producer Don MacDonald. “With the levy increase, the cattle industry must boost its marketing efforts in the coming years if it's to remain competitive.”

The other major move to bolster Australia's presence in global markets is the National Livestock Identification System (NLIS). Since Jan. 1, 2006, all cattle movements between properties must be reported to the NLIS database.

All cattle must be ID'd with an accredited radio-frequency NLIS device (ear tag or rumen bolus) before they leave any property. Each device contains a microchip encoded with a unique number linked to the property of origin.

Sale yards must notify the NLIS database of all cattle sold, while abattoirs are required to notify the database of all cattle harvested. Participation is mandatory.

Brothers James and Ted Laurie raise cattle on their family property near Gloucester, NSW. They're members of a regional beef cooperative — Barrington Beef — which includes farm-retail traceback protocol via an ID system complementary to the NLIS hardware.

“It's something we had to bite the bullet and get into whether we wanted to or not,” James says. Fortunately, they were already using individual ID in their herd management, so it wasn't a new concept.

“It's a matter of upholding our name and reputation on what we raise — not just protecting food security,” Ted adds. “In today's world, there's no other way to be fairly rewarded for the quality of our beef than by tracing it back to our doorstep.”

With farmers like the Lauries, the Reynolds family and Sam White among the mix, odds are Australia's beef industry will remain strong and competitive for the foreseeable future. By capitalizing on what White says is a global mindset, Aussie beef producers will remain formidable international competitors.

“I reckon consumers, whether inside our borders or overseas, all deserve access to a safe, affordable and consistent beef supply,” White says. “Australian beef producers are not unlike anyone else — we want a return on our investment — and therefore simply need a chance at our share of the market.”

A closing window

The past five years have been an extraordinary period for the Aussie beef industry, but members expect their window of prosperity to begin narrowing over the coming months. Yet, it will be buoyed by a number of key factors:

  • Cyclically low U.S. production and sustained price strength that will encourage imports into the U.S.

  • The retention of additional market share in the Pacific Rim due to weak U.S. market presence.

  • Strong domestic beef demand and constrained domestic supplies.

However, with global competition heating up, Meat & Livestock Australia expects:

  • U.S. beef will begin re-entering Japan in 2006, increasing to 90% (240,000 mt) of pre-BSE levels by 2009.

  • Canadian beef exports to Japan, which restarted in December 2005, will reach 75% (15,000 mt) of previous supply in 2007.

  • Japanese beef consumption gradually recovers from BSE scares, approaching 2000 levels by 2010.

  • U.S. boneless beef from under-30 (age-verified) cattle will re-enter Korea in 2006 — reaching 75% of previous supply in 2007.

  • The U.S. border will reopen to Canadian “cow beef” in the third quarter of 2006, forcing significant quantities of Australian cow beef away from the U.S.

  • Argentine beef will re-enter NAFTA markets in January 2008. Brazilian beef will remain banned by NAFTA countries through at least 2010.

  • Composition of Aussie beef exports to the U.S. will continue to be about 66% lean trimmings and 33% whole-muscle cuts.

  • Brazilian competition will be fierce in non-NAFTA markets.