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CME: How Much Brazilian Beef Will be Imported to US as Market Opens?

03 August 2016

US - On Monday, the USDA officially announced the reopening of trade with Brazil, in the form of fresh and frozen beef, write Steve Meyer and Len Steiner.

While the news release is titled, “USDA Announces Reopening of Brazilian Market to US Beef Exports”, the big news is the opening of US markets to chilled and frozen Brazilian beef.

Brazil currently exports cooked and canned beef to the US, but this will be the first time since 2003 they will be allowed to export fresh product to us, pragmatically. Previously, fresh Brazilian beef had been banned because the country was classified as affected with foot-and-mouth disease (FMD).

According to a risk analysis conducted by USDA’s Animal and Plant Health Inspection Agency (APHIS), the OK was given to initiate trade of fresh beef with Brazil based on the conclusion that risk to US livestock was “low”.

Aside from the animal health aspects, with an increasing domestic cattle herd and therefore increasing supply of beef the other obvious concern is to what level will we import Brazilian beef and how will that impact our market?

First, it is key to realise that as far as we can determine, the Food Safety and Inspection Service has not approved any specific Brazilian plants, yet, to export fresh beef to the US. This will have to be done before any fresh beef shipments to the US take place.

Additionally, due to Tariff Rate Quotas, Brazil will have relatively limited access to the US market, at least for a few years. Tariff Rate Quotas (TRQ’s) are assigned to countries exporting product to the US, who do not have a free trade agreement with us.

The basic definition of a TRQ is a certain country, or group of countries, can export fresh beef to the US up to a certain volume limit, after that limit a hefty quota (tax) is applied to the beef making it relatively more expensive than other options.

Since Brazil does not have a country specific quota to export to the US, they will be classified in the TRQ group labelled “Other”. The maximum volume of this TRQ group is 64,805 metric tons (mt).

Approved countries without a country specific quota can ship under the “others” TRQ until the 64,805 mt is reached. The quota is first-come, first-serve for these countries.

All imports within quota (country specific and other) pay 4.4 cents per kilogram beef exported to the US, except for Free Trade Agreement partners which are duty free.

All fresh beef exports to the US, over quota limits, pay 26.4 per cent ad valorem tax. The quota system does not apply to cooked/canned beef.

So what does this mean for Brazil? In 2015, 68 per cent of the “other” TRQ was utilised by Nicaragua, Honduras, Costa Rica, and Ireland. For a very simple analysis this would have only left 20,738 mt of quota volume to Brazil. While this is an oversimplification due to the first-come first-served nature of the quota, it demonstrates that Brazil will have competition in the quota space.

Although the maximum limit of Brazilian beef exported to the US could be 64,508 mt, based on market competition it is very unrealistic to think Brazil would overtake the full quota. Longer term (in 2020) these TRQ’s are scheduled to change, and could give Brazil a higher volume ceiling.

To put this in perspective, in 2015 the US imported 570,740 mt of beef from Australia, 299,955 mt tons from New Zealand, and 285,036 mt from Canada (to name our top 3 sources) for an annual total of 1.5 million mt.

This is to make the point that, in the near future, imports of fresh Brazilian beef should not have huge effects on the industry – not considering potential domestic livestock health risks.

We would expect the majority of imported fresh beef from Brazil to be in the category of 90 per cent lean beef, very similar to the product we currently import from Australia. The value of the real could make Brazilian beef rather more competitive than Australian product, for US importers.

However, Brazil is a major exporter to both China and Russia and it is highly unlikely they would divert product away from those markets.

On the flip side, the Brazilian market will also be open to US beef products. While their economy is currently in a downturn, in the long run there is potential for US grain fed beef in the high end markets of Brazil as Brazilian beef is mainly grass-fed.

In 2015 though, we exported a total of 134 mt to Brazil, making it our 60th largest customer, on a volume basis, out of the 123 countries we shipped beef to last year.

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