South American beef – a post-Brexit threat?

South America is a key player on the global beef market and export volumes are expected to grow further in the coming years. This could well cause increased concern for UK producers, a situation that could be exacerbated post-Brexit if the government forges ahead with trade deals with the region. To what extent are these concerns likely to be well-founded?

Brazil, Uruguay, Paraguay and Argentina collectively exported 1.8 million tonnes of fresh and frozen beef during 2016. For these countries, exports are expected to expand further as production systems develop and productivity gains materialise. These include raising calving rates, better finishing, and improvements to market access. The increasing prevalence of lower cost South American product could hurt the competitiveness of UK beef on the global stage. Of even more significance could be that imported beef may be given wider access to the domestic market post-Brexit.

Global beef exports

Last year, Brazil was the second largest global exporter of bovine meat, at nearly 1.1 million tonnes. Only exports of carabeef from India were larger in volume terms. This level of shipments was virtually static on 2015, but remained below 2014 due to lower production in response to a downturn in the cattle cycle. This was not helped by a slackening in demand from Russia, given the poor economic situation there. However, there was significant growth in shipments to the Chinese market, as more plants gained approval for export. In 2017, increasing production as a result of herd rebuilding is expected to bolster export prospects. The Brazilian Real, while strengthening in 2016, remains low by historical standards and should provide some support to exporters.

The EU is not currently a major export destination for Brazil, due to quota restrictions, high tariffs on out-of-quota shipments and the fact that fewer beef producers are now licenced to supply the EU market than were licenced in 2007. Despite this, from an EU perspective, Brazil is the primary supplier of imported chilled and frozen beef holding around a third of the market. Shipments totalled 65,600 tonnes in 2016. The product mix is approximately 60:40 in favour of frozen over fresh/chilled beef. Within the EU, Italy and Spain are the primary destinations, with the UK only accounting for five per cent of its trade with the EU. However, historically the volumes have been much higher. Before EU concerns were raised about cattle traceability, associated with FMD controls, in December 2007 Brazil was the second largest supplier of beef to the UK market. In contrast, in 2016 it had slipped to eighth position, with only a one per cent market share.

Though not in the same league as Brazil, Uruguay and Paraguay are also key global exporters and both shipped over 270,000 tonnes of beef last year. Paraguay has previously been limited by unfavourable market access conditions, not helped by disease outbreaks, but this is now changing as the country gained access to over 20 new markets last year. Considerable investment has been taking place in the beef sector which has resulted in large increases in production and, consequently, exports in recent years. Priority has been given to exports which have been helped by the establishment of more export approved plants. Conversely, while Uruguay has access to a greater number of key markets, including China and the US, the potential for expansion is lower due to limited land availability, although there is still scope for further productivity increases.

Uruguay is, however, a significant supplier of beef to the EU, being the largest after Brazil, with 41,600 tonnes shipped during 2016. The EU was also Uruguay’s second largest beef export market after China. It supplies high value chilled cuts, mostly boneless rump and loin, under the High Quality Beef or “Hilton” quota, and grain-fed beef under the tariff-free autonomous beef or “481” quota. Uruguay also ships significant quantities under other EU quota schemes. As with Brazil, the UK receives just a small proportion, seven per cent, of the total volume shipped to the EU. Paraguay ships a much smaller volume of beef to the EU both within and outside of the Hilton quota, as its quota allocation is much smaller than Uruguay’s. However, shipments increased sharply in 2016 following the lifting of the EU ban, imposed because of FMD, in May 2015.

Finally, the election of a new government in Argentina in December 2015 has already resulted in rising exports, up 17 per cent in 2016, after over a decade of decline. In 2005, Argentina was the fourth largest global beef exporter but, by 2016, it had fallen to eleventh place, shipping only 154,000 tonnes of product. This was due to restrictions and taxes on agricultural exports designed to keep food prices affordable for Argentinians. However, a substantial recovery in exports will take time, as the cattle herd has declined by five million head over the last ten years and, on top of this, processing capacity has also declined. However, herd rebuilding is now taking place and beef production is expected to move up in 2017.

China and Chile were the key export markets for Argentina in 2016, alongside the EU and Israel. The volume of high-quality chilled beef shipped to the EU amounted to 33,000 tonnes last year, which would have come under the Hilton and 481 quotas. However, Argentina has not filled its Hilton quota allocation for a number of years, due to the fall in production, including of high-quality steer beef, and falling number of plants licensed to export to this market. This trend is expected to be reversed over the coming years, meaning there is potential for growth in shipments to the EU in the longer term.

EU UK import origins chart

The analysis highlights the strong competitiveness of South American beef on the EU market. Even though with some quotas, product is subject to 20 per cent customs duty and even higher under other quota regimes. Looking forwards, the Mercosur trade bloc is currently in negotiations with the EU over a free-trade agreement but progress has been slow. The EU-Mercosur Association Agreement was launched as long ago as 2000, and was even suspended between 2004 and 2010 because of considerable differences on the trade part of the agreement with food being at the forefront of this. The EU Commissioner for Agriculture and Rural Development, Phil Hogan, has stated that beef should be ruled out of the negotiations. However, with the product being such an important export for the Mercosur nations some concessions may well have to be made to seal a deal. Allowing greater volumes of lower cost South American beef onto the EU market with reduced/zero tariff would be a concern not only for EU member states, but also a post-Brexit UK. Almost ninety per cent of UK beef exports, or over 98,000 tonnes, went to the EU during 2016 so this trade could be threatened. This would be particularly concerning if the UK loses tariff-free access to the EU post-Brexit, while access of the Mercosur group countries increased.

The threat of increasing direct competition on the UK market can also not be eliminated, given the eagerness of the UK government to forge new trade agreements, following divorce from the EU. This could even involve a UK-Mercosur trade deal. More specifically, Argentina has already individually stated it would be interested in forming a bilateral trade deal with the UK. Even without any trade agreements, the UK may still start to see volumes of South American beef on the domestic market increasing again. This would especially be the case if the UK government adopts a lower level of tariff protection than is currently imposed by the EU. How the current EU quotas might be reallocated following Brexit could also be an issue.

There is clearly still much uncertainty regarding the extent to which UK beef will be in competition with South American product over the coming years. However, with the region still holding much untapped potential for increasing productivity, it seems inevitable that the volumes of this low-cost beef on the global marketplace will increase. This could affect UK producers directly, by competing on the home market, or indirectly via UK export competition. As such, producers will need to focus on maximising productivity and profitability, as well as focusing on the provenance of British beef, in order to meet this potential threat. However, compared with pre-2007, when there were large volumes of Brazilian beef on the UK market, there is now a stronger degree of loyalty towards British beef in both retail and food service, helped by labelling and quality assurance schemes. But, of course, South American beef might be lower in price.