The Mid-Autumn festival has passed, indicating that the third quarter will soon be over. Q4 for many companies is a quarter of the transition. On the one hand, they want to make a perfect end to this year. On the other hand, they want to organize their thoughts for next year.

At this time last year the main topic of discussion in the market was whether to continue to make offers against the backdrop of rising overseas offers. Looking at it now, the buyer who chose to continue the offer was undoubtedly right. But at the time, many people were not quite sure about the extent of the tightening of smuggling channels, the impact of the ASF epidemic, and so on.

2018.09.27 Mr. Simon Quilty, consultant of MIG, shared the impact of ASF in the global expert link session of "MIG China Imported Beef Market Analysis Conference"

Uncertain Market

This has been a good year for most of the businesses that do the imported beef trade. As smuggling was tightly controlled and the ASF epidemic shifted consumption from pork to beef, the price of imported beef gradually increased to its highest level in history.

We found two phenomena. One is that more than 90% of the top 20 importers so far this year have been in the industry for more than three years. Failure happens overnight, and it works in this industry as well.

Many outsiders see only the traders' moments of brilliance, but the years of accumulation and even losses that preceded them may be experienced only by the parties themselves. The threshold of beef trade seems very low, but in fact, the requirements for participants are higher.

Second, most of this year's profits come from orders in the second half of last year and the first half of this year. Marked by SIAL in May, although the domestic spot price keeps increasing, the offer price of foreign futures has also increased significantly, exceeding the increase of spot price. Now, inverted futures price has become the new normal. In this situation, making a profit is more difficult.

That is why some importers, while making money this year, are anxious. Because they don't know what's going to happen next year, and at the end of the day, they're insecure because of the uncertainty in the market.
 

This insecurity comes not only from importers, but also from other participants in the whole industrial chain. For example, due to the high price of live cattle and the shortage of cattle sources, some abattoirs in Uruguay have suffered operating losses and had to consider the mode of substitution or even sell assets. In order to expand the supply channels, some importers seek for cooperation with slaughterhouses in more countries. However, the resources of slaughterhouses are limited, and the door is already crowded with other importers, facing the pressure of competition.

Some big restaurant chains are under pressure from suppliers to raise prices amid fluctuating prices. On the one hand, they keep looking for substitutes with lower prices; on the other hand, they hope to find more importers to cooperate, so as to avoid the situation of running out of goods.

Some traders, in order to have a stable source of capital, will choose more than one capital side, and even some capital side's capital cost is obviously higher than the market level, but it is more stable than putting all eggs in one basket.

For the stable development of business, some enterprises give employees more incentives in terms of equity. Through our investigation of some enterprises, we find that there are many reasons for the failure of enterprises that quit the industry due to poor management. But companies that have been profitable for a long time in this industry have one thing in common: the stability of their core teams.

Reasons for uncertainty

We randomly ranked the importer share of a large Brazilian exporter's exports to China in a given month in 2017 and 2019. The comparison shows that only one of the top ten importers is the same, which objectively reflects the relatively loose cooperation between exporters and importers.

Although we have also seen successful cases of cooperation on import and export commodity brands in the market, we have seen more cases where the cooperation was interrupted after one or two years due to the inability to ensure lasting profits.

Importers and exporters in China usually cooperate in two ways. One is brand monopoly or agency. By cooperating with the upstream to monopolize the right to sell the factory's brand or position in the domestic market. The second is mass imports. Make use of capital advantage to purchase a large number of target products and obtain preferential prices based on the average market level.

But either way, it does not change the source of this instability: exporters seek to maximise profits from fluctuating prices.

In 2015, MIG put forward a point: Against the backdrop of the booming middle class consumer market represented by China, the global beef price has shifted from supply-driven to demand-driven since 2015. Supply-driven markets are characterized by cost pricing, while demand-driven markets are characterized by demand-driven pricing.

Taking Brazil as an example, we took the period from May 2018 to April 2019 and compared the price of live cattle in Brazil with the price of Brazil's FFQ 7 Cuts purchased from China in Brazil. We found that the price of Brazil's FFQ 7 Cuts increased significantly, while the price of live cattle in the same period was relatively stable or even slightly declined.

Who makes the middle profit? The first is the slaughterhouse, which controls both the cattle supply and the pricing power. The other links of the industrial chain are secondary.

But slaughterhouses are typically cyclical businesses. When times are good, profits are high. When cattle sources are reduced, there will be a loss due to insufficient utilization rate. For example, some factories in Australia even stop production when there is a shortage of cattle.

 
Understanding is the foundation of communication, and understanding this is the foundation of effective communication with exporters.

-MIG Research 2019

-World Beef Report

Find some certainty in uncertainty

In the final analysis, pure trade models are hard to build sustainable barriers to. Importers usually extend the first or second level industrial chain upward or downward to improve their anti-risk ability.

MIG believes that there are two layouts in the upstream of the industrial chain, trade and terminal, and one in the supply chain of service tools and logistics. A sustainable model with strong anti-risk ability can be formed, and the supply chain can be stable.

Any market has a similar history. Firms that grow savagely at first and then have more of the key elements of the industry to lay out remain. Take Japan as an example. After years of development, Japan is now polarized. On one side are the large importers represented by NH Foods, Starzen, etc., who have either deployed upstream slaughterhouse resources globally, or deployed processing plants or cold-chain logistics systems domestically. On the other side are small importers who import 1-2 containers each month, and they usually have their own terminal resources.

The seemingly unstable beef supply chain, if carefully analyzed, we find that each country's industrial chain and some certainty. Argentina's live cattle stock, for example, is stable, and there is some room for growth in the future. For example, the trade volume between China and Uruguay is stable. Uruguay ranks among the top three exporting countries all the year round, thanks to the stable political relations between China and Uruguay and Uruguay's unique natural resources. For another example, the beef supply in the United States is relatively stable, because the mature and developed fattening system in the United States enables it to have a more stable production compared with grass feeding. In fact, Chinese imports of American beef have increased year-on-year for three months in a row, even under tariffs and hormone restrictions.

MIG Research 2019 Chart of US exports to China

MIG has accumulated resources in overseas upstream for many years, and hopes to help industry colleagues in overseas upstream to form a more stable supply chain. If you are interested in learning more, please fill in your contact information in the following link, we will contact you.

A lot of things are interlinked. Just like in a football match, if you keep on passing the ball, even if you can score a goal once in a while by virtue of the strikers' super personal ability or good luck, the chances of scoring a goal are very small. Take it easy and play with it. Although this is slow, but as long as the content of play, play your own advantages, the goal is sooner or later.

Similarly, the chances of making a quick buck betting on the market are slim. You should follow your own pace, one step at a time. Although slow, but as long as the direction is right, success is inevitable.

Every step forward is not easy, but it must be inevitable. It takes more than ability, heart and sometimes a little luck, but there are always opportunities for those who are prepared.