Given the unprecedented surge in Brazil’s beef price and the fact that the Uruguay price is well ahead of the Irish and EU average, there is a temptation to conclude that world market prices and international trade removes any threat from a Mercosur trade deal.

While rising markets lift all boats, the EU remains particularly exposed to an increase in global trade which is based on selling more forequarter beef to China and the USA.

For every 5kg of forequarter sold to these markets, 1kg of steak meat has also to be sold and for this the EU is the preferred destination.

Problem with beef

The only problem with the proposed Mercosur trade deal is the level of access it gives to the South American countries for exporting beef to the EU.

The 99,000t quota, split 55% fresh beef and 45% frozen, is to be phased in over five years and will be subject to a tariff of 7.5%, which is a huge reduction from the current WTO rate (€3.04/kg plus 12.8% of product value).

Additionally, the current Hilton Quota under which Argentina has access for 29,500t beef, Brazil 10,000t and Uruguay 6,376t, will have the tariff reduced from the current 20% to zero.

The Commission contends that the 99,000t proposed quota will have minimal impact on the EU beef market because it represents just 1.2% of an 8m tonne EU market.

If all beef was the same, then that is a valid point but the problem is that not all beef is the same. The EU has now ceased to be a market of interest for forequarter manufacturing beef that is used in burgers, mince and products such as lasagne that use beef as an ingredient. This product is already traded at a global market price which set by the USA and China, currently the two major importers of this beef.

World beef price

With the price of beef well ahead of the EU average in Uruguay and the Brazil price closing fast in recent days, it is tempting to conclude that we needn’t worry about South American supplies given the current strength of world markets.

However, beef isn’t just a single component and the EU is still the preferred destination for global exporters of steak meat.

It isn’t just forequarter beef that is moving to a world market price. The round cuts traditionally used for roasting are also in some cases being directed to markets with a demand for a slower-cooked meat product as consumer interest in the traditional roast is in decline.

Vulnerable

This leaves the steak meat taken from the rump, loin and rib where the EU has been the traditional world leader. This represents a small amount of the beef carcase but a disproportionately high part of the value and it is the area that is vulnerable to greater access from exporters who are rapidly developing their business with China for forequarter-based cuts of beef.

Brazil alone exported over 65,000t of beef to China in September

Recent approvals by China of factories in the Mercosur countries means that the capacity to supply that market has doubled. Brazil alone exported over 65,000t of beef to China in September, according to the World Beef Report (WBR), which is three times the typical monthly volumes in 2018.

This will put Brazil into the number one supplier position in China, the position currently held by Argentina, which exported 217,920t to China between January and August this year, though it is having more factories approved as well.

What this means for the EU

As South American supplies to China explode, it means that a huge surge in the supply of steak meat is also available, but outside the EU there is limited potential.

That means that every animal processed to supply China generates a steak meat supply for which the EU is the most attractive market. A low tariff would make this market for steak meat even more attractive than it is at present.

A low tariff would make this market for steak meat even more attractive

The effect of surplus steak meat supplies from South America is reflected in a weak EU price, which is €3/kg less for striploin steak at present than it was this time five years ago when cattle prices were also particularly weak – and this is with the safeguard of WTO tariffs in place.

Further liberalisation of the EU beef market will have the effect of driving EU steak meat to world market price, putting EU farmers with all the constraints of the EU production system on the same level as farmers in the rest of the world.