Live cattle export market faces uncertainty

The controversy that has erupted in the past two weeks over claims of Australia spying on its neighbour Indonesia appears to have spilled over into the live export market, potentially escalating the issue from a diplomatic one into a wider one that affects corporate Australia.

According to numerous reports, the Indonesian government is moving forward with plans to open up the importation of beef from a wider range of countries, including Brazil, which would effectively increase the competition against Australian producers. The major saving grace for Australia on this front is the significantly cheaper transportation cost advantage that Australia enjoys compared with more distant located competitors.

Three companies that could be directly affected by any retaliatory actions from Indonesia in relation to the $175 million live cattle export market are Australian Agricultural Company (ASX: AAC), Elders (ASX: ELD) and Ruralco (ASX: RHL). AACo is a major exporter of company-owned and raised cattle into Indonesia while rural services businesses Elders and Ruralco are also involved with managing live export orders. For Elders, the Indonesian issue comes on top of the recent resignation of seven senior employees, including the general manager, from its live export division.

Foolish takeaway

At AACo’s recent half-year results presentation, the company identified ongoing negative effects from the 2011 temporary suspension of live exports and challenges from limited improvement in Indonesian import permit numbers and conditions. These conditions have ultimately led to a drop in live export sales achieved in the six months to 30 September with volumes declining from 48,109 head of cattle to 35,454 head of cattle.

The recent earnings results, coupled with the latest diplomatic row, make AACo’s strategic decision to build an abattoir in Darwin all the more critical to the company’s long-term outlook. With the facility expected to be operational during the second half of calendar year 2014, the spying scandal is likely to have less effect than it otherwise might have.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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