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Ian Lahiffe: Beefing up business: U.S. success in the Chinese beef market

June 15, 2018

As wage earnings increase in China, so does the demand for meat. Meanwhile, the U.S. is easing its way back into the market after 14 years. What should beef producers do to ensure their success in the new market? 

The following is an edited transcript of Nicole Erwin's interview with Ian Lahiffe, lead of operations at Allflex Livestock Intelligence in Beijing, China. Click below to hear the full interview:

 

 

 

Nicole:         I'm speaking with Ian Lahiffe, lead of operations at Allflex Livestock Intelligence in Beijing, China. Ian was formerly new business general manager for Alltech in China. Ian, thanks for joining us.

 

Ian:              Thank you very much. Glad to be here.

 

Nicole:         As wage earnings increase in China, so does the demand for meat. Meanwhile, the U.S. is easing its way back into the market after 14 years of being banned, but analysts predict the transition won't happen overnight. What is your take on the re-entry of U.S. beef into China?

 

Ian:              It's a very topical issue, and I'm delighted to be here to talk about it. I think the first point is that the growing demand for beef, as you highlighted, and the growing income in China is very clear. Secondly, China needs new suppliers for beef, so it's a very pragmatic approach to reward the U.S. for nearly 15 years of lobbying and education. And in 2017, the market was reopened.

 

                    Now, the challenge, and why it will take time, is due to the Chinese requirements for U.S. beef in terms of two aspects: one is traceability, and the other is the use of hormones. These are the two issues that the U.S. as an industry needs to address or have a plan for so that they can get full access and take advantage of the huge surge in demand in China.

 

Nicole:         There are debates that take place here in the U.S. as to what constitutes hormone-free and antibiotic-free. Some would say a weaning period takes away any trace elements of antibiotics or hormones, and that equals hormone-free. Does that mentality cut it abroad?

 

Ian:              I don't think so. I think the young consumers — and that's the particular age group that we're dealing with — if you ask them about their consumer habits and their preferences, “healthy,” “natural” and “antibiotic-free” are frequently used keywords. Actually, there was a bit of a fuss in China when McDonald's made their announcement that they would move to antibiotic-free in the U.S. The Chinese consumers were like, "Well, what about China? When will you move to antibiotic-free production here?" So, I think it's an issue — not only from a government and regulatory perspective — that in order to get full value from the market, moving toward antibiotic-free in its purest form, if possible, is what the consumer market is really looking for.

 

Nicole:         Canada is spearheading an acceleration project that aims to track an animal from farm to table. There are similar programs on the ground in the U.S. as well. Is this the type of system needed for new market requirements like China's?

 

Ian:              I think so. Obviously, a lot of countries have their own national identification systems. Increasingly, we're seeing processing companies want more information as to where the animals come from. Part of it is provenance, part of it is building a brand that consumers trust. If you're making a claim that it's an Angus, or particular claims about organic, well, how can you back up these claims? So, I think part of it is commercial, but part of it is going to be a government requirement in terms of international trade because there are a lot of sensitivities around traceability, particularly in China.

 

Nicole:         China is only second to the U.S. in global beef imports, from what I've read. What would you say are the differences in preference in beef products in the U.S. and China? And how do producers raise livestock to meet different market demands? Do you have to pick between one or the other?

 

Ian:              That’s a very good question. I think the first thing is that, obviously in the U.S., Angus is the leading beef breed, and that's partially driven because of Angus' efficiency, but also because of the particular cuts — you get a better steak cut. In China, it's a little bit different. While there are more and more people interested in eating Western steak and Western beef — typical beef consumption — there are actually lots of traditional Chinese dishes like hotpot, where the meat is very thinly cut and you can get value out of all different types of cuts. Also, there's quite a strong market for chilled meat rather than frozen beef. In a lot of Chinese cuisine, they prefer fresh meat.

 

                    I think the message would be that it's important for producers to understand the consumer experience of eating the beef. Don’t just assume, “Well, because we produce prime Angus beef (it will be successful).” Maybe that's not what the market is willing to pay for, or maybe that’s not where the demand is. So, I think it's good to get an understanding of where the true beef consumption is taking place within the market.

 

Nicole:         Are there parts of the U.S. that are ahead of the curve in meeting some of these demands and cultural requirements of being hormone-free?

 

Ian:              Well, according to the U.S. Meat Export Federation, only 3 percent of the U.S. beef herd officially meets China's requirements for hormone usage. For the record, about 15 percent of the herd will meet requirements for traceability. So, these are quite low numbers in terms of the total potential growth. But, again, it takes time. Obviously, the market only opened in 2017, and it opened in a political frenzy. It was all done with a lot of goodwill about a new president. There was a “rush job” to get beef into the market, whereas when you get into the true supply chain challenges, I think it will take a lot longer for the producers and the supply chain in the U.S. to get there.

 

                    I know there are a number of states in the U.S. like Texas, Nebraska, Kansas and Montana that are leading in terms of their engagement with China from a state to government level. I'm sure there's a huge engagement between the U.S. and China and their beef industries to understand the needs of the market. I think the market is also moving so quickly in China that the market of 2003 is very different than 2018. I believe even within a number of years, China's consumption habits will continue to evolve, so it's a constantly moving target.

 

Nicole:         The United States' main competitor is South America. How much does ag science play a role in our ability to compete with other countries? For example, utilizing natural feed additives and understanding the significance of modified environments for hygiene and bacteria control? Does the U.S. have an advantage here?

 

Ian:              I think the U.S. certainly has an advantage. Obviously, there's a commoditization. When you look at the volumes that are coming into China — I mean, between Australia and Brazil, they would be somewhere in the region of supplying 350,000 tons of beef, which is almost half of Ireland's production, to put that in context. It's very easy for it to slip to a per-ton price. The initial reaction from Chinese buyers when U.S. beef came on the markets was, "Oh, it's too expensive. We're used to buying big containers from Brazil that are coming in maybe $40,000–$50,000 cheaper per container." So, I think that is a real challenge.

 

                    It's not only a challenge that the U.S. would face. European exporters to Asia would also be challenged by South America. I think the efficiencies are, as you mentioned, the scale, but also meat quality. I think what the U.S. really has is, not only does it have the science and the excellence, but it has a grading system to back all that up. I think the USDA (label) and prime cuts and all that is well-understood in the Asian markets. That's a sign of quality and reliability.

 

Nicole:         If U.S. beef is at a cost disadvantage in a price-sensitive market like China's, what are some strategies that U.S. farmers not using hormones can do to increase profit? And the same question for farmers who have not yet moved away from hormone additives: What can they do to increase profit margins?

 

Ian:              Well, I think it's a very exciting time. The supply chains are changing, and part of what's driving this is an incredible Chinese entrepreneurial spirit. If you think of Alibaba and JD.com, they are e-commerce giants. If you look at what they've done in a comparable sector of seafood, they've taken all of the middlemen and all of the traders out of the supply chain, and now they work directly with producers, engaging in the customer experience, giving feedback and shipping the product so it's the freshest it can be. It's the closest you can get to your customer.

 

                    I think my advice to any of the ranchers is to try to find a way to connect directly with these e-commerce platforms and build, insofar as possible, your own brand. Maybe your order will come directly from China rather than going through three to four trading companies where margins will be added, but very little value might be created.

 

                    When you saw the activities in 2017 when the market was first opened, a lot of Chinese entrepreneurs were looking around thinking maybe they'll take stakes in U.S. businesses as part of their commitment to disrupting the supply chain.

 

Nicole:         So, how difficult is it for ranchers to make those connections?

 

Ian:              Well, the first thing you can do is get in contact with these e-commerce companies. They all have offices in the U.S. The thing is that they're almost like hunters, so they'll find you. So, make sure you have your own branding. Make sure you have a website. Think about social media — are you on Chinese social media platforms? Are you on Western social media platforms? Is there a story behind your beef? Is it well-understood? Does your story connect with Chinese consumers, Asian consumers? Maybe engage some people that have experience in the region to get some ideas as to how you can connect and then generate demand that way.

 

Nicole:         The U.S. beef brand is not as familiar as other brands in China because it hasn't been on the shelves, which are already crowded with its competitors. So how do you get Chinese consumers to take notice of it once it is actually on the shelf or in the freezer?

 

Ian:              I think, generally, the U.S. is seen as a model of quality for products in general. In China, obviously, if you look at the premium offerings in the market, it would mostly be Australia and New Zealand. But, again, you're into the differentiation here — the Australian premium would be a grass-fed Wagyu, whereas American might be a grain-fed Angus.

 

                    Again, it's about education. It's about using these online platforms. It's about training people on how to cook, because one of the challenges is that you might have excellent beef quality, but if somebody cooks it very badly, people would say, "Whoa, that American beef isn't as good as people say." So, I think it's about following education right through to consumption.

 

                    I was in Carrefour (retail company) and Walmart in the last few months just looking around, and there's U.S. beef with flags, and the price, obviously, isn't as competitive as the Australian beef, but it is certainly generating customer interest. There’s also the “symbol” of Black Angus — the Chinese consumer seems to think when it's a pure black animal, it's definitely high-quality. Whereas sometimes with the crossbreeds that we see in Europe — we're bringing Chinese beef farmers to Europe and they look at a field of Irish cattle and say, "Oh, how could the beef be good from those when they're all different colors?" Even very simple messaging like this can be used to the U.S.'s advantage.

 

Nicole:         So, cultural education, marketing and traceability.

 

Ian:              Yeah, I think traceability. I mean, there are a lot of interesting technologies that I'm seeing in the market. Obviously, Walmart has an interesting relationship with IBM, and they're doing a blockchain project in China. They're looking at beef. Their pilot project was in pork and fruit, but beef is next.

 

                    I think you can use DNA traceability. It's already being widely used in the U.S. I think it's a matter of understanding if we can get a premium by being more transparent — so rather than just adding extra cost and extra work, ensuring that this is really driving a premium. I think that's part of the business model: By being fully transparent and providing the customer confidence, can you get a few extra cents per kilogram? I think that's a key part of the negotiation skills, and I'm sure the U.S. beef guys are going to be really good at that, too.

 

Nicole:         Lastly, how far away are we from implementing some of these programs?

 

Ian:              I don't think very far at all now. I mean, there's obviously a bit of concern due to what we call this impending or ongoing trade war. If you look at some of the commodities, there is a very famous turning around of five shipping containers of sorghum. They were on their way to China when the tariffs were announced. Three of them were diverted to other markets and two were sent back to the U.S. With beef, there's a lot of hesitation as to the extra tariffs that will make the price even higher. There's also a concern that during this potential tension, that if your beef is in port, suddenly there will be an issue and they'll say that the paperwork isn’t right, or “Our software system is down. Please reapply," and suddenly your shelf life is shortened.

 

                    There's been a lot of concern about these things, but I would say the demand is so strong. China will need another 600,000 tons of beef by 2020, and where do you turn for that beef? Realistically, if you want beef coming from reliable sources, Ireland is a good example and the U.S. Two prime countries that aren't already exporting. So, in that sense, it's now time to take action. By 2020, of that 600,000, can the U.S. supply 200,000 tons or 300,000 tons? The sky is potentially the limit because the Chinese domestic industry is contracting. It's the perfect storm for U.S. beef producers now. It's just a matter of sending the right signals and taking the right actions.

 

Nicole:         Ian Lahiffe is lead of operations at Allflex Livestock Intelligence in Beijing, China. Thank you.

 

Ian:              Thank you very much.

 

Ian Lahiffe spoke at ONE: The Alltech Ideas Conference. Click below to see presentations from ONE18:

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