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China hit Australia with trade restrictions on barley and beef exports this May. Of agricultural goods exports last year, beef was the largest earner with barley finishing in twelfth place. As such, the cost of these trade restrictions could be quite severe, especially given the current economic climate.

Beef

China has increased its consumption of Australian beef 60-fold over the past decade. However, in early May, China suspended beef exports from three abattoirs in Queensland and one in NSW for regulatory compliance issues (see Figure 1).

Figure 1: Affected abattoirs

Beef is Australia’s biggest export to China. According to Meat and Livestock Australia, Australia exported 206,306 tonnes of beef, worth A$1.66 billion in 2019. Demand in China for Australian beef rose from 4^th to top export destination in 2019, driven in large part by African Swine Fever and the domestic protein shortage this created.

Beijing has since turned to Russian beef, importing 21.4 tonnes on May 3. Trade between China and America for beef may also kick back up again as China lifted a 19-year import ban on US beef in February.

The four abattoirs provide an estimated 35% of beef exports to China, according to the ABC. Using 2019 exports as a reference point, the ban could cost the Australian beef industry $581 million if other abattoirs are unable to ramp up production to meet Chinese demand.

It is important note that Australia’s wide spread of export markets – reaching over 100 destinations – will come in handy for the current trade dispute (See Figure 2). Having said that, China still accounted for 24% of total exported veal and beef in 2019 and as the majority of suspensions have been placed on Queensland based abattoirs we could see the sunshine state sustain a more significant blow compared to other states.

Figure 2: Australian beef and veal exports by destination

Source: Department of Agriculture

Barley

China has imposed two tariffs amounting to 80.5% following an 18-month dumping investigation. These tariffs have materialised despite the strong barley trading relationship between the two nations – China is Australia’s largest barley export market, and Australia is China’s largest supplier of barley.

These tariffs come at a time when the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) are expecting barley prices worldwide to fall in 2020-21 due to a near record global production and growing competition from other grains in the feed market. 

Barley is Australia’s second-biggest winter cereal crop by area and volume after wheat – over the past five years, Australia exported just under 7 million tonnes of Barley on average (see Figure 3).

Figure 3: Volume of Australian exports of barley by destination (000’s tonnes)

Source: ABARES

Barley can be used for malting (beer brewing) or feed (for livestock). Over the last decade, Australian barley exports to China have been predominantly supported by a Chinese beer brewing boom. Of the 1.59 million tonnes of barley shipped to China last year, less than 10% was intended for feed (see Figure 4).

Figure 4: Malting and feed barley exports to China over 2019 (tonnes shipped)

Source: ABS

Malting barley is subject to more rigorous specifications and thus attracts a price premium over feed. Although highly variable, Victorian Farmers’ Federation grains manager Simon McNair said malting barley’s premium over feed has historically been around $50/tonne.

Although it is likely that Australia will be pushed out of the Chinese barley market, at least for the next five years, it is not likely Australian barley producers will be left without alternative markets to trade in. Increasing exports to existing buyers in South Korea, Japan and Vietnam is an option, and a free trade agreement with Indonesia due in July is estimated to induce 500,000 to 1 million tonnes of barley exports. Even domestically there is plenty of demand for barley after natural disasters last year dug into reserves. However, these actors are predominantly interested in feed barley. The Chinese barley market has been particularly lucrative over recent years because of its strong demand for high quality malting barley.

The replacement of malting barley exports with feed barley exports will contribute to a loss for Australian barley farmers, as will the price drop ensuing from China’s departure from the barley market. Based on an estimated crop harvest of 12.5 million tonnes and a price drop of $40/tonne, Grain Producers Australia Chair Andrew Weidemann foresees an impact of up to $500 million. However, the decision of some Australian barley farmers to halt planting and the simultaneous spike in demand from Indonesian and domestic farmers may offset this price drop by filling the gap in demand and supply. Having said that, the ABARES’ $330 million estimate on the cost of Chinese barley tariffs has been described by farmers as “grossly underestimated”.

The silver lining for barley farmers across the nation could be the missing tariff on malt itself.  As such, we may see direct trade between Australian malting houses and China’s beer brewing market burgeon in the coming months, thus offsetting losses.  Anecdotally, there have also been talks of export spikes to Vietnam with the 1,500 kilometre border with China being used to circumvent the artificial trade barriers.

Conclusion

There is no doubt that the industries in question will be materially affected by the recent round of trade restrictions imposed on Australia by the Chinese government. While the barley tariffs will be felt most in Western Australia, Queensland will endure the brunt of the force from beef export suspensions.

But barley and beef could be the tip of the iceberg. The Chinese government demonstrated its willingness to escalate trade tensions last week when it advised its citizens to reassess travel plans to Australia due to an alleged rise in racial discrimination since the COVID-19 outbreak. Further trade restrictions could well be on the way.

This article was prepared by Ben Scott, Research Officer and Gene Tunny, Director at Adept Economics. Please get in touch with Ben (ben.scott@adepteconomics.com.au) with any questions.