Impact of the China-Australia Free Trade Agreement on Australian agribusiness

The Agribusiness Bulletin

The Agribusiness Bulletin focuses on national and local industry, as well as cross-industry insights and trends. This includes some of the drivers we expect to shape the future of the industry and potential challenges that may arise.

Impact of the China-Australia Free Trade Agreement on Australian agribusiness

Australian food and fibre exports to China have risen dramatically in recent years, and there is great optimism it will continue to do so. Indeed, rising demand from China was a pivotal reason why agribusiness was recently identified by Deloitte as a key growth area of the Australia economy in coming decades. However, until now, Australian producers and exporters have faced competitive disadvantages in penetrating the Chinese market versus nations that already have an FTA with China, such as ASEAN, New Zealand and Chile. A bilateral Free Trade Agreement (FTA) with China will not only put Australia on a level playing field with these nations, it will put Australia at an advantage over some of the other major food and fibre competitors into the Chinese market, such as the US, European Union and Canada.

A focus on beef

Deloitte Access Economics modelled the economic impacts of the China-Australia FTA on the Australian economy, including on different parts of agriculture. As one of the sectors of Australian agriculture that are expected to benefit the most from the FTA, this article takes a closer look at the impacts on the cattle and beef industry.

The existing tariff on Australian beef imports into China is between 12 and 25 per cent and our modelling is based on complete tariff removal as at a decade from now. There is also an existing 10 per cent tariff on live cattle. However, according to the Department of Foreign Affairs and Trade, much of the Australian live cattle imports into China are pure bred, and this type of live cattle import does not currently attract a tariff. As such, it is the removal of the tariff on beef (as opposed to live cattle) that has the largest direct impact on the Australian cattle and beef industries.

Whilst there is a danger in modelling such complex systems, our modelling based simply on the removal of Chinese tariffs on Australian beef throw up some interesting results including:

• An incremental 1 per cent rise in the farm gate price of live cattle relative to the price if the FTA was not in place. Applied to a 350 kg yearling valued at $800, this equates to approximately $8 per head. This is primarily a function of rising demand for Australian beef in Chins, as it becomes relatively cheaper to Chinese consumers
• The higher farm gate price flows through to a higher processed (butchered) beef price, of just over 3 cents a kilogram
• The higher prices for cattle and beef cause a supply response from Australian farmers. The volume of output of cattle increases by approximately 2.2 per cent, or approximately 280,000 head applied to the size of today’s national herd
• There is also an increase of nearly 3 per cent in the volume of processed beef produced, or an additional 60,000 tonnes
• Exports of chilled or frozen beef increase by more than 6 per cent. It is notable that the volume of beef exports increase by more than the volume produced. This means that domestic consumption of beef has fallen, as expected given the higher domestic beef prices. The recent downward trend in average per capita beef consumption in Australia is therefore likely to be accentuated by the FTA
• The combination of higher prices and higher output sees overall value-add in beef cattle rise by approximately 2.5 per cent, or $350 million applied to today’s industry. 

Many other sectors of Australian agriculture will also benefit from the FTA. However, it is not all a good news story for Australian agriculture. For agricultural industries that either do not export to China, or are not in line for tariff reduction, there are may be small declines in output. This reflects both exchange rate effects (the overall impacts on Australia from the FTA are dominated by the benefits to the coal industry), and a general switch of activity, including land use switching, to those sectors that have become relatively more profitable because of the tariff removal.

These results quantify impacts on two parts of the beef supply chain – on farm and processing. How the impacts flow through the supply chain will be an interesting point to watch. Given the recent challenges in the Australian beef sector there may well be an opportunity for debt reduction, investment in innovation, accelerating farm succession plans, and some welcome tailwinds for those graziers looking to expand their business.