Price Determination in the Australian Food Industry A Report

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Supply chain management Wholesale markets remain a major function within the chain where the majority of prices through the chain are set or directly influenced. This is despite an increasing percentage of business direct to supermarkets to support their fresh product image and customers, and to obtain greater stability of returns. This practice varies by category based on the volume of individual commodity lines and the scale and sophistication of the enterprises. The size of the consumer markets accessed by major supermarket chains has applied pressure for coordination of facets of supply activity (for example, quality management). However, the range of buying options reduces the scope for other forms of integration between producers (such as the use of open-price supply agreements and mixing supply between direct sources and purchases off the market floor). Seasonal competition exists subject to availability – though this is less of an issue these days as crops of major lines tend to be available all year. Main drivers of prices through the chain: • Retail prices are influenced by the seasonal costs of supply but also by the level of spending by the consumer. The consumer is sensitive to the cost of fresh food items that go into the shopping basket. • The wide range of factors that drive the retail pricing of any food category over time are set out later in the report. • As with other categories, retailers seek a target margin to achieve corporate and/or business targets but also to cover losses associated with produce spoilage, clearance discounting and the labour-intensive business of putting fresh food appeal into practice with stock display replenishment and adequate turnover of bay space. • Wholesale prices (where the grower sells produce to a wholesaler who on-sells or sells on the grower’s behalf to a retailer) are generally set in the fresh wholesale market system which exists in capital cities and limited other major urban centres. The increasing practice of producers directly supplying retailers to bypass wholesale markets are nonetheless set with reference to such prices. Price Determination in the Australian Food Industry A Report • Seasonal crop variations resulting from climatic change and other natural events or causes are generally the greatest single production factor to affect prices. Such variations affect: – higher/lower output than the normal crop; – smaller/larger fruit size; – climate/storm damage; and – crop disease and pest damage. • The wholesale price setting mechanism is not set to pay the highest for best quality but to clear all product that is supplied. At times it pays low prices for high quality and vice versa. • A major weakness in the fresh food market system is the lack of discipline that is sought by the supplier to the market and the general lack of complete information as to the supply and satisfied demand at any point in time. • Market pricing is therefore open to manipulation by the intermediary and to a lesser extent by major buyers due to the lack of total market visibility. A major fresh food market is a place for the well informed buyer and seller in this day and age. Otherwise participants are exposed to price/return risks, regardless of product quality. • Supply is still the largest driver of price. Markets are relatively uninformed with minimal credible forecasting data or an understanding of the volume/price relationship. This leaves much trade occurring in commodity conditions. • More organised fresh categories which provide participants with good information as to total crop forecasts, market conditions and product availability over a season are far better at managing the risks that arise from poor information. 54
Figure 50. Fresh fruit: Major drivers of prices and costs The fresh fruit category is highly diverse in terms of the product groups, scale of enterprises in farm production and extent of integration that exists through the chain. The sector is strongly driven by the competition at retail level between major supermarkets and other outlets for a share of the consumer dollar. 1. Farm production factors • Production volume highly volatile and seasonal which has a major bearing on the volumes coming to market, resulting in large fluctuations in wholesale and retail prices. • High perishability and limited shelf life of product requires timely access to market once crops are planted and picking time committed. • Pressure for water-use efficiency has improved yields over time. 2. Value-chain integration • Increasing scale efficiency and integration of growing/packing and brand marketing activities by larger growers. • Increasing incidence of direct supply by integrated growers/packers to chain retailers, providing stable pricing in order to secure long lines of consistent quality product. • Pressure on wholesale/agency enterprises through growth in direct supply business. • Juice fruit availability and returns have strong bearing on returns to citrus sector. 3. The marketing approach • Increasing branding of product by grower/packer has impact on market access to more stable returns at retail and wholesale. • Increased use of fresh food retail themes and systems by major chain retailers as a point of differentiation has driven strong supply and quality management disciplines back through the value chain to suppliers and logistics systems. • Limited branding of fresh food at point of retail sale. Juice processing Growing Packing Retail Wholesaling Food service 4. Regulation and compliance • Increasing costs of doing business in farm enterprises to meet environmental, product integrity and food safety demands. • A few other regulatory barriers to value-chain profitability. 5. Trade impacts • Export volumes are increasing in scale but based on market windows into premium fresh markets in Asian cities. • Potentially strong impact of imports in certain areas (bananas, pineapples, table grapes, apples) is currently adversely affecting confidence for further investment to maintain economies of scale in production enterprises. 6. Technology and innovation • Increasing capital intensity in large-scale production and in packing house efficiency is changing operating cost structures. • Limited transparency of market prices and costs through the wholesale market sector. • Greater investment in innovation to improve production consistency and quality, varietal performance and handling efficiencies in harvesting, grading, transport and packing. • Innovation in minimal processing and pre-preparation of fresh fruit for more convenient end use in home and food service. 7. Retail market dynamics • Strong competition at retail level between major chains and between chains and other forms of convenience and specialty retail. • Competitive pressure from food service. • Greater demand for convenience and lifestyle solutions in meals and food preparation. • Greater preference for consistency of product availability and quality in retail presentation. Price Determination in the Australian Food Industry A Report 55
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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
Page 16 and 17: • assertions as to market power i
Page 18 and 19: Overview - main drivers of prices i
Page 20 and 21: Price Determination in the Australi
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 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 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 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
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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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Oczkowski, E, Murphy, T 1999, Influ
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Price Determination in the Australian Food Industry A Report

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