Price Determination in the Australian Food Industry A Report

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Figure 103. White sugar, 2kg, supply chain map Farmer Primary Process Secondary Process Market Logistics Retail Brand Ownership/ Management transporter Farmer Miller Refiner Chain Retailers Consumer harvest/haul Wholesalers Food Service • Australia produces between 30–40 million tonnes of cane per year from around 450,000 ha. • Approx. 650 cane growers but this is declining. Queensland is main production state. • Price drivers include Brazilian crop tonnage, world oil prices (which dictate ethanol production in Brazil). • 5–6m tonnes of sugar produced. • Five mill owners account for 100% of processing. • Small companies are finding it increasingly difficult to continue processing in the current industry climate. Most refining is collocated with milling and owned by the same company. • The supermarket is the main channel for refined sugar sales due to sugar’s status as a staple. Other Retailers • The majority of refined sugar is sold through the major supermarket chain stores. SUGAR – ANALYSIS OF PRICING Retail versus farmgate prices over time Price Determination in the Australian Food Industry A Report The comparison of retail and farmgate (equivalent) returns over time is set out in Figure 104. The cane-growing sector is paid a cane return which is based on a weighted average pooled return derived from on the average returns achieved by millers from export and domestic markets in each season. This is mostly driven by export returns. Payments to individual producers are based on agreements with millers based on formulas which include sugar content and cane quality. The net average return to the cane farmer has steadily been driven down to the level of the cost of production. Retail prices Though volumes have been static, the average value of the grocery retail market in the last 10 years has steadily increased across all packaged sugar product lines. Retailers often use 2kg white sugar product as a loss leader. This reflects strong competition for the basic 2kg sugar product from a mix of factors, including a higher share of the market being taken by specialty sugar and sweetener products. It also reflects the sluggish demand in the retail market and the frequent use of discounting to stimulate sales. Recently, sugar has been used as an ‘every day low prices’ product by major retailers. Value-adding in sugar products There has been limited value-adding to the refined sugar product, with the exception of the marketing of convenience single-serve portions for home and food service use. 96
Assumptions Our analysis of the prices at retail and farmgate are based on the following: • retail prices compiled by reference to the average retail value of sugar product in the Australian market (per ABS data); and • farmgate prices in the chart reflect the equivalent value per 2kg of sugar which the cane producer is paid for the cane supplied to a mill. The conversion of cane value to a processed sugar value is based on industry averages in terms of the yield of sugar derived from cane. Figure 104. Retail and farmgate sugar price, white, 2kg, 1993–2002 $ 3.00 2.50 2.00 retail 1.50 1.00 farmgate price equivalent 0.50 0 1993 2002 Source: ABS and Macarthur Agribusiness Farmgate returns • In the context of the world market environment, production in the Australian industry has little or no impact on the prevailing world market returns, which are set by the factors set out earlier. • The overall costs of sugar production are affected by a large number of variables: – total volumes of supply are governed by overall planting area, tonnes of cane produced and the prevailing sugar content that is achieved in growing areas; – scale efficiency and integration of individual farm units. There is a consistent trend towards lower costs of production through larger average farm sizes and integration of harvesting, transport and milling operations. This improves asset utilisation and minimises overhead costs; – production factors such as climate, disease and pest levels while cane is either growing or being harvested play a role in cane production levels and the quality and content of cane produced; and – cane is a ratoon crop and therefore farmers are, to a certain extent, locked in for a complete crop cycle regardless of cane prices. Otherwise they face significant crop losses. Costs The level and behaviour of total costs of cane production have been analysed in a number of industry studies that have been associated with issues regarding deregulation of industry arrangements and the need for adjustment assistance. The evidence is mixed as to the relationship between farm size and costs of production (Hildebrand 2003). Economic studies have suggested no evidence of such a correlation and commercial studies of industry practices have suggested that large-scale operations provide a lower unit cost of output. The most recent estimates of the total average costs per tonne have been compiled through ABARE studies in 1996. These derived an estimated cost of $30.80 per tonne of cane, of which about $23 relates to cash costs. Price Determination in the Australian Food Industry A Report 97
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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
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The approach taken The pricing anal
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The changing value chains - various
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The approach taken Assumptions used
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Figure 39. Lamb market sales, ’00
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Page 60 and 61: Observations The price comparison s
Page 62 and 63: Figure 46. Pork products, supply ch
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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 100 and 101: • The major cost faced by egg pro
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 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
Page 148 and 149: Price Determination in the Australi
Page 150 and 151: Oczkowski, E, Murphy, T 1999, Influ
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Price Determination in the Australian Food Industry A Report

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