China's animal protein market has experienced great volatility in recent years.
African swine fever, COVID-19 and shifts in distribution channels are not only reshaping the supply side, but also the way consumers behave. And this provides some exciting opportunities for the beef industry.
The contraction in Chinese pork supply as a result of ASF - we estimate that Chinese pork production will drop 37 per cent from 2018 to 2020 - and the accompanying high prices are causing consumers to shift away from pork.
Chinese per capita consumption of pork was 40kg in 2018. We estimate that it will drop to 28kg/person in 2020. Over that same period, we can see that consumption of other proteins has increased.
Chinese per capita consumption of beef is estimated to have increased from 5.9kg in 2018 to 6.1kg in 2020. It may seem like a small number, but multiply that by the population and it equates to a 500,000 tonne increase in consumption.
The shortage of pork has seen pork prices rise to record levels. Retail pork prices between 2011 and 2019 generally fluctuated between CNY 22/kg and CNY 26/kg (about AUD 4.50/kg - AUD 5.40/kg at today's rates).
In February this year, we saw pork prices almost reach CNY 60/kg (AUD 12.40/kg). Although pork is the main protein consumed in China and generally price inelastic - i.e. consumption does not change much with price variation - when pork reaches these higher prices, we can see consumption becomes more sensitive to prices.
These increasing prices also mean the price of beef becomes relatively cheaper. Prior to the pork price increase in 2019, beef was generally 1.5 to two times the price of pork. Beef is now trading at about 1.2 times the price of pork.
We are also finding that pork prices and beef prices are now much more correlated, suggesting that beef is becoming more of a substitute for pork.
The other interesting thing we have identified is the increasing home consumption of beef. Prior to 2019, we estimated that approximately 60pc of beef was consumed out of home.
However, in the first eight months of 2020 we have seen beef retail prices increase faster than wholesale prices, indicating that demand from retail consumers is increasingly strong.
For Australia, limited supplies, high prices and geopolitical tensions have not supported beef exports to China this year.
Australia's beef exports to China were down 9pc for the year to July. Meanwhile, China's beef imports from all countries was up 42pc, supported by large volumes from Brazil and Argentina.
Interestingly, Australia's exports of chilled beef to China were up 60pc. While some of this would be going into the restaurant trade, we believe there is an increasing volume going into the retail trade.
Australia is one of the few countries that can export chilled beef to China and the opening of the retail trade provides a great opportunity.