Chinese firms will be looking to carve off a bigger piece of the Australian beef industry in the next few years as mainland food companies look offshore to feed China’s 1.35 billion people, according to one of Australia’s big four banks.
National Australia Bank said the two countries are expected to seal a free trade deal this year and that agreement will help boost outbound direct investment from China to Australia.
“We are expecting more deals coming in animal proteins, dairy and fruit among the food and agricultural market as China is working on food safety issues. Chinese companies will also lock in supply through the acquisitions,” Patrick Vizzone, the bank’s regional head of food and agribusiness, told EJ Insight in an interview.
He said another reason to expect more deals is the higher cost in producing food in China. Australia has higher labor costs than China but it has more arable land per capita, making beef production there more competitive.
Fresh-apple prices in the United States were twice the levels that prevailed in China back in 2007, but by 2013 the price premium in the US had narrowed to 25 percent. Similar thing happened with regard to New Zealand, where apples were sold at 75 percent premium compared to China in 2007 but by last year the premium had dropped to less than 25 percent, according to data compiled by NAB.
“We are using fruits and vegetables as example because they are labor-intensive sectors… the same will happen to meat,” Vizzone said.
According to NAB data, Chinese consume about 3 million calories per person per day, of which about 15 percent comes from meat. That total daily intake is much higher than in Japan, mainly due to the huge consumption of high-calorie pork in China.
But now more Chinese are leaning towards beef, even though Chinese consume just 3,000 calories of beef on average per person each year.
“We are also seeing a big investment drive by beef companies overseas, where Australia is the largest beef source for China. It will be a key food in M&As in the coming years. It has been exploding in China,” Vizzone said.
Half of China’s imported fresh and frozen beef and offal is from Australia, with China paying US$721 million last year for 154, 777 metric tons of the products. Uruguay is the second-biggest supplier and New Zealand the third.
China accounted for less than 15 percent of Australian beef exports last year but Vizzone expects this share to rise to a quarter 25 percent in two years.
“We don’t expect deals in the food sector to be as large as the WH Group [takeover of US-based Smithfield Foods Inc.], at least this year. But there will be smaller deals in the second half on beef companies as the industry is fragmented,” he said.
China’s largest meat processing firm WH Group, previously known as Shuanghui, bought US-based Smithfield Foods Inc., the world’s biggest pork processor and hog producer, last year for US$7.1 billion. The Chinese group listed in Hong Kong on Aug 5.
Other Chinese firms are also looking to lunch offshore. Chengdu-based agribusiness New Hope Group has been buying up cropland and livestock farms in countries such as Canada, New Zealand, Bangladesh, the Philippines, Indonesia and Vietnam.
And the country’s biggest food player COFCO Group, the parent of China Agri-Industries Holdings Ltd. (00606.HK), has set aside at least US$10 billion for potential acquisitions abroad.
But, Asian companies, including those from China, have faced problems investing in Australia, such as the lack of infrastructure, a complex investment process especially for state-owned enterprises and high labor costs, Vizzone said.
“Hopefully a free trade agreement can help on that and attract more deals from Asia including China,” he said.
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