The economic impacts of COVID-19 on Australian beef

The economic impacts of COVID-19 on Australian beef

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"Many forecasters are expecting the economic downturn to be reasonably short lived and that 2021 will be more positive," says Rabobank senior analyst Angus Gidley-Baird.

"Many forecasters are expecting the economic downturn to be reasonably short lived and that 2021 will be more positive," says Rabobank senior analyst Angus Gidley-Baird.

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Opinion: the longer-term economic fallout of COVID-19 has the potential to cause a bigger impact on the Australian beef industry.

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The immediate impacts of COVID-19 - with social isolation and disruption to supply chains - dominates the news at the moment.

However, the longer-term economic fallout has the potential to cause a bigger impact on the Australian beef industry.

Now the virus has gone pandemic, it is affecting people and economies around the world.

On March 24, we heard the International Monetary Fund state that the "coronavirus pandemic will cause a global recession in 2020 that could be worse than the one triggered by the global financial crisis of 2008-09".

While every situation is different, a brief look at previous periods of economic slowdown, can provide some guidance on what this might mean for beef prices.

To do this, I have chosen the US market and US import prices for beef as there are good historical records, it is a major export market for Australia and, arguably, the US import price sets the benchmark for all global beef prices.

Over the past 35 years, there have been three periods of economic downturn.

In 1991, GDP growth in the US was -0.1 per cent, in 2001 it was 1pc and in 2009 it was -2.5pc. Global growth was 2.6pc, 2.5pc and -0.1pc respectively in these years.

It is important to recognise that the US imports a large volume of lean trimmings or manufacturing beef, primarily from Australia.

This predominantly goes into the quick service restaurant trade as hamburgers.

During economic downturns, consumers' disposable incomes will decline and consequently spending will reduce.

People still need to eat but they may choose to not eat at expensive restaurants or, as is the case now, they may choose to eat at home. If they choose to trade down to cheaper cuts, the QSR trade and, in turn, US import prices may be supported.

But if they choose to eat at home, it will support the US domestic beef supply chain over imported beef.

In 1991, US import beef prices rose through the year before dropping to finish at levels close to where it started.

In 2001, prices rose gradually through the year to finish about 10 per cent higher at the end.

In 2009, a similar thing happened with prices rising gradually to finish the year about 10 per cent higher.

It should be noted that in 2008, with the collapse of financial institutions, beef prices rose dramatically (by almost 50 per cent) before dropping and finishing the year 10pc lower.

It appears from these three examples that US import prices generally show a slight appreciation during times of slower economic activity.

This could be a good indication for Australian beef prices. But we are in different times, with people being encouraged to not eat in public areas which will impact QSR sales.

At the same time, the Australian cow kill and therefore exports of lean trimmings will be lower.

One positive ray of hope is that many forecasters are expecting the economic downturn to be reasonably short lived and that 2021 will be more positive.

  • Angus Gidley-Baird is a Rabobank senior analyst
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