Price Determination in the Australian Food Industry A Report

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• The major cost faced by egg producers is feed. This represents approximately 60 per cent of costs of production in normal conditions. • Whilst the general level of retail and wholesale prices have been historically driven by a costplus approach, since deregulation of the supply and pricing of eggs, fluctuations in pricing have been determined largely by variations in available egg supply. • In recent times, the level of retail prices has been strongly influenced by greater use of private label product by major retailers – leading to minimal increases in prices to the consumer. • Major chain retailers have driven an increase in the market share held by private label product to combat competition for their egg sales from the non-integrated box market which sees discounting at independent outlets. Figure 94. Eggs: Major drivers of prices and costs Cage eggs are a major grocery category where over time the production industry has gone through substantial change and restructure, with strong rationalisation of growing and marketing sectors. 1. Farm production factors • Production has tended to be volatile due to movements in supply in response to price signals. • Product is perishable with a limited shelf life for optimum freshness. • There are long lead times to scale up production yet flock reductions can be immediate through culling. • Production profit is sensitive to fluctuations in feed costs. 2. Value-chain integration • Instability of price and return for growers and marketers due to an inability to maintain a stable match between demand and supply. • Increasing scale efficiency in egg farms, grading and packing operations. • Strong concentration of ownership in the collection, grading, packing and marketing stages. • Consolidation of egg marketing into a small number of companies operating in different zones has enhanced bargaining power of marketers. • Box market remains a large share of market – in disaggregated form where packers supply direct to retail. 3. The marketing approach • Limited differentiation and de-commoditising at retail. • Brand presence still strong in major retail sectors with strong price competition against box market and private label. • Packaging and presentation is reasonably generic. • Marketing approach based on the relative cost of eggs as a protein source. • Small niches carved out for free-range egg lines in all forms of retail, but supply lines less reliable. Growing Grade and packing Marketing Distribution Retail Food service Price Determination in the Australian Food Industry A Report 4. Regulation and compliance • Major challenge facing producers is compliance (over any time up to 2008) with new cage size regulations. These will require re-equipping across the sector. • Uncertainty over the extent of the future impact of that capital requirement on production levels and accordingly on temporal matching of supply and demand. 5. Trade impacts • Limited exports of powdered eggs helps remove small market surpluses. • Small volume of shell egg exports out of Western Australia has minimal effect on east coast market. • No shell egg imports are permitted under Australian Quarantine and Inspection Service rules. 6. Technology and innovation • Increasing capital intensity is improving cost structures in grading and packing sector. • Limited transparency of market prices and costs through the box market channel chain, yet retail market is highly visible. • Limited new product development over recent years. • Limited scope to diversify core product due to its uniform, consistent nature – yet development of powdered egg products and pre-cooked products for food service has occurred. 7. Retail market dynamics • Diverse retail market with major chains only having about 40% of market. • The growth of the private label in eggs has been strongly based on price competition in order for retailers to gain greater share of total market. • Greater demand for convenience and lifestyle solutions in meals and foods has put pressure on the egg as a fresh food option. • Prices deemed sensitive at retail point of sale. • Growing diversity of consumer needs will see increasing demand for processed products in food preparation solutions. 88
Figure 95. Cage eggs, supply chain map Farmer Packing Marketing Market Logistics Retail Brand Ownership/ Management transporter logistics Hatchery Breeders growing Collection, Grading and Packing Egg Marketer Wholesalers Chain Retailers Food Service Domestic Consumer box market Other Retailers • About 13.5 million birds in production. • Commercial production estimated at 244m dozen. • Approx 1,100 egg farms, mostly located close to urban demand regions. • Seven large players. • Each major grading and packing business is integrated into marketing – five players have merged their marketing into a joint venture, Novo. • Concentration – three players have major share of chain retail market (Pace, Novo and Sunny Queen). Share of channel is estimated at: • major chain, 40%; • box market (direct to small retail), 35–40%; • other and processed, 20–25%, with processed estimated at 15%. EGGS – ANALYSIS OF PRICING The levels of prices and costs • Egg production features high barriers to entry. Production – once committed – is relatively inflexible. • Industry is typically asset-rich and cash-poor in view of the major capital requirements for production and packing, the investments in flocks and feed, and the fluctuating selling prices. • Fluctuations in supply exist but face lead times. A flock lays for 76 weeks but it can take up to 50 weeks to get a hatchling into production. Yet production can be cut very quickly (by killing the layer). • Cage egg production systems, which provide about five-sixths of total output, provide scope for better scale efficiencies and greater integration than other systems which are in use. These provide greater animal mobility and perceived better welfare for the birds. • It is estimated that the costs of production (for a 700g dozen eggs) are: cage eggs $1.25 per dozen barn eggs $1.70 per dozen free range eggs $2.15 per dozen Source: RIRDC 2002 • It has been estimated by industry analysis that the sustainable retail price differential for barn and free range eggs is approximately 60c a dozen. • Over time, the retail prices for eggs have been held at levels below the increases in the cost of living. Price Determination in the Australian Food Industry A Report 89
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Price Determination in the Australi
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© Commonwealth of Australia 2004 T
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FOOD AND AGRICULTURE BUSINESS GROUP
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FIGURES Price Determination in the
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• The current focus of retail cha
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• assertions as to market power i
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Overview - main drivers of prices i
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Food lines The analysis of food pro
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Figure 1. Overview of the approach
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Figure 2. Corporate profitability I
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Figure 4. Major drivers of prices a
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5.3 The greater influence of prevai
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DAIRY - PACKAGED MILK Overview of t
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Figure 10. Whole milk, 2 litre, sup
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Prices through the chain Our analys
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Figure 16. Natural cheddar cheese:
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Farmgate prices Farmgate prices are
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DAIRY - ANALYSIS OF PRICING OF DAIR
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Figure 25. Dairy butter and blend s
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‘Step-ups’ are paid by several
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THE MEAT SECTOR Analysis of the det
Page 50 and 51: The approach taken The pricing anal
Page 52 and 53: The changing value chains - various
Page 54 and 55: The approach taken Assumptions used
Page 56 and 57: Figure 39. Lamb market sales, ’00
Page 58 and 59: Figure 41. Lamb: Major drivers of p
Page 60 and 61: Observations The price comparison s
Page 62 and 63: Figure 46. Pork products, supply ch
Page 64 and 65: Figure 48. Value and cost-adding fr
Page 66 and 67: Supply chain management Wholesale m
Page 68 and 69: Figure 51. Fresh vegetables: Major
Page 70 and 71: FRESH HORTICULTURE - WHOLESALE MARK
Page 72 and 73: FRESH HORTICULTURE - ANALYSIS OF PR
Page 74 and 75: market access - in the United State
Page 76 and 77: The industry’s product mix The ke
Page 78 and 79: PROCESSED FRUIT AND VEGETABLES Anal
Page 80 and 81: Figure 69. Frozen vegetables, peas,
Page 82 and 83: PROCESSED PINEAPPLES - ANALYSIS OF
Page 84 and 85: Figure 75. Fresh fruit, with juice,
Page 86 and 87: GRAIN AND OILSEED PRODUCTS Analysis
Page 88 and 89: Figure 79. Flour, 1kg, supply chain
Page 90 and 91: Figure 82. Share of retail price of
Page 92 and 93: OILSEEDS - OVERVIEW Background The
Page 94 and 95: Figure 87. Oils and fats, supply ch
Page 96 and 97: The amount represented by the retai
Page 98 and 99: Industry risks The key area of risk
Page 102 and 103: Figure 96. Consumer price index, fo
Page 104 and 105: • Many such operators have indica
Page 106 and 107: SUGAR PRODUCTS Analysis of the dete
Page 108 and 109: Figure 103. White sugar, 2kg, suppl
Page 110 and 111: Projected export returns for the co
Page 112 and 113: • Export prices are driven by glo
Page 114 and 115: Retail prices • The average retai
Page 116 and 117: Industry risk • The overall retur
Page 118 and 119: 4. The performance of Australian fo
Page 120 and 121: THE PERFORMANCE OF AUSTRALIAN VERSU
Page 122 and 123: THE PERFORMANCE OF GLOBAL BRAND MAN
Page 124 and 125: THE PERFORMANCE OF PRIMARY MANUFACT
Page 126 and 127: Our purpose in preparing this secti
Page 128 and 129: GROCERY RETAIL - WHAT DETERMINES PR
Page 130 and 131: The consumer trend towards eating o
Page 132 and 133: GROCERY RETAIL - PERFORMANCE OF GRO
Page 134 and 135: 6. Issues for consideration ISSUES
Page 136 and 137: PRODUCER INTEGRATION Does integrati
Page 138 and 139: Industries have in several cases ta
Page 140 and 141: Examples include: • 1 litre milk
Page 142 and 143: Figure 132. Targeting the stomach H
Page 144 and 145: MAJOR ADJUSTMENT - WHAT’S HAPPENI
Page 146 and 147: THE IMPACT OF DROUGHT The sector Di
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Oczkowski, E, Murphy, T 1999, Influ
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Price Determination in the Australian Food Industry A Report

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