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Examination of the prices paid to farmers for livestock and the prices paid by Australian consumers for red meat

A report to the Minister for Agriculture, Fisheries and Forestry

February 2007

© Commonwealth of Australia 2007

This work is copyright. Apart from any use permitted by the

Copyright Act 1968, no part may be reproduced without permission

of the Australian Competition and Consumer Commission. Requests

and inquiries concerning reproduction and rights should be addressed

to the Director Publishing, Australian Competition and Consumer

Commission, PO Box 1199, Dickson ACT 2602.

Produced by the ACCC Publishing Unit 02/07.

Contents

Summary i

1.Introduction1.1 Ministerialrequest 1

1.2 Natureofinquiry 1

1.3 Outlineofreport 2

2.RedmeatproductioninAustralia 32.1 BeefproductioninAustralia 3

2.1.1 Australianbeefexports 4

2.2 SheepandlambproductioninAustralia 4

2.2.1 Australianlambexports 5

2.3 TherelevanceofexportsforAustralia’sdomesticmeatmarket 5

3.RedmeatprocessingandretailinginAustralia 83.1 Longandcomplexsupplychain 8

3.1.1 Directsupplyagreements 9

3.1.2 Theimportanceofgrainfinishing 9

3.1.3 Feedlotsandprocessors 9

3.2 Retailmarketshares 10

4.Historicalmovementsinlivestockandretailprices 114.1 Appropriateindicatorprices 11

4.2 The2006Decemberquarter 11

4.2.1 Livestockprices 11

4.2.2 Retailpricemovements 13

4.3 Longertermmovementsinlivestockandretailmeatprices 13

4.3.1 Beef 13

4.3.2 Lamb 14

4.3.3 Awideninggapbetweenlivestockandretailmeatprices 14

4.4 FindingsofWhitehallAssociates’research 16

4.4.1 Relationshipbetweenlivestockandmeatprices 16

4.4.2 Theeffectofincreasingintegrationthroughoutthesupplychain 17

5.Relationshipbetweenlivestockandretailprices 185.1 Costsaddedthroughoutthesupplychain 18

5.1.1 Grain‘finishing’tospecification 19

5.1.2 Othercostsofproduction 20

5.2 Therelevanceofsaleyardlivestockpricesasanindicatorofinputcost 20

5.2.1 Theeffectofdirectsupplyagreements 20

5.2.2 Qualityoflivestock 21

5.3 Competitioninlivestockandretailmeatmarkets 22

6.Conclusions 23

ACCCcontact 24

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SummaryOn28November2006theHon.PeterMcGauran,MP,MinisterforAgriculture,FisheriesandForestry,wrotetotheAustralianCompetitionandConsumerCommission(ACCC)requestingthattheACCC‘examinethepricespaidtofarmersforlivestockandthepricesthatAustralianconsumersarepayingforredmeat’.Theministerwasconcernedthatfarmerswerereceivingminimalreturnsforlivestockwhileconsumerswerepayingrecordhighretailpricesforredmeat.

Therequestwasmadefollowingalargeincreaseinthenumberofsheepandcattlesoldinsaleyardswhichinturnledtoasharpdeclineinthepricesoflivestock.Forexample,theeasternyoungcattleindicator(EYCI)decreasedby30percentbetweenitspeakinAugust2006anditsfirstlowpointinlateOctober2006(afterashortlivedrecovery,itslumpedtoanevenlowerlevelinearlyDecember).

Itwasalsoclaimedthattherewasnodiscernableflowthroughtoconsumersindecreasedretailmeatprices:thebeef/vealandlamb/muttonmeatsub-groupsoftheAustralianBureauofStatistics’consumerpriceindexwereat,ornear,recordlevels(innominalterms)inthe2006Septemberquarter.

Thebeef/vealandlamb/muttonsub-groupsoftheconsumerpriceindexdid,however,decreaseintheDecemberquarter(by1.87and0.69percentrespectively).

key findingsTheACCCurgescautionwheninterpretingmovementsinthemarginbetweensaleyardandretailmeatprices,particularlyovershortperiodsoftime.Thisisprimarilybecauseshort-termmovementsinmarginsdonotnecessarilymeanthatmarketconditionsaremovinginwaysthatare‘outoftheordinary’orcausedbyweaknessesincompetition.

Therearearangeofindicatorsofbothsaleyardandretailpricesforredmeat.Althoughthedifferentpriceindicatorsvaryintheamount,themarginbetweensaleyardpricesandretailpricesforredmeathaswidenedoverthepastfewmonths.Movementsinthismargin,however,arenotunusualandmaybecausedbyseveralfactors,suchaschangingcoststhroughoutthesupplychainandincreasedvalueaddedattheretailend.

Inexaminingtherecentwideningofthismargin,theACCChasfocusedontwokeyissues:

Therelationshipbetweensaleyardandretailmeatpricesandwhetherornotrecentmovementsappearinconsistentwiththenatureofindustrysupplyarrangements,thecostsofotherinputsandhistoricexperience.

Whetheranyparticularseller,orgroupsofsellers,isabletoundulysuppressthepriceoflivestockand/orsetdomesticretailredmeatpriceswithoutregardtocompetitors.

Inotherwords,inadditiontoexaminingthelinkbetweenlivestockpricesandretailmeatprices,theACCChasconsideredwhetherthereareotherfactorsthatinfluenceretailmeatpricesthatmayworktocounteractlowerlivestockpricesandalsowhetherthereislikelytobesufficientcompetitionateitherendoftheretailredmeatsupplychainsothatnosinglebuyerorseller,orgroupsofbuyersorsellers,isabletoexertundueinfluenceonthepriceoflivestockorredmeat.Ifbuyersandsellersdonothavesignificantpricesettingpowerineitherofthesesectors,itisunlikelythattheapparentlywideningmarginbetweensaleyardpricesandretailredmeatpricesiscausedbyinadequatecompetition.

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Onthebasisoftheevidenceavailabletoit,theACCCconsiderstherearethreefactorsthatappeartomitigateconcernsthatlargebuyers/sellersareexertingmarketpower:

Thesupplyofredmeattoconsumersinvolvesalongandcomplexsupplychain.Thismeansthattherewillnotnecessarilybeadirectandimmediaterelationshipbetweenthepriceoftherawproduct(livestock)andthefinalgood(packagedmeat).

Thereisarangeofsupplyarrangementsinplacethroughoutthesupplychainthataffecttherelevanceofsaleyardindicatorpricesasagaugeofappropriateretailprices,especiallyintheshortterm.

Thereappearstobeareasonabledegreeofcompetitionatbothendsofthesupplychain.

Long and complex supply chainThecostoflivestockisonlyonecomponentofthetotalcostincurredbysupermarkets(andotherretailers)inprovidingfreshmeattoconsumersanditrepresentsarelativelysmallproportionofthefinalpriceofpackagedmeat.

Costsandvalueareaddedtotherawproductvia‘finishing’ongraintomeetqualityspecificationsandbyactivitiessuchasslaughtering,processing,transporting,butcheringandpackaging.Thereisnoreasontobelievethatthesecostswillnecessarilyremainunchangedwhilelivestockpricesmove.Oneofthesecosts,thepriceoffeedgrainforthefinishingoflivestockseemstobeofparticularimportanceinthecurrentconditions.

Thepriceoffeedgrainnearlydoubledduring2006asgrainshortagesincreasedbecauseofdroughtandimportrestrictions.

Whilegrainfinishingofbeefiscommonplace,theincreasedfeedpriceswouldnotnormallybesuchasignificantfactorinlambproduction.However,thecurrentdroughtconditionsmeanthatanincreasingnumberoflambsarebeing‘supplementaryfed’ongrainbecauseofpoorpastures.

Whethertheincreasedcostoffeedissufficienttocompletelymitigatetheeffectoflowerlivestockpricesornotdependsontherelativemagnitudeofeachandmaybedifferentforbeefandlamb.TheACCChasnotsoughttodefinitivelyanswerthisquestion.Itdoes,however,considerthatgrainfeedingcattleandsheepishavinganeffectonretailbeefandlambpricesthat,tosomedegree,counteractslowerlivestockprices.

The effect of direct supply agreementsExtensiveuseofdirectsupplyagreementsbylargeretailersmeansthatalargenumberoftransactionsoccuroutsidethetraditionalsaleyardandsuchagreementsusuallyincluderiskmanagementprovisionstohedgeagainsttheeffectofpriceshocks.Accordingly,largeandsuddenmovementsinsaleyardindicatorpriceswillnothaveadirectandimmediateeffectontheretailpriceschargedbytheseretailers.

Thetwolargersupermarketsbothbuymostoftheirmeatsupplythroughdirectsupplyagreements,ratherthanfromsaleyards.Bothsubmittedthatvirtuallyallbeefandanincreasingproportionoflambaresuppliedthroughdirectsupplyagreements.

BothColesandWoolworthsprovideddetailsoftheiractualbuyandsellpricestotheACCC.Throughout2006,theaveragebuyingpriceforbeefforbothsupermarketswasaboveandmorestablethantheEYCI.ThesharpdeclineintheEYCIintheDecemberquarterwasnotreflectedinthesupermarkets’averagebuyingprices.

Thereappearstobetwokeyreasonsforthis.First,thedirectsupplyagreementsprovideadegreeofriskmanagement,withpricesnegotiatedsomedegreeinadvance.Second,asdirectsupplyagreementsandotherformsofverticalintegrationremoveanincreasingnumberoflivestockfrom‘traditional’saleyardmarkets,thesemarketshavepotentialtobecomemorevolatile.

Similarresultsappliedtolamb;however,thesupermarkets’averagebuyingpriceswerenotasstableasforbeef.Thisappearstobeduetogreaterseasonalityinlambproductionandlessrelianceondirectsupplyagreements.

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Competition at both ends of the supply chainTheACCCconsidersthatsaleyardpricesforcattleandsheeparedeterminedbyanumberofsupplyanddemandfactors.Inbothsectorsinternationaldemandisakeyinfluenceonsaleyardpricesandmayplaceaconstraintondomesticstock,particularlyhigh-qualitystock.Thequalityoflivestocksoldthroughsaleyardsisalsoakeydeterminantofsaleyardprices:thehigherthequalityofstock,thehigherthepriceitcancommandinbothexportanddomesticmarkets.

Inboththelambandbeefsectors,salestointernationalmarketsaccountforalargeshareoftotalmeatproductionandeventhelargestretailersbuyonlyasmallproportionoftotalproduction.Undertheseconditionsitseemsunlikelythatanyonepartywouldbeabletosuppresspricesand/orimposeoneroustermsandconditionswithoutproducersalteringtheirspecificationstotargetalternativemarkets.

Domesticsalesaredividedbetweenthefoodservice,foodprocessingandretailsectors.Withintheretailsector,salesappeartobedividedfairlyevenlybetweenthelargesupermarketchainsandbutchers.Intheseconditions,itseemsunlikelythatanattemptbyanyonepartytochargeunreasonablyhighpricescouldbesustainedwithoutlosingmarketshare.

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LivesTOCk AnD ReD MeAT RePORT inTRODUCTiOn inTRODUCTiOn �

1. Introduction

1.1 Ministerial request On28November2006theHon.PeterMcGauranMP,MinisterforAgriculture,FisheriesandForestry,wrotetotheAustralianCompetitionandConsumerCommission(ACCC)requestingthattheACCC‘examinethepricespaidtofarmersforlivestockandthepricesthatAustralianconsumersarepayingforredmeat’.Theministerwasconcernedthatfarmerswerereceivingminimalreturnsforlivestockwhileconsumerswerepayingrecordhighretailpricesforredmeat.

TheACCChasinterpretedtheterm‘redmeat’toencompassbeefandvealproductionandlambandsheepmeatproduction.

Therequestwasmadefollowingalargeincreaseinthenumberofsheepandcattlesoldinsaleyardswhichinturnledtoasharpdeclineinthepricespaidforlivestock.Forexample,theeasternyoungcattleindicator(EYCI)decreasedby30percentbetweenitspeakinAugust2006anditsfirstlowpointinlateOctober2006(afterashortlivedrecovery,itslumpedtoanevenlowerlevelinearlyDecember).

Atthesametime,therewasnodiscernableflowthroughtoconsumersintheformofdecreasedretailmeatprices:thebeef/vealandlamb/muttonmeatsub-groupsoftheAustralianBureauofStatistics’consumerpriceindexwereat,ornear,recordlevels(innominalterms)inthe2006Septemberquarter.

1.2 nature of inquiryTheminister’srequesttotheACCCdidnotconstituteaformalpriceinquiryunderPartVIIAoftheTrade Practices Act 1974,norwasitanallegationthattherehadbeenacontraventionoftheTradePracticesAct.AstherequestwasnotapriceinquiryunderPartVIIA,oranallegationaboutacontraventionoftheTradePracticesAct,theACCChadnoformalinformationgatheringpowersandinsteadreliedonthecooperationofinterestedpartiesandindustrybodies.AnumberofpartiesmadesubmissionsandprovideddatatoassisttheACCCinitsinquiryandmanymoreassistedbydiscussingtheissuesraisedinsubmissionswithACCCstaff.

SomeofthesubmissionsweremadeonaconfidentialbasisandinthosecasestheACCCundertooktomaintaintheconfidentialityoftheinformationanddataprovided.Accordingly,thisreportdoesnotcontainalltheinformationtheACCCreliedontoreachitsviews.

TheACCChasgenerallyreliedonthesubmissionsandstatementsofinterestedparties,buthasalsotestedtheassertionsandpositionsputforwardinthesesubmissionsandstatementswithotherindustryparticipantsbeforeformingitsviewsaboutparticularmatters.TheACCChasnot,however,testedinformationclaimedasconfidentialagainsttheviewsofotherindustryparticipants.InthesecasestheACCChassoughttoobtainsimilarinformationfrommultiplesourcesandhasusedthismechanismtotestinformationprovidedinconfidence.

Inundertakingthisexaminationofprices,theACCCconsideredthatitsobjectwastodevelopanunderstandingofthefactorsthatdrivethesettingofretailredmeatpricesanddeterminewhetherornottherewereanyimpediments,suchasalackofcompetition,togenuinecostsavingsflowingthroughthesupplychaintoconsumers.

TheACCChasnotsoughttoexaminethecostsandpricesatalllevelsofthesupplychainortoidentifyalldriversofcostsintheindustryanditconsiderssuchanindustrysurveytobebeyondthescopeoftheminister’srequest.

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1.3 Outline of reportSectiontwoprovidesabriefoverviewofbeefandlambmeatproductioninAustralia,providingsomedetailsofthescaleofproductionandtherelevanceofexportsforthedomesticmeatmarket.

Sectionthreeprovidesabriefdescriptionofthesupplychain,withaparticularfocusontheinvolvementofthemajorsupermarketsinthesupplychain,andadescriptionofretailmeatmarketsharesinAustralia.

Sectionfourexaminestherecentandlongertermmovementsinlivestockandretailmeatprices.

Sectionfivediscussesthreefactorsthatmaymitigateconcernsthatretailpriceshaveremainedtoohighdespitelowerlivestockprices.

SectionsixpresentstheACCC’sconclusions.

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2. Red meat production in AustraliaBeefandlambaremajoragriculturalcommoditiesinAustraliaandrepresentasignificantsegmentoftheAustralianeconomy.In2005–06thegrossvalueofAustralia’slambandcattleproductionwasapproximately$9.5billion,ornearly1percentofAustralia’stotalgrossdomesticproduct.1

Australiaisoneofthelargestproducersofredmeat,contributing4percentoftheworld’sbeefsupplyand7percentoftheworld’slambsupply.Itistheworld’ssecondlargestexporterofbothbeefandlamb.2

RedmeatisthemostsignificantcomponentofAustralia’stotalmeatproduction,accountingforapproximately70percentoftotalproduction.3

RedmeatisalsoAustralia’smostpopularmeat,commanding55percentoftotalretailfreshmeatpurchases(beefandlambaccountedforalmostallofthis).In2005Australianconsumersspentmorethan$7.9billiononredmeat.4

2.1 Beef production in AustraliaAustraliaproducesover2milliontonnesofbeefandvealannually.In2005–06thevalueofdomesticproductionamountedtoover$7.4billion,65percentofwhichwassoldtoexportmarkets.5In2006–07itisestimatedthatbeefandvealalonewillaccountforapproximately16percentofAustralia’stotalfarmexports.6

ThebeefcattleindustryisalsothemostgeographicallydispersedagriculturalindustryinAustraliawithproductionspreadacrosseachstateandadiversityofclimaticenvironmentsasshowninfigure1.7In2005–06producersinQueenslandrepresentedoverhalfofAustralianbeefandvealproduction,withNSWandVictorianpropertieseachproducingaroundone-fifthoftotalproduction.Figure1providesastate-by-statebreakdownofAustralia’sbeefandvealproduction.

Figure 1: Australian beef and veal production, 2005–06

Source: ABARE

1 Meat and Livestock Australia (MLA),MeatandLivestockAustralia(MLA), Australian beef industry—fast facts 2006 andAustralian sheep meat industry—fast facts 2006.2 ibid.ibid.3 Australian Bureau of Statistics (ABS),AustralianBureauofStatistics(ABS),Agricultural commodities,7121.02004-05,p.25data.4 MLA 2007, NSW, viewed 24 �anuary 2007, www.mla.com.au.MLA2007,NSW,viewed24�anuary2007,www.mla.com.au.5 Australian Bureau of Agricultural and Resource Economics (ABARE),AustralianBureauofAgriculturalandResourceEconomics(ABARE),Australian beef industry: financial performance to 2005–06,ABARE,

Canberra,2006,p.1.6 Australian Bureau of Agricultural and Resource Economics (ABARE) statistics,AustralianBureauofAgriculturalandResourceEconomics(ABARE)statistics,Value of Australian commodity exports (25),2006.7 MLA,MLA, Australian beef industry—fast facts 2006.

Vic16.4%

NSW20.4%

NT0.1%

WA5.5%SA

4.0%

Qld50.9%

Tas2.7%

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TheAustralianBureauofAgriculturalandResourceEconomics(ABARE)reportsmarkeddifferencesinthestructureandfinancialperformanceoffarmswithinthebeefindustry.UnlikeotherAustralianbroadacreindustries,suchasgrainproduction,therearealargenumberofsmall-scaleproducers.Around30percentofspecialistbeefproducers(forwhombeefisthedominantagriculturalactivity)areclassifiedassmallbeefspecialistsbecausetheyhavefewerthan300beefcattle.Thoseproducers,however,accountforjust13percentofthevalueofbeefproduction.8

ThefeedlotindustryhasemergedasavitalfactorincattleproductioninAustralia.At�une2006therewereapproximately1millioncattleonfeedanditisestimatedthat34percentofnationalcattleslaughterissourcedfromfeedlots.Thefeedlotindustrycontinuestobesustainedbystrongdomesticandinternationaldemandforpremiumqualitygrain-fedbeef.Inrecenttimes,thegrowthofthefeedlotindustryhaslargelybeendrivenbyincreaseddemandby�apanandKoreaforgrain-fedbeef—Australia’sstatusas‘diseasefree’providinganimportantcompetitiveadvantage.

2.1.1 Australian beef exportsAsmentionedabove,approximately65percentofAustralia’sbeefproductionisexported.�apan,theUnitedStatesofAmerica(USA)andKoreaarethemajorexportmarketsforAustralianbeef,collectivelyaccountingforalmost90percentoftotalAustralianbeefexportsin2005–06. 9

Beefandvealexportsroseby5percentduring2006toarecord953932tonnesshippedweight(swt)—1percentabovethepreviousrecordof946629tonnesexportedduring2001.10

In2005–06nearly600000liveheadofcattle(valuedat$404.4million)wereexported.IndonesiaandtheMiddleEastwerethelargestmarkets,accountingfor62and15percentofliveexportsrespectively.11

2.2 sheep and lamb production in AustraliaIn2005–06thevalueofAustralia’ssheepmeatproductionwasestimatedtobe$2.1billion.Thisamountedtoapproximately380000tonnesoflamband244000tonnesofmutton.Aswithbeef,theexportsectorisvitalwithapproximately45percentoflamband76percentofmuttondestinedforinternationalmarkets.12

In2005–06around38700broadacrefarmshadmorethan200sheep.Approximately75percentoftheseproducedlambsforslaughter.Thesefarmsaccountedfornearly90percentofalllambsslaughteredinAustralia.13

VictoriaandNSWjointlyproduced62.4percentofAustralia’stotallambproductionand61.3percentofAustralia’smuttonproduction,withWesternAustraliaandSouthAustraliabeingtheothertwomajorsheepmeatproducingstates.14

Stronginternationaldemandandhistoricallyhighdomesticlambprices,coupledwithfallingwoolprices,haveinrecentyearsshiftedthefocusintheAustraliansheepindustrytotheproductionofsheepandlambsforslaughter.Whilein1990–91farmswithmorethan200sheepearnedjust6.3percentoftheirgrossrevenuesfromsheepandlambsales,thisfigureisestimatedtohaveincreasedto20percentin2005–06.15

From1998to2005domesticconsumptionoflambfellby17percent.16Despitethisdecrease,Australiansremainamongtheworldshighestpercapitalambconsumers,eatinganaverageof10.2kgoflambperpersonannually.17

8 ABARE, 2006ABARE,2006, Australian beef industry, financial performance to 2005–06,October2006,p.4.9 www.mla.com.au/TopicHierarchy/News/MarketNews/2007/Record�Australian�beef�exports� in�2006.htm.www.mla.com.au/TopicHierarchy/News/MarketNews/2007/Record�Australian�beef�exports�in�2006.htm.10 ibid.ibid.11 MLA,MLA,Australian beef industry—fast facts 2006.12 MLA,MLA,Australian sheep meat industry—fast facts 2006.13 ABARE,ABARE, Australian lamb industry—financial performance to 2005–06,Canberra,2006,p.1.14 MLA,MLA,Australian sheep meat industry—fast facts 2006.15 ABARE,ABARE,Australian lamb industry—financial performance to 2005–06,Canberra,2006,p.2.16 ABARE, 2006,ABARE,2006,Slaughter lamb industry, financial performance to 2005–06,September2006,p.4.17 MLA,MLA,Australian sheep meat industry—fast facts 2006.


2.2.1 Australian lamb exportsAustraliaistheworld’slargestexporterofmuttonandthesecondlargestexporteroflamb.18Approximately45percentofAustralia’slambproductionand75percentofmuttonproductionisexported.

Overthepasttwodecades,exportshavebecomeincreasinglymoreimportantforAustralianproducers.Since1998lambexportshaveincreasedby29percentandhaveincreasedfrom16percentoftotalproductionto45percent.19

In2005–06thevalueofAustralianlambandmuttonexportsamountedto$783millionand$442millionrespectively.Involumeterms,lambexportsforthe2006calendaryearreachedarecord146706tonnesswt—anincreaseof3.6percentcomparedwith2005.Muttonexportsfor2006totalled162881tonnesswt—anincreaseof15.3percentcomparedwith2005levelsandthehighestlevelforthepastfouryears.20

TheUSAandNorthAsiaarethebiggestconsumersofAustralia’slambexports,jointlyaccountingforalmost50percentofthemarket.TheseregionsarealsolargeimportersofAustralianmutton;howevertheMiddleEastisthelargestconsumerofAustralianmutton,accountingfornearly24percentoftheexportmarket.21

Australiaistheworld’slargestexporteroflivesheep.In2005–06,almost4.3millionlivesheepwereexportedwithatotalvalueofalmost$300million.Over99percentofthesesheepweredestinedfortheMiddleEast,withKuwaitandSaudiArabiaaccountingforover50percentoflivesheepexports.22

2.3 The relevance of exports for Australia’s domestic meat market

TheabovediscussionhighlightsthatthedomesticredmeatmarketrepresentsonlyaportionofAustralia’stotalredmeatproduction.Inthecaseofbeefproduction,domesticconsumptionaccountsforaround35percentoftotalproduction.Forlamb,thecorrespondingpercentageishigherataround55percent.

Withinthedomesticmarket,beefandlambareinputsintoanumberofothersectors,suchasfoodprocessing,foodserviceandtheretailgrocerysectorforsaleasfreshmeat.Withinthelattercategory,retailoutletsincludeindependentbutchers,independentsupermarketsandthelargesupermarketchainssuchasColesandWoolworths.

MeatandLivestockAustraliaestimatesthattheretailsectoraccountsforaround24percentofAustralia’sbeefproductionandaround49percentofAustralia’stotallambproduction.

BasedontheseestimatesandRoyMorganResearchestimatesofretailmeatmarketshares,theACCChasestimated23theproportionoftotalbeefandlambproductionthatispurchasedbyfreshmeatretailers.Theseestimatesareshowninfigures2and3respectively.

18 ibid.ibid.19 ibid, p. 4.ibid,p.4.20 www.mla.com.au/TopicHierarchy/News/MarketNews/2007/Mutton�exports�up�in�2006.htm.www.mla.com.au/TopicHierarchy/News/MarketNews/2007/Mutton�exports�up�in�2006.htm.

www.mla.com.au/TopicHierarchy/News/MarketNews/2007/Record�Australian�lamb�exports.htm.21 MLA,MLA,Australian sheep meat industry—fast facts 2006.22 ibid.ibid.23 By applying the retail market share to the proportion total production purchased by retailers.Byapplyingtheretailmarketsharetotheproportiontotalproductionpurchasedbyretailers.

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Figure 2: Destination of Australian beef production, 2005–06

Source: MLA and Roy Morgan Research

Figure 3: Destination of Australian lamb production, 2005–06

Source: MLA and Roy Morgan Research

TheACCCestimatesthatin2005–06,WoolworthsandColesbought6.4percentand5.6percentrespectivelyoftotalbeefproductionand13.2percentand11.5percentrespectivelyoftotallambproduction.Together,WoolworthsandColespurchasedonly12percentoftotalbeefproductionand24.7percentoftotallambproduction.

Anumberofmarketparticipantssubmittedthatthereissufficientcompetitionbetweenthedomesticmarketandexportmarketstoallowproducers(aswellasprocessorsandfeedlots)toswitchtoexportmarketsiftheyareunhappywiththepricesofferedbysupermarkets.

Woolworths6.4%

Coles Group (including Bi-Lo)5.6%

Independent Supermarkets1.1%

Other Supermarkets1.3%

Butchers7.4%

Other Stores2.0%

Foodservice9.5%

Processing1.8%

Export65.0%

Woolworths13.2%

Coles Group (including Bi-Lo)11.5%

Independent Supermarkets2.4%

Other Supermarkets2.6%

Butchers15.2%

Other Stores4.0%

Foodservice6.1%

Export45.0%


ColesstatedthatthedominationofexportsinthemeatsectorhaspreviouslyledtotightsupplyandqualityproblemsforAustralianretailersandthattheselimitationswerethecatalystforColesdevelopingitsverticallyintegratedmeatsupplychainin1998.AsimilarviewwasalsoexpressedbywholesalerMetcashwhostatedthatthestrongexportmarketleavesaneverdiminishingsupplyofqualityproductavailablefordomesticsale.Woolworthsalsosubmittedthatitfacessignificantcompetitionfromtheexportsectorforthepurchaseoflivestock.

ResearchpreparedfortheDepartmentofAgriculture,FisheriesandForestry(DAFF)24alsofoundthatbuyersofcattleforthedomesticmarketcompeteatvariouspointsofsaleagainstexportbuyerswhiletheAustralianLotFeedersAssociation(ALFA)submittedthatthereisanextraordinarilyhighlevelofcompetitionforAustralianbeefaroundtheworldandthisputsstrainonsupplytodomesticmarkets.Similarly,accordingtoABARE,Australianbeefcattlesaleyardpricesarebeingdrivenlargelybyoff-shoredevelopments.25

24 S Spencer,SSpencer,Price determination in the Australian food industry, a report,AustralianGovernmentDepartmentofAgriculture,FisheriesandForestry,Canberra,2004,p.39.

25 ABARE, 2006,ABARE,2006,Australian beef industry, financial performance to 2005–06,p.1.

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3. Red meat processing and retailing in Australia

Thereisaconsiderableamountofprocessing,transportandpackagingrequiredtotransformtheliveanimalintothevariouscutsofredmeatthatconsumersbuyfromretailers.Thissectionprovidesabriefdescriptionofthesupplychain,withaparticularfocusontheinvolvementofthemajorsupermarketsinthesupplychain,andadescriptionofretailmeatmarketsharesinAustralia.

3.1 Long and complex supply chainThefreshredmeatsupplychainislongandcomplex.Woolworthsdescribeditsmeatsupplychainasfollows:

Purchaseofliveanimal

Finishingtospecification

Transportationtoabattoir

Slaughterandboning

Transportationtoprocessingplant(forpreparationofcase-readymeat)ordistributioncentre(forin-storebutcheries)

Ageingandstorage

Transportationtostores

In-storebutcherypreparation

Refrigerationanddisplay

Saletocustomer

ThesupplychainissimilarforallAustralianmeatretailers;however,theextentofretailers’verticalintegrationthroughthesupplychainvaries.Nonetheless,thecostofpurchasingliveanimalsisonlyonecomponentofthesupplychain.

InformationprovidedbyColesrevealsthatthepriceitpaysforawholecow(inclusiveofproducerandfeedlotcosts26)typicallyaccountsfor53percentoftheendretailprice.Processingactivitiesandcosts(killfee,boning,packagingandchilling)accountfor14percentoftheendretailpricewhileretailactivitiesandcosts(slicingandtrimming,packaging,labour,shrinkage,promotionandadvertising,storecostsandretailmargin)accountforabout30percentoftheendretailprice.ThesesharesofvalueaddedaresimilartofindingsreportedbyWhitehallAssociates.27

Similarinformationprovidedforlambrevealedthattheprice(inclusiveofproducerandfeedlotcosts)oftheliveanimaltypicallyaccountsforabout50percentoftheendretailprice.Processingactivitiesandcosts(killfee,boning,chillingandfreezing)accountfor13percentoftheendretailpricewhileretailactivitiesandcosts(slicingandtrimming,packaging,labour,shrinkage,promotionandadvertising,storecostsandretailmargin)accountfor31percentoftheendretailprice.

26 Information provided by a market participant showed that, in December 2006, feedlot activities and costs accounted for 30 per centInformationprovidedbyamarketparticipantshowedthat,inDecember2006,feedlotactivitiesandcostsaccountedfor30percentofthevalueofcattlereadytobeprocessed.

27 Spencer,Spencer,Price Determination in the Australian Food Industry, A report,AustralianGovernmentDepartmentofAgriculture,FisheriesandForestry,Canberra,2004,p.42.

LivesTOCk AnD ReD MeAT RePORT ReD MeAT PROCessing AnD ReTAiLing in AUsTRALiA ReD MeAT PROCessing AnD ReTAiLing in AUsTRALiAReD MeAT PROCessing AnD ReTAiLing in AUsTRALiA �

Becausethecostoflivestockrepresentsasmallproportionofthetotalcostofthefinishedproduct,anygivendecreaseinthepriceoflivestockresultsinamuchsmallerpercentagedecreaseinretailmeatprices(theretailpriceissignificantlyhigherthanthelivestockprice).Forexample,ifsaleyardcostsrepresent20percentofretailprices,andsaleyardpricesfallby10percent,retailpriceswouldbeexpectedtofallbyonlyabout2percent,ifthepriceofallotherinputsremainedthesame.

3.1.1 Direct supply agreementsBothmajorsupermarkets,ColesandWoolworths,haveverticallyintegratedsupplyandserviceagreementsthroughoutthesupplychainwithfarmers,feedlotsandprocessors.Thesupermarketsarguedthatthesearrangementsinvolvesettingpricesbasedontheprevailingcostsofproductionincludingaprofitmargin.

Thesupermarketsalsoclaimthatpricesarenegotiatedwithproducersinadvanceandsetforvariousperiods.Subsequentchangesinmarketprices(eitherupordown)donotaltertheagreedprice.Forexample,Woolworthsstatedthatitnegotiatesaguaranteedminimumlambpricewithproducersthreemonthsinadvance.Ifthemarketpricefallsbelowtheagreedprice,Woolworthspaysthenegotiatedpricebutifthemarketpricerises,itsharesthegainwiththeproducer.

Thesetypesofagreementsprovideadegreeofcertaintytobothproducersandsupermarkets.Theuseofaguaranteedminimum,ratherthanamaximumpricesuggeststhatthenegotiatingpowerbetweenbuyerandsellerisnotundulyskewedinfavourofthebuyer.Theuseofcontractstodetermineinputpricesinadvancealsosuggeststhatthereisunlikelytobeadirectandimmediaterelationshipbetweenthecontractedpriceandpricesinthespotmarkets(e.g.saleyardprices).

Colesclaimedthatnosupplierhasleftitssupplychainsinceitwasdevelopedin1998;whileWoolworthsclaimedthatnoneoftheirsuppliershavecomplainedaboutthepricestheyreceivefromWoolworths.ThisargumentwassupportedbyALFAwhosurveyedaselectnumberoffeedlotstounderstandtheirsupplyarrangementswithColesandWoolworths.ALFAnotedthat:

Ineachresponsefromthefeedlots,onesimplecommentwasreiterated:theAustraliacattleandbeefmarketsaresohighlycompetitiveandcomplexthatthepotentialforanysinglebusinesswithinthemarkettodictatepricesisconsiderednegligible.28

3.1.2 The importance of grain finishingThevastmajorityofbeefandanincreasingamountoflambsoldtoAustralianconsumersarefinishedongrain.Thatis,thelivestockarefedaparticularmixoffeedforaspecifiedperiodtoreachacertainquality.Woolworths,ColesandsomeindependentbutchersallidentifiedtheimportanceofgrainfeedingtomeetthequalityexpectedbyAustralianconsumers.

Whilegrainfinishingofbeefiscommonplace,theincreasedfeedpriceswouldnotnormallybesuchasignificantfactorinlambproduction.However,thecurrentdroughtconditionsmeanthatanincreasingnumberoflambsarebeing‘supplementaryfed’ongrainbecauseofpoorpastures.

3.1.3 Feedlots and processorsItwasnotedbyonemarketparticipantthatthepricingstructurewithinthefeedlotindustryisverytransparentandifthefeedlotsaren’tsatisfiedwiththepriceofferedtothembythesupermarkets,feedlotswillrefusetosupplythesupermarketsandtargetothermarketsinstead.Furthermore,onemarketparticipantnotedthattheredmeatsupplychainworksasa‘two-waystreet’andthatitisinthebestinterestsofsuppliersandbuyersto‘lookaftereachother’.Indeed,oneprocessorreportedthatithadbeenpayingfarmerstocontinuetofeedlambstoensurethatthequalityrequirementsofitscustomersweremet.

Severalmarketparticipantsexpressedtheviewthatabattoirsandprocessorstypicallyoperatewithsmallmarginsandthatmarginsareveryvolatileandfluctuatewithsupplyanddemand.

28 Submission from the Australian Lot Feeders Association.SubmissionfromtheAustralianLotFeedersAssociation.

ReD MeAT PROCessing AnD ReTAiLing in AUsTRALiA LivesTOCk AnD ReD MeAT RePORTLivesTOCk AnD ReD MeAT RePORT�0

TheVictorianFarmersFederation(VFF)statedthatprocessorspreferredasmooth,reliablesupplyoflivestock,avoidinglargepeaksandtroughstoensuretheycanretaintheirworkforce.

Anumberofpartiesstatedthatprocessorshavebeenstretchedtocapacityinrecentmonthsasdroughtconditionshavebroughtunprecedentedlevelsofsell-offsbyproducers.TheVFFarguedthatpriceisthemosteffectivewayforprocessorstosignaltoproducerstheeffectsoftheseconstraintsontheirabilitytoprocessstock.

3.2 Retail market sharesIn2005–06Australiansspent$6.4billiononbeef,withconsumerseatinganaverageof35.6kgperperson.Beefisthemostpopularfreshmeatatretail,commanding35percentofthemarketshare.29

RoyMorganResearchconductsquarterlysurveysofconsumers’retailmeatexpendituretoestimatemarketsharesforretailmeatsupply.

Figure4providestheseestimatesofmarketshareforSeptember2006.Thetwomajorsupermarketsaccountedfor50percentofnationalmeatsalesinthe2006Septemberquarter.Butchersaccountedforapproximately31percentofsaleswhileindependentandothersupermarketsaccountedforabout10percentofnationalmeatsales.

Figure 4: Retail share of weekly meat expenditure, September 2006

Source: Roy Morgan Research

29 MLA,MLA,Australian beef industry—fast facts 2006.

Woolworths, 27.0%

Coles Group (including Bi-Lo), 23.4%

Independent Supermarkets, 4.8%

Other Supermarkets, 5.4%

Butchers, 31.0%

Other Stores, 8.2%

LivesTOCk AnD ReD MeAT RePORT �isTORiCAL MOveMenTs in LivesTOCk AnD ReTAiL PRiCes �isTORiCAL MOveMenTs in LivesTOCk AnD ReTAiL PRiCes�isTORiCAL MOveMenTs in LivesTOCk AnD ReTAiL PRiCes ��

4. Historical movements in livestock and retail prices

Thissectionprovidesbackgroundtothesharpdecreaseinsaleyardlivestockpricesinthe2006Decemberquarterandreviewsthelongertermrelationshipbetweenlivestockpricesandretailmeatprices.

ThesectionconcludeswithareviewofthefindingsofresearchbyWhitehallAssociatesabouttherelationshipbetweenlivestockpricesandretailmeatpricesthatbroadlysupporttheACCC’sfindings.

4.1 Appropriate indicator pricesThereareseveralpossibleindicatorsofsaleyardlivestockprices.Forexample,MLAproducesanumberofspotpriceindicatorsonaweeklyanddailybasis,includingtheEYCI.30SeveralparticipantshavepresentedEYCIdatatotheACCC,anditiswidelyacceptedasabroadmarketindicator.31MLAadvisedthatitisnot,however,themostappropriateindicatortocomparewithretailpricesasitincludesallyoungcattleincludingthosethatarenotsuitableforprocessingintomeat.MLAthereforealsoprovidedquarterlydataforthenational‘tradesteerindicator’for1998–06.

WhiletheACCCagreeswithMLAthatthetradesteerindicatorisabettercomparatorforretailprices,thetradesteerindicatorandtheEYCIarecloselycorrelated32andtheEYCI’swidespreadacceptancemakeitanobviousindicatorprice.Accordingly,bothindicatorshavebeenusedinthisreport.

MLAalsoprovidedquarterlydataforthe‘tradelambindicator’33for1998–06andthisisusedasthebasiclivestockpriceforlamb.

4.2 The 2006 December quarter

4.2.1 Livestock pricesThesharpdeclineinlivestockpricesappearstohavebeencausedbyanincreaseinthenumberoflivestockofferedforsaleasfarmers‘de-stock’theirpropertiesinresponsetoextremedroughtconditions.ThenumberofheadmakinguptheEYCIreachedrecordlevelsinthisperiod.

TheEYCIfellbyapproximately30percentfromapeakof382c/kgcarcassweight(cwt)inAugust2006to267c/kgcwtinlateOctober2006asshowninfigure5.Afterashort-livedrecovery,theEYCIslumpedagain,toitslowestpointsincethelastepisodeofseveredroughtin2002–03(265c/kgcwt).Asimilardecreaseoccurredinthetradesteerindicator.

However,consideringonlythepeakandtroughofarelativelyvolatileindicatoroverstatesthe‘average’amountofthedecrease.TheaverageEYCIforthefirstthreequartersof2006was357c/kgcwtandforthelastquarterwas290c/kgcwt:afallof67c/kgcwt(or19percent).

30 The EYCI is a seven-day rolling average of 24 young cattle categories from 26 saleyards across Queensland, New South WalesTheEYCIisaseven-dayrollingaverageof24youngcattlecategoriesfrom26saleyardsacrossQueensland,NewSouthWalesandVictoria.Itisexpressedincentsperkgcwt.

31 The EYCI is the base for MLA/SFE Cattle Futures Contract, listed on the Sydney Futures Exchange.TheEYCIisthebaseforMLA/SFECattleFuturesContract,listedontheSydneyFuturesExchange.32 MLA,MLA,Eastern Young Cattle Indicator.33 National weighted prices for trade lambs 18–22kg carcass weight, fat score 2–4 (lambs typically purchased to provide productNationalweightedpricesfortradelambs18–22kgcarcassweight,fatscore2–4(lambstypicallypurchasedtoprovideproduct

forAustralianbutchersandsupermarkets).

�isTORiCAL MOveMenTs in LivesTOCk AnD ReTAiL PRiCes LivesTOCk AnD ReD MeAT RePORTLivesTOCk AnD ReD MeAT RePORT��

Figure 5: Eastern Young Cattle Indicator with number of head, January 2006 to January 2007

Source: MLA

Figure6plotsthetotalnumberoftradelambyardingsandtheweeklytradelambindicatorthroughout2006.

Thetradelambindicatorpeakedat389c/kgcwtin�uly,thendecreasedsteadily,reachingalowof260c/kginearlyNovember2006(afallofaround33percent).ThenumberoflambsyardedpeakedinNovember2006.

Figure 6: Weekly trade lamb indicator and number of trade lamb yardings, 2006

Source: MLA

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4.2.2 Retail price movementsThereislimiteddataonretailmeatpricesavailable.However,ABAREadjuststhebeef/vealandlamb/muttonsub-groupsoftheconsumerpriceindex(CPI)toarriveatthe‘averageretailprices’forbeefandlamb.34

TheCPIsub-groups(andthereforeABARE’saverageprices)forbeefandlambbothfellintheDecemberquarter(beef/vealby1.87percentandlamb/muttonby0.69percent).Theyhadbothbeenattheirhighest(nominal)levelsearlierin2006.

Retailpricesforbeef/vealandlamb/muttonarechartedwiththeirrespectivelivestockindicatorpriceinsection4.3.

4.3 Longer term movements in livestock and retail meat prices

4.3.1 BeefFigure7chartsABARE’saverageretailbeef/vealpricesandthetradesteerindicatorfor1998–06.Throughoutthisperiodretailpricesofbeefhavetendedtonotfallsignificantlyfollowingdecreasesinlivestockprices.Therewasadecreaseofapproximately3percentintheaverageretailpriceofbeefinthe2002Septemberquarter;however,thetradesteerindicatorhadfallen24percentbetweenSeptember2001andSeptember2002.

Thisdecreasedoes,however,tendtosupportthenotionthatasustaineddecreaseinthelivestockpricewouldresultinamuchsmallerpercentagedecreaseintheretailprice,allthingsbeingequal.

Figure 7: Comparison of average retail beef and trade steer livestock prices, 1998–2006

Source: MLA

34 Price estimates are formed by indexing forward from actual average prices of beef, lamb and mutton during the 1973 December quarter,Priceestimatesareformedbyindexingforwardfromactualaveragepricesofbeef,lambandmuttonduringthe1973Decemberquarter,basedonmeatsub-groupsoftheconsumerpriceindex.Theseindexesarebasedonaverageretailpricesofselectedcuts(weightedbyexpenditure)instatecapitals.

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4.3.2 LambFigure8chartsABARE’saverageretaillamb/muttonpricesandthetradelambindicatorfor1998–2006.Throughoutthisperiod,therehasbeenagreaterfluctuationbetweenaveragelambretailpricesandlivestockprices,withnoticeabledecreasesinretailpricesaftermostdecreasesinlivestockprices.

Thismaybeduetothefactthatthereisgreaterseasonalityandlessrelianceongrainfeedinginlambproduction.Itmayalsobeduetosupermarketsrelyingonmoresaleyardpurchasesoflamb(ascomparedtocattle).

However,aswithbeef,adecreaseinthelivestockpriceoflambhasresultedinamuchsmallerpercentagedecreaseintheretailprice.

Figure 8: Comparison of retail lamb prices and trade lamb livestock prices, 1998–2006

Source: MLA

4.3.3 A widening gap between livestock and retail meat pricesTheSouthAustralianFarmersFederation(SAFF)submittedthatsince1981retailpricesforbeefandlambhaveincreasedatagreaterratethanlivestockprices.

Figure9chartsABAREdata35ofretailandlivestockprices36from1981to�une2006.Thedatashowsthatduringthisperiodthesaleyardcattlepriceincreasedbyaround150percentwhiletheretailpriceofbeefincreasedbyaround190percent.

35 ABARE,ABARE,Australian commodity statistics (154,155),2006.36 Cattle price is a weighted average of yearling, ox and cow prices.Cattlepriceisaweightedaverageofyearling,oxandcowprices.

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Figure 9: Comparison of average retail and livestock prices for beef, 1981–2006

Source: ABARE

Similarly,forlambthesaleyardpriceincreasedbyaround160percent,whiletheretailpriceoflambincreasedby235percent.

Figure 10: Comparison of average retail and livestock prices for lamb, 1981-2006

Source: ABARE

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AsSAFFrecognisedinitssubmission,accurateidentificationofthecauseofthisdivergenceisdifficult.AsSAFFsuggesteditcouldbeduetotheincreasinglycompetitivenatureoflivestockproductionand/orincreasedvalueaddedattheretailendofthesupplychain.Itcouldalsoreflectchangingcostsatvariouslevelswithinthesupplychain,suchasincreasedtransportorprocessingcosts.

Since1998,however,retailpricesforbeefandlambhaveincreasedataslowerratethansaleyardprices.Thesaleyardpriceofcattlehasincreasedbyjustover70percentwhereastheretailpriceofbeefhasincreasedbylessthan60percent.Forlamb,thesaleyardpricehasincreasedbyapproximately88percentwhiletheretailpricehasincreasedbyaround77percent.

Likewise,dataprovidedbyMLAforcattleandlambtypicallypurchasedforsalebyAustralianbutchersandsupermarketsrevealsthat,sinceMarch1998,theretailpricesofbeefandlambhaveincreasedataslowerratethansaleyardprices.Theretailpriceofbeefhasincreasedbylessthan60percentwhilethelivestockpriceofcattlehasincreasedby75percent.Theretailpriceforlambhasincreasedbyaround76percentwhilethelivestockpricehasincreasedbyjustunder80percent.37

TheACCChasnotsoughttoidentifythereasonsforthesechangesovertime.Itconsiderssuchaninquirytobebeyondthescopeoftheminister’srequest.Thisanalysisdoes,however,provideanindicationofthecomplexityoftherelationshipbetweenlivestockpricesandretailmeatprices.Accordingly,theACCCurgescautionininterpretingmovementsinthemarginbetweensaleyardandretailmeatprices,particularlyovershortperiodsoftime.

4.4 Findings of Whitehall Associates’ researchTherelationshipbetweenlivestockandretailmeatpriceshaspreviouslybeenexploredinPrice determination in the Australian food industry,aresearchreportpreparedforDAFFbyWhitehallAssociates.38

TheWhitehallreportwarnedthattherearedangersassociatedwithmakingsimplecomparisonsbetweenfarmgateandretailpricesforbothbeefandlamb.Itnotesthatthelimitedtimeseriesforpricedatashowsthatthereislittlecorrelationbetweenlevelsofpricesovertime;andthatincreasingintegrationupanddownthesupplychainreducesthenumberoftransactionsoccurringthroughouttraditionalmarketchannels,furtherdecreasingtheusefulnessofthisinformationasanindicatorofmarketconditions.39

4.4.1 Relationship between livestock and meat pricesThereportfindsthatinthedomesticmarket,competingsourcesofmeatdrivepricesattheconsumerendofthesupplychain,whileexportreturnsdictatecostsattheotherend.

Thereportfoundthatbuyersofcattleforthedomesticmarketcompeteagainstexportbuyers,processorsandmarketers.Theprevailingfarmgatepriceatwhichamajordomesticbuyerpurchasescattlewillbeinfluencedby:

thestrengthofinternationaldemand

thedemandforstoreandbreedingcattle

thelevelofavailablesupply

prevailingexportprices.40

37 Quarterly data was averaged over each year to account for seasonal effects.Quarterlydatawasaveragedovereachyeartoaccountforseasonaleffects.38 S Spencer,SSpencer,Price determination in the Australian food industry, a report,AustralianGovernmentDepartmentofAgriculture,

FisheriesandForestry,Canberra,2004.39 ibid., pp. 39–48.ibid.,pp.39–48.40 ibid., p. 39.ibid.,p.39.


Thereportalsofoundthatdespitethehigherproportionoftotallambmeatproductionsoldinthedomesticmarket,returnstothelambproductionandprocessingsectorarestronglyinfluencedbyinternationalmarkets.Withthegrowinginfluenceofexports,thesupplyoflambandprevailingpricesaredrivenbyfactorswhichinclude:

exchangeraterelativityandvolatility

seasonalconditionswhichaffectbothqualityandquantity

greaterexposuretocommodityrisks(suchasfeedgrainpricesandimportrestrictionsonfeedgrains)astheincidenceofgrainfeedingoflambsincreases

returnsfromwool,althoughthisinfluenceisweakeningbecauseofthestrongroleplayedbycross-breedingandincreasingspecialisationinlambproduction.41

Thereportalsonotesthathighervaluelambcutshaveincreasedatagreaterlevelrelativetolegsandforequarterchops,indicatingastrongerdemandforpremiumproductandcutsasconsumersbecomemoreconsciousofquality.

4.4.2 The effect of increasing integration throughout the supply chainTheWhitehallreportalsonotedtheincreasingdegreeofintegrationthroughoutthesupplychain,notingthatproducerssuchasAACoandStanbrokewereincreasinglyintegratingverticallytomanagebreeding,finishingprocessingandretailing/branding.Atthesametime,retailersareverticallyintegratingthroughtheuseofdirectsupplyagreements.Accordingly,thevastmajorityofbeefsupplieddomesticallyisincreasinglysuppliedthroughtheuseofdirectarrangementsthatintegrateproducer,processorandretailer.Thereportalsonotedthatwholesalemarkets‘forbeefcarcassesandportionsofbeefareusedintheminorityofcases’.42

41 ibid., p. 44.ibid.,p.44.42 ibid., p. 42.ibid.,p.42.

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5. Relationship between livestock and retail prices

Thelongandcomplexsupplychaindiscussedinsection3meansitshouldnotbeassumedthattherewillnecessarilybeadirectandimmediaterelationshipbetweenthepriceoftherawproduct(livestock)andthefinalgood(packagedmeat).

Thissectionexaminesthreefactorsthatmaymitigateconcernsthatlargebuyersareexertingmarketpower:

Coststhroughoutthesupplychainmaymoveintheoppositedirectiontolivestockprices.

Therelevanceofsaleyardlivestockpricesasanindicatorofinputcosts.

Theexistenceofcompetitiveforcesatbothendsofthesupplychain.

5.1 Costs added throughout the supply chainThecostoflivestockisonlyonecomponentofthetotalcostincurredbysupermarkets(andotherretailers)inprovidingfreshmeattoconsumers.Alargepercentagedecreaseinthepriceoflivestock,suchaswasseeninthe2006Decemberquarter,resultsinamuchsmallerimpactonretailmeatpricesbecausethepriceoflivestockisonlyasmallpartofthetotalcostsofproducingfreshmeatfordomesticconsumption.Forexample,ifsaleyardcostsrepresent20percentofretailprices,andsaleyardpricesfallby10percent,retailpriceswouldbeexpectedtofallbyonlyabout2percent,ifthepriceofallotherinputsremainsthesame.

Figure11reproducesasupplychainmappublishedbyWhitehallAssociatesinitsreportexaminingcostsandvalueaddedthroughoutthebeefsupplychain.TheexaminationwasundertakenaspartofwiderresearchintothedeterminationoffoodpricesinAustraliaforDAFF.

Takingawhole-of-carcassapproachtothemeasurementofreturns,theWhitehallreportestimatedasnapshotofgrossreturnstoeachmajorsectorthroughoutthesupplychain.

Figure 11: Value and cost added from farmgate to retail, beef

Source: Food price determination in Australia, a report

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Costsandvalueareaddedvia‘finishing’ongraintomeetqualityspecificationsandbyactivitiessuchasslaughtering,processing,transporting,butcheringandpackaging.Thereisnoreasontobelievethatthesecostswillnecessarilyremainunchangedwhilelivestockpricesmove.Oneofthesecosts,thepriceoffeedgrainforthefinishingoflivestockseemstobeofparticularimportanceinthecurrentconditions.

5.1.1 grain ‘finishing’ to specificationMarketparticipantsstatedthatthevastmajorityofmeatsoldinsupermarketsandbutchershopsisfromlivestockthathasbeen‘finished’ongrain.Itwaswidelyacceptedamongmarketparticipantsthatmeatsourcedfromgrain-fedlivestockisofsuperiorquality.

Whilegrainfinishingofbeefiscommonplace(itisestimatedthat80percent,ifnotmore,ofbeefsoldinsupermarketsissourcedfromgrain-fedanimals)theincreasedfeedpriceswouldnotnormallybesuchasignificantfactorinlambproduction.However,thecurrentlackofpasturemeansthatanincreasingnumberoflambsarebeing‘supplementaryfed’ongrainandfodder.Oneindependentbutcherchainindicateditwascurrentlysourcingallofitsmeat(includinglamb)fromfeedlots.

ALFAagreedthatfeedgrainpriceswereanimportantinputintobeefproductionandsubmittedthatthereisaclearinverserelationshipbetweenthepriceoflivestockandthepriceoffeedgrain,particularlyintimesofdrought.Thereisashortageofgrain(resultinginincreasedfeedgrainprices)andfarmersseektode-stocktheirpropertiesduetoashortageofpastureandhighfeedcosts(resultingindecreasedlivestockprices).

Figure12plotstheEYCIandthreecommonfeedgrainprices.ThechartsupportsALFA’sviewthatthereisaninverserelationshipbetweenlivestockpricesandfeedgrainpricesastheEYCIandgrainpriceshavetypicallymovedinoppositedirectionssince1998.Thechartalsoshowsthatfeedgrainpricesinlate2006wereattheirhighestlevelssincethelastdroughtin2002–03.

Figure 12: Comparison of EYCI and feed grain prices, 1998–2006

Note:Thescaleinthischartisnotthesameforallseries.TheEYCIisc/kgcwt,whilethefeedgrainpricesare$/tonne.

Source: MLA and ABARE

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ColesandWoolworthsbothsubmittedthattheirlong-termsupplyarrangementsinvolvesettingpricesbasedontheprevailingcostsofproductionandthatthisincludedthecostoffeedgrain.Increasinggraincoststhroughoutthecourseof2006havebeenaddingtothesupermarketcosts.MrMichaelLuscombe,chiefexecutiveofficerofWoolworths,mademediarepresentationsthatthegainsfromlowerlivestockpriceswereoutweighedbyhigherfeedcosts.43Thisgeneralargument,thatincreasinggrainpriceswereoffsettinglowerlivestockprices,waswidelysupportedbyindustryparticipants.

Highfeedcostshavehadaparticularimpactonthefeedlotindustry.ALFAcontendsthatfodderandfeedcostsrepresentaround60percentoffeedlotinputcosts(ofwhichgrainaccountsforover75percent)whilefeedercattlepricesrepresentaround30percentofinputcosts.

OnemarketparticipantprovideddatarevealingthatthetotalcostofyearlingcattledeliveredtotheprocessorinDecember2006wasonlynegligiblylowerthaninDecember2005despiteadeclineofover12percentinthepriceoffeedercattle.Thecomparisonrevealedthatfeedcostshadincreasedby$70pertonne(anincreaseofalmost40percent)andthishadallbutoffsetthereductioninthecattleprice.Thedataalsoshowedthat,inDecember2006,feedlotactivitiesandcostsaccountedfor30percentofthevalueofcattlereadytobeprocessedcomparedto21percentinDecember2005.

ALFAagreedthatincreasedoverallproductioncosts,causedbyhighfeedcosts,increasedtheoverallcostsofproducinggoodqualitygrain-fedbeef,evenassomeinputcosts(suchasfeedercattle)maybepusheddownwards.

5.1.2 Other costs of productionTheremayalsobeotherchangesinothercoststhroughoutthesupplychainthatmitigatedecreasinglivestockprices.

Woolworthsprovidedadetailedcomparisonofitsend-to-endcostsforbeefandlambinNovember2005andNovember2006.ThedatarevealedthatWoolworths’marginonbeeffellin2006andthatareductioninthepurchasecostofbeefwasmatchedbyanequivalentpercentagereductionintheaveragesellpriceofbeef(perkilogram).Forlamb,Woolworths’averagesellpricealsofellin2006.WhileWoolworths’purchasecostoflambhadfallenbymorethanitssellprice,someinputcostsforlambhadincreasedsignificantlyin2006.

5.2 The relevance of saleyard livestock prices as an indicator of input cost

Therelevanceofsaleyardindicatorpricesasanindicatorofretailinputpricesappearstobeproblematicfortworeasons.First,theextensiveuseofdirectsupplyagreementsmeansthatalargenumberoftransactionsoccuroutsidethetraditionalsaleyardandtheyincluderiskmanagementarrangementstoreducetheeffectofpriceshockstobothproducerandretailer.Second,severalindustryparticipantscommentedthatthelivestockinsaleyardsisoftennotofthequalitythatendsuponsupermarketandbutchers’shelves.

5.2.1 The effect of direct supply agreementsAsnotedinsection3,thetwolargersupermarketspurchasemostoftheirmeatthroughdirectsupplyagreementsratherthanfromsaleyardsandthesedirectsupplyagreementsprovideadegreeofriskmanagement.

BothColesandWoolworthsprovideddetailsoftheiractualbuyandsellpricesintheirsubmissions:Colesfor2006andWoolworthsfortwo-and-a-halfyearstoDecember2006.ThedatarevealedthatWoolworths’averagesellpriceofbeef(perkilogram)andbuyprice(perkilogram)hadremainedconsistentoverthelasttwoyears.Similarlyforlamb,Woolworths’averagesellandbuypriceshadremainedrelativelyconsistentoverthelasttwo-and-a-halfyearsalthoughpriceshadfluctuatedmorethanbeefprices.

TheColesdataalsorevealedthatitsaveragebuypriceforbeefwasrelativelystable(within4percent)throughout2006.Whilepricesforlambweremorevolatile,itsaveragebuypriceremainedabovethesaleyardindicators.

43 On ABC’sOnABC’s The Country Hour (27December2006)MrLuscombesaidthatthecostofcattlehaddecreasedabout$40.00/head,butthecostofa90feedhadincreasedbyabout$75.00.

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5.2.2 Quality of livestockAcommonviewexpressedbymarketparticipantswasthatAustralianconsumersareaccustomedtoeatingmeatofthehighestqualityandtheyexpecttobeabletobuyconsistent,goodqualitymeatallyearround.

Thesupermarketssubmittedthattheirbuyingstrategiesaredrivenbyqualityandtheywantaconsistentsupplyofqualitymeatallyearround.Thesupermarketsarguedthattheyhavestrictqualityspecificationsinplaceandtheywillnotbuylivestockunlesstheymeetthesecriteria.Thisargumentwassupportedbyinterestedpartiesfromothersectorsofthemeatindustry.ALFAstatedthat:

…themuchhigherproductspecifications,includingtighterspecificationgridsand/ortheuseofadditionalqualityassurance(QA)moduleswithgreaterrequirements,meansthattheproductsoldtomajorretailersissignificantlydifferentiatedfromcompetingproducts(especiallynon-QAgrass-fedproduct,suchasmightbeavailablecheaplyduringforceddroughtsales).44

Thesupermarkets,aswellasothermarketparticipants,expressedtheviewthatmuchofthelivestocksoldinsaleyardsisnotofthequalitythatsupermarketsdemand.

Colessubmittedthatonlyaboutone-thirdoflivestockatsaleyardsis‘trade’quality(i.e.issuitableforprocessingasmeat)and,ofthat,onlyaboutone-thirdis‘primelivestock’whichColesmaybuy.Colesarguedthattheiradditionalweightspecificationsmeantthat‘thepercentageofsuitablelivestockforColesisusuallyverysmall’.Likewise,WoolworthsarguedthatthemajorityoflivestockbeingsoldinsaleyardsdidnotcomeclosetomeetingWoolworths’specificationcriteria.

Anumberofmarketparticipantsstatedthatthepoorqualitylivestockpassingthroughthesaleyardsis‘notthesamemeatthatendsuponsupermarketshelves’.ThelivestockpresidentoftheVFF,AilsaFox,wasquotedassaying:

Alotofthelambsoldthroughthesaleyards…isnotsuitableforkillingimmediatelyforconsumption.Ifyouslaughteredthemtherewouldbenexttonomeatonthem…sotheselambsarebeingboughtbythefeedlottersorproducerswhoare…feedingthemup,whichinturncostsalotofmoney.45

Infact,participantsstatedthatdespitethehighernumberofyardings,therehadactuallybeenadecreaseinthenumberofqualitylivestockcomingontothemarket.Colessubmittedthatprimelivestockhadgenerallybeeninshortsupplyatsaleyards.ThisviewwassupportedbyMetcashwhosubmittedthatgiventhedrought,therewaslessqualitymeatavailablefromwholesalersandprocessors.

Severalprocessorsconfirmedthatduetoseasonalconditionstherehadbeenasignificantreduction(someestimatedover30percent)intheamountofqualitylambstobeprocessed.Anothermarketparticipantstatedthattherehadbeena7–8percentyear-on-yearreductioninthesupplyofsupermarket/butcherqualitymeatbetweenOctober2005andOctober2006anda26percentreductionbetweenOctober2004andOctober2006.

44 Submission from the Australian Lot Feeders Association.SubmissionfromtheAustralianLotFeedersAssociation.45 Herald Sun, 29November2006,p.12.

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5.3 Competition in livestock and retail meat marketsBothColesandWoolworthssubmittedthattheyarebuyinglivestockinacompetitivemarketwheretheybuyarelativelysmallshareoftotalproduction,andexportsplayavitalrole.Industryparticipantsandobserversgenerallyagreed,notingthatnoonepurchaserwasableto‘distort’themarketbecauseproducersthatweredissatisfiedcouldalterthespecificationsoftheirstocktotargetotherpurchasersorexportmarkets.

ColesstatedthatthedominationofexportsinthemeatsectorhashistoricallyledtotightsupplyandqualityproblemsforAustralianretailersandthattheselimitationswerethecatalystforColesdevelopingitsownverticallyintegratedmeatsupplychainin1998.AsimilarviewwasalsoexpressedbywholesalerMetcashwhostatedthatthestrongexportmarketleavesaneverdiminishingsupplyofqualityproductavailablefordomesticsale.Woolworthsalsosubmittedthatitfacessignificantcompetitionfromtheexportsectorforthepurchaseoflivestock.

Giventherelativelysmallshareoftotalproductionbeingpurchasedbyeventhelargestdomesticretailers,itseemsunlikelythatanyonepartywouldbeabletosuppresspricesand/orimposeoneroustermsandconditionswithoutproducersalteringtheirspecificationstotargetalternativemarkets.

Similarlyinretailmarkets,bothColesandWoolworthssubmittedthattheyoperateinacompetitiveenvironmentandthattheyfacesignificantcompetitionfromindependentsupermarketsandbutchers.ColesandWoolworthsarguethatanyattempttoinflatepriceswouldseethemrapidlylosemarketshare.

WhileColesandWoolworthsarethetwolargestcompetitorswithabouthalfofallmeatsales,theyfacecompetitionfromeachother,othersupermarketsandabout3000independentbutchers.Itseemsunlikelythatanattemptbyanyonepartytochargeunreasonablyhighpricescouldbesustainedwithoutlosingmarketshare.

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6. ConclusionsWhilethereisarelationshipbetweenthepricepaidtofarmersforlivestockandretailmeatprices,therearemanyfactorsthroughoutthesupplychainthatmakedrawingasimplelinearrelationshipproblematic.Theassumptionthatthereshouldbeadirectandimmediatelinkignoresthecomplexityofthesupplychainitselfandofsupplyarrangementswithinthechain.

Thesupplychainislongandcomplexandthereisaconsiderableamountofworkandcostinvolvedintransforminglivestockintofreshmeatavailabletoconsumersforpurchase.Thecostsincurredthroughoutthesupplychain(andchangestothem)arenotalwaysasobservableas,orasreadilyidentifiablewith,theproductionofmeat.Theymayalsomoveintheoppositedirectionaslivestockprices.Forexample,theincreaseinthecostoffeedgrainthroughout2006,anditssubsequenteffectonthecostofproductionofbeef(andtoalesserextentlamb),isnotimmediatelyasobviousinthedeterminationofretailmeatpricesasitisinsaleyardlivestockprices;ithas,however,hadasignificanteffect.

Becausethepriceoflivestockisarelativelysmallproportionofthetotalcostofthefinalproduct,alargepercentagedecreaseinthepriceoflivestock,suchaswasseeninthe2006Decemberquarter,resultsinmuchsmallerpercentagedecreasesinretailmeatpricesbecausetheretailpriceissignificantlyhigherthanthelivestockprice.Forexample,ifsaleyardcostsrepresent20percentofretailprices,andsaleyardpricesfallby10percent,retailpriceswouldbeexpectedtofallbyonlyabout2percent,ifthepriceofallotherinputsremainedthesame.

Australianconsumersdemandaparticularqualityofmeatandmuchofthelivestocksoldinsaleyardswillnotmeettheserequirements.Tohelpensureconsistentqualitysupplysupermarketsusedirectsupplyagreements.

Thesesupplyagreementsprovidelessvolatilelivestockpurchasepricesthanaretypicallyobservedinsaleyardpricesandprovidebothretailersandproducerswithgreatercertainty.Thisflowsthroughtoconsumersintheformofmoreconsistentqualityandlessvolatileprices.Thegreatertheextentofsuchsupplyagreements,thelessdirectorthemoremutedwillbetheeffectofsaleyardlivestockpricesonretailprices.

Otherfactorsinthesupplychainmayalsohaveaninfluence.Forexample,thelargenumberoflivestockbeingsoldinsaleyardsledtonearrecordslaughteringratesinlate2006.Thisledsomeindustryparticipantstocommentthatdecreasinglivestockpricesmayhavebeenasignalthatmeatprocessorswereatorapproachingcapacity.TheACCCwasnot,however,abletoobtaindataortoverifywhetherornotcapacityconstraintsinmeatprocessingwereaparticularissue.

ColesandWoolworthshavebothprovidedtheACCCwithdetailedinformationabouttheirinvolvementatvariouslevelsofthesupplychain,theiractualbuyandsellpricesformeatanddetailsoftheirmarginsonredmeatovertime.Thisinformationconfirmsthattheiraveragebuypriceisgenerallyhigherandlessvolatilethansaleyardpriceindicators.

Finally,theACCCnotesthatboththelivestockandretailmeatmarketsappeartobereasonablycompetitive.Themajorsupermarketsfacecompetitionfromotherbuyers(forbothdomesticandexportmarkets)whenpurchasinglivestockandtheypurchasearelativelysmallpercentageofAustralia’stotalredmeatproduction.Undertheseconditionsitseemsunlikelythattheywouldbeabletosuppresspricesand/orimposeoneroustermsandconditionswithoutproducersalteringtheirspecificationstotargetalternativemarkets.

Likewise,inretailing,whileColesandWoolworthsarethetwolargestcompetitorswithabouthalfofallmeatsales,theyfacecompetitionfromeachother,othersupermarketsandabout3000independentbutchers.Intheseconditions,itseemsunlikelythatanattemptbyanyonepartytochargeunreasonablyhighpricescouldbesustainedwithoutlosingmarketshare.

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