China's weak beef market poses risk to Brazil

(Bloomberg) - China's beef imports are declining amid slowing consumption and ample domestic supplies, hitting its biggest supplier, Brazil.

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China's beef imports fell last year for the first time since at least 2016, with prices dropping to their lowest level in nearly three years, official data showed. This year's imports are set to fall by 4%, ending a 12-year streak of soaring growth, according to the US Department of Agriculture.

This dilemma underscores the risk of relying heavily on a single customer: last year, China was the destination for beef from South American countries with more than 52%, even after imports were halted for about two months due to mad cow disease. While Brazilian meat processors have been trying to diversify their exports, alternatives are still limited.

"Brazil relies heavily on China - if China goes wrong, Brazil will be severely affected," says Leonardo Alencar, an analyst at XP Investimentos.

Over-reliance on China has already taken a toll on the earnings of meatpackers. Minerva SA, South America's largest beef supplier, will see its export revenues fall by nearly 18% in 2023. Marfrig Global Foods SA's South American beef business is down by nearly 26%.

China's share of the global meat trade has fallen sharply from its peak in 2020 as the country's domestic meat supply increases. According to the U.S. Department of Agriculture, China's meat production will reach 7.7 million tons this year, an increase of 1 million tons from 2020. In addition, the economic slowdown has prompted consumers to seek cheaper proteins.

"Local people are abandoning cattle breeding and slaughtering heifers in large numbers," Minerva's chief executive Fernando Galletti de Queiroz said in a conference call with analysts last month.

Gilberto Tomazoni, JBS SA's chief executive officer, said on the company's earnings call that increased competition from Australia was also putting pressure on the prices Chinese importers were willing to pay.

However, most analysts predict that China's decline will be temporary, and that the Asian nation will continue to be a major growth engine for Brazilian beef exporters, as per capita consumption remains below the global average.

Last month, China approved the export status of 24 more Brazilian beef processing plants, and it could become even more important in the coming years. JBS, the world's largest beef supplier, said on Friday that capacity at one of its largest Brazilian plants would soon increase after the approval.

The increase in the number of approved plants means "a big step forward for the Brazilian carcass industry," Tomazoni said Friday at a ceremony celebrating the first shipment of beef from the company's plant in Campo Grande.

Brazil's share of China's beef imports will rise to 60% in a few years with the new approval," said Joao Otavio Figueiredo, director of the livestock department at consultancy group Datagro.

What is certain is that Brazil is looking for new customers and trying to diversify. The government has already opened new markets for beef in Mexico and Singapore. But Brazil's potential for expansion still pales in comparison to China's huge market.

"China is a good business partner for Brazil, and it will be for a long time," said Alcides Torres, founder of the consulting firm Scot Consultoria. We have increased our exports to other destinations, but not enough to replace China".

-Written with the help of Hallie Gu.

(There is an error in the year in the fifth paragraph).

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