Why This Aussie Export is Bursting with Debt

cow_update
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Killing a cow is illegal in India. Yet ironically, the country is now the biggest beef exporter in the world.

India achieved that status a bit by accident. You see, Indians may not eat beef, but they consume a huge amount of dairy products. To support the large dairy industry they raise water buffalos, a large type of bovine.

Buffalos — or cara-beef — are a cheaper type of beef. And it’s OK to export them, since Indians don’t see them in the same category as sacred cows.

India started exporting cheap buffalo meat in the 2000s, and the market has exploded since then. Mainly due to the increase in global demand for beef.

Australia may have lost the crown to India, but it is still one of the world’s largest beef exporters, at number three. Beef is the top fourth export for Australia, as 75% of the beef produced in the country is exported.

The largest beef producing state is by far Queensland, as you can see in the image below.

national-cattle-numbers

Source: Meat and Livestock Australia

Yet the beef industry in Queensland has a problem: they are suffering from a debt crisis.

You see, Queensland’s meat business is not making enough profits to cover costs. And now there is a real disconnect between rural debt and farm production, as shown in the chart below.

rural-debt-and-nvfp

Source: Queensland’s Rural Debt and Drought Taskforce

Debt in the rural industry is soaring, especially among beef producers. Basically, income from farms cannot support the debt they are in.

Debt started to spike in 2003, when land values increased considerably. You see, it was the beginning of the asset bubble that would end with the GFC.

With low interest rates, farmers were able to borrow a higher amount against their land. And used that debt to expand their business by buying more land, machinery, and to make farm improvements.

Yet after 2008, land value plummeted, lowering farmer’s equity. South West and Northern Queensland’s land values went back to levels in 2002, as seen in the graph below.

queensland-rural-debt

Source: Queensland’s Rural Debt and Drought Taskforce

And after 2008, farmers continued borrowing to ease losses.

You see, in 2011 the Australian government banned live cattle export. It caused cattle values to fall dramatically.

And then there was the drought from 2012–2014. The drought affected 85% of the state. Farmers had to increase their debt to manage the farm.

The live cattle exports ban and the drought left farmers without income for many years. And this destroyed their business.

Farmers are now fighting against the banks to prevent foreclosure.

The drought may be over now. Yet years of strong demand for beef and drought have diminished the national herd to 26 million — a 20 year low. Farmers have to rebuild the herd, and some may need to get into more debt to do this.

Plus the outlook for exports is not great. Australia has improved international market access for beef exports, and has entered into a free trade agreement with China. Yet even after dropping tariffs, Chinese beef imports from Australia have declined 30% this year.

The problem is that high meat prices are making it difficult for Australia to compete in the international market. Especially after Brazil has re-entered the market with cheap beef, and has become the largest beef exporter to China. And Brazil is not the only competitor Australia has to worry about. There is also India, the US, Argentina and Uruguay.

With high debt and increased entrants into the market, the landscape will only get harder for Australian beef producers.

Regards,

Selva Freigedo,
For The Daily Reckoning

Selva Freigedo

Selva Freigedo

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