Price Determination in the Australian Food Industry A Report

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The changing value chains – various integration models The pages that follow outline the value chain for the sector, although it is necessary to appreciate the complexities with which the beef sector is grappling. The domestic beef value chain sees increasing diversity as the competition within the sector remains strong, and while competing meats and protein sources improve their sophistication. The following points are relevant: • Beef production companies are vertically integrating through the chain (for example, AACo and Stanbroke) to manage breeding, finishing, processing and retailing/branding. • There are limited barriers of entry for grass-fed beef production. However cattle herds are increasing and rural land prices continue to escalate. • Producers with feedlot operations – more attractive to the marketplace – achieve sufficient economies of size and better leverage based on their ability to deliver larger numbers of quality carcasses on a more consistent basis. • Smaller producers, often with limited quality control systems, prefer liveweight and saleyard selling systems where they are not penalised for poor carcass quality. • Processors have high barriers to entry (in terms of required capital, access to export markets and access to sufficient throughput of carcass volumes), experience strong competition and strong exposure to business risk due to the level of invested capital. Processors will tend to absorb the risks associated with fluctuating volumes. • Processors are looking to embark increasingly on value-based livestock selling and marketing. • Retailers have access to significant contract processing capacity to provide scope to improve their control over the overall returns from the carcass. Figure 34. Beef: Major drivers of prices and costs The beef sector is an extremely diverse category with a very wide range of product applications and market/product combinations. Price Determination in the Australian Food Industry A Report 40 1. Farm production factors • Production stable – limited production volatility. • Limited effects of the seasonality of production • Profitability of intensive operations influenced by feed prices. • Meat products are perishable with very limited shelf life once slaughtered. Timely access to markets is important. 4. Regulation and compliance • Increasing costs of compliance with environmental, welfare and food safety requirements for beef producers and all meat processors. • Limited further integration of processing under competition laws. • Strong requirement to meet ethical and product integrity demands in export markets. Farm production 2. Value-chain integration • Increasing integration of production, processing and marketing along the chain. • The management of supply of product through the chain is affected by a large trade in frozen product. • Integrated (vertical) value chains are being driven by a variety of models – a mix of producer-led, processor-led and retailer-led. • Large producers integrating through marketing alliances. • Increasing scale efficiency of beef production facilities (feedlot) and processing works. • Greater concentration of processing ownership. Processing 5. Trade impacts • Returns to beef industry are driven by the nature and scope of export market access into a range of high-value and commodity market segments. • Export share of total output fluctuates and accordingly determines overall wholesale returns. • Prevailing world commodity prices effectively set wholesale prices in domestic markets. Marketing Wholesaling Retail Food service 6. Technology and innovation • Increasing capital intensity in feedlot production and processing facilities is changing cost structures. • Moderate transparency of market prices and costs provides adequate market signals to early chain participants. • Technology in beef genetics, lot feeding and especially traceability are improving the quality and reliability of the product. • Greater investment in innovation to diversify beef cuts according to eating quality and to extract value through marketing lower grade commodity. 3. The marketing approach • Increasing differentiation and de-commoditising of beef products through specialised cuts and eating quality grades to enhance competitive position against other forms of protein. • Niche branding of beef products based on ethical and integrity values. Export 7. Retail market dynamics • The growth of the private label in meat retail packaging. • Declining per capita consumption in recent years through price competition from other meats. • Greater demand for convenience and lifestyle solutions in preparation of cuts for a wider range of meal solutions. • Greater concentration of the retail markets for meat products in supermarkets. • Strong segmentation in retail market between premium, mid-range and commodity products from retail and specialist butchers.
Figure 35. Rump steak, grassfed, 1kg, supply chain map Farmer Primary Process Secondary Process Market Logistics Retail saleyards/direct consignment transporter Brand Ownership/ Management Fattening Property Broker/agent Food Service saleyards/private sale Abattoir and Bone Out Wholesalers Butcher Domestic Consumer Breeding Property • 76,557 beef enterprises in Australia. • Around 25 million head of cattle. • Gross value of production around $5.7 billion, with 65% of production exported. • Feedlot sector has about 27% of total production. • Main drivers of price – herd levels in competitive world market suppliercountries, export status of competitors, export market sector demand, consumer preferences, drought, health status. • Niche market supplier prices driven by these are additional factors associated with quality. toll process route • There are around 250–300 meat processors (beef and sheep meat) in Australia. • Around 25 large processors located across Australia process 61% of production. • Bone out is done primarily at the abattoir where the animal was killed. • Increasingly, producers are retaining ownership of their beef beyond the farmgate and marketing it under their own brands. Therefore they use the toll processors. This method is being undertaken by larger players. • Increasing integration up and down the value chain is reducing the role and influence of a separate wholesale function. Chain Retailer • Fresh beef is sold through major supermarket chains and butcher shops. BEEF – ANALYSIS OF PRICING Retail, wholesale and farmgate As discussed above, there are dangers in simple comparisons between farmgate and retail prices. The limited long-term series price data for meat shows that there is little correlation between levels of prices over time. Figure 36. Farmgate, retail and wholesale price trends, cents/kg, 1998–2003 cents/kg 1800.00 1600.00 1400.00 1200.00 1000.00 800.00 600.00 400.00 200.00 0.00 Source: MLA and NLRS retail silverside wholesale rump portions wholesale carcass yearling heifer sales OTH retail rump steak retail chuck Oct 1998 monthly June 2003 Price Determination in the Australian Food Industry A Report 41
Page 1: Price Determination in the Australi
Page 4 and 5: © Commonwealth of Australia 2004 T
Page 6 and 7: FOOD AND AGRICULTURE BUSINESS GROUP
Page 8 and 9: FIGURES Price Determination in the
Page 10 and 11: Price Determination in the Australi
Page 14 and 15: • The current focus of retail cha
Page 16 and 17: • assertions as to market power i
Page 18 and 19: Overview - main drivers of prices i
Page 22 and 23: Food lines The analysis of food pro
Page 24 and 25: Figure 1. Overview of the approach
Page 26 and 27: Figure 2. Corporate profitability I
Page 28 and 29: Figure 4. Major drivers of prices a
Page 30 and 31: 5.3 The greater influence of prevai
Page 32 and 33: DAIRY - PACKAGED MILK Overview of t
Page 34 and 35: Figure 10. Whole milk, 2 litre, sup
Page 36 and 37: Prices through the chain Our analys
Page 38 and 39: Figure 16. Natural cheddar cheese:
Page 40 and 41: Farmgate prices Farmgate prices are
Page 42 and 43: DAIRY - ANALYSIS OF PRICING OF DAIR
Page 44 and 45: Figure 25. Dairy butter and blend s
Page 46 and 47: ‘Step-ups’ are paid by several
Page 48 and 49: THE MEAT SECTOR Analysis of the det
Page 50 and 51: The approach taken The pricing anal
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 100 and 101: • The major cost faced by egg pro
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Figure 96. Consumer price index, fo
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• Many such operators have indica
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SUGAR PRODUCTS Analysis of the dete
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Figure 103. White sugar, 2kg, suppl
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Projected export returns for the co
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• Export prices are driven by glo
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Retail prices • The average retai
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Industry risk • The overall retur
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4. The performance of Australian fo
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THE PERFORMANCE OF AUSTRALIAN VERSU
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THE PERFORMANCE OF GLOBAL BRAND MAN
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THE PERFORMANCE OF PRIMARY MANUFACT
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Our purpose in preparing this secti
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GROCERY RETAIL - WHAT DETERMINES PR
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The consumer trend towards eating o
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GROCERY RETAIL - PERFORMANCE OF GRO
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6. Issues for consideration ISSUES
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PRODUCER INTEGRATION Does integrati
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Industries have in several cases ta
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Examples include: • 1 litre milk
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Figure 132. Targeting the stomach H
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MAJOR ADJUSTMENT - WHAT’S HAPPENI
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THE IMPACT OF DROUGHT The sector Di
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Price Determination in the Australi
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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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