Beef price transparency​ under spotlight

Cattle Council of Australia (CCA) initiated this project after concerns that producer interests are being adversely affected by a lack of price information along the beef value chain.

For some this may seem an unnecessary exercise given the abundance of price information in processors’ grid schedules and saleyard market reports.

Others who may have looked at the results of bone-out competitions and seen the sizeable variations in saleable meat yield may feel that effective value-based pricing cannot come soon enough.

Then there are those who may look at quality factors and wonder how a 10-20c/kg carcase premium can translate into mark ups for selected MSA cuts at retail of $9-10/kg above the price of non-graded product.

Add in an overriding reliance on export with its complicated demand dynamics together with supply-side issues at home and in competitor countries and it is not unreasonable to conclude that there may be a lot of low-visibility stuff going on that relates to price.

In stark contrast to the beef industry, commodities that do not undergo significant modification from paddock to plate can have very simple and transparent value chains.

In the fruit and vegetable world retail markup of 100pc is a longstanding practice so if a grower sees his tomatoes selling for $3.99/kg in the shop and he didn’t get $20/box (10kg) from his market agent he will very quickly be asking why.

It would seem unlikely that the beef industry could ever emulate such simplicity in its value chains but CCA’s position seems to be that it is worth a look.

The aim of the study is to establish whether producers are likely to benefit from improved price transparency, the extent of any such benefit and realistically what might be able to be done to achieve it.

This latest report from authors Brian Todd of agInfo Pty Ltd and Peter Barnard of Oliver and Doam Pty Ltd is Milestone 5 in the process and appears to have reached some important conclusions.

ANALYSIS thus far has found that producers are likely to benefit from increased price transparency in cattle and beef markets but the level of these benefits may be small.

To achieve significant benefits the report concluded that any initiatives taken to improve transparency must lead to at least one of two outcomes:

In arriving at this conclusion the authors looked closely at the differences between the US and Australian industries and the relevance of mandatory price reporting as it applies in the US.

The key findings are as follows:

(1) Typically over 95pc of price discovery in US cattle markets emanates from the futures market. This suggests that the biggest advantage that US producers have over their Australian counterparts is the ability to discern trends through the Chicago live cattle futures market.

(2) The methods processors use to set cattle prices in the US did not alter significantly pre and post the introduction of mandatory price reporting. This suggests that even if there had been improved price transparency in Australia in 2013 and 2014, the same result would have occurred with drought-induced supplies driving cattle prices to depressed levels.

(3) Mandatory price reporting in the US had no effect on processors exerting market power. Indeed evidence exists that in some circumstances mandatory price reporting may have even aided processors in exerting market power.

(4) Despite the above, the majority of studies point to mandatory price reporting playing a very small but detectible role in price discovery to the benefit of US producers.

The report goes on to say that perhaps the greatest benefit from mandatory price reporting in the US has been to encourage a move to vertical supply chain integration with many more cattle being transacted under value related payment systems. Liveweight based transactions have given way to a massive increase in carcass weight transactions based on grade and yield.

IN the Australian context the authors believe greater price transparency may further assist the move to value-based payment systems but noted certain provisos.

The reason is that Australia’s beef production system is much more diverse than that of the US and has much more complicated payment systems.

Firstly they identified a need for some form of facilitation for producers to compare alternative grids given the complexities involved.

Secondly they noted the need for producers to have confidence in the grading/assessing of carcases against grids. In the US, government inspectors perform the quality and yield grade assessments compared to the Australian system where processors undertake those tasks albeit under audit/accreditation provisions.

The point about the complexity of Australian grids and the difficulty this creates for producers in trying to predict how their cattle will grade across competing grids is not new.

My final project as a research officer before taking up a senior executive position with the Queensland Livestock and Meat Authority in the 1990s was to develop an application to accurately predict how lines of cattle would grade under different grid specifications and the net return differences across those grids.

The model used predictive assumptions as well as historical feedback data in regard to weight/fat/dentition/bruising distributions and achieved very acceptable levels of accuracy. Freight adjustments were built in to adjust for slaughter location and the predicted price outcomes aligned extremely well with actual results post slaughter.

It would seem relatively straightforward to extend this concept to include the chiller components of current-day grading and come up with a very workable pc or on-line application.

The remainder of the report provides an overview of potential options for improving cattle and beef price transparency together with analysis of ease of implementation and indicative costs.

It can be accessed from the MLA website at http://www.mla.com.au/Research-and-development/industry-issues.