Price Determination in the Australian Food Industry A Report

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OILSEEDS – OVERVIEW Background The oilseed industry is predominantly export-focused, although this varies between crops. The main commodity used in retail cooking oil and margarine is canola, with smaller quantities of sunflower and soybeans. This report focuses on canola because it represents over 50 per cent of the oils and fats used in the domestic retail market. Australia produces on average 1.6–1.8 million tonnes of canola annually, of which around 400,000 tonnes is used in the domestic crushing sector almost exclusively for products for the domestic industry. As such, international price movements of both canola and the competing oils and fats crops are the major factor influencing raw material prices. As in other agricultural businesses, because the raw material is the major cost component, the influence of international prices is felt right through the value chain. The industry’s product mix and use The industry uses a range of oils and fats in its product range (see graph below). However, many of the more important in terms of total volume are not used in retail products, namely tallow, palm and cottonseed. Figure 84. Industry’s use of oils and fats 1994–1995 canola sunflower other soft oils olive soybeans cottonseed palm tallow 1999–2000 2000–2001 2001–2002 2002–2003 0 100 200 300 400 500 600 ’000 tonnes Price Determination in the Australian Food Industry A Report Source: Australian Oilseeds Federation All palm and most olive oil is imported, with both these commodities growing their share of the market. For palm oil this growth is price-based and for olive oil it is lifestyle and image-based. The graph above illustrates that canola has steadily increased share as production has increased (except for the impact of the 2002–03 drought). Canola has now replaced all other soft oil usage that does not have an intrinsic demand. The retail market is an important segment for the oils and fats industry in terms of value but is less important in terms of volume – see graph below. The retail market is not growing other than for the olive oil and value-added segments, such as plant sterol-enhanced margarines. The food service and food manufacturing sectors are growing by around 2 per cent per annum. Figure 85. Market mix of the industry’s use of oils, 2002 commercial 37% food service 28% Source: Australian Oilseeds Federation retail 35% 80
In addition to imports of crude or refined oils which are further processed in Australia, there are imports of finished products which have a significant impact on the retail market and prices. Figure 86. Oilseeds: Major drivers of prices and costs 1. Farm production factors • Can be significant volatility in production which affects price and quality – oil content can range from 36–48% which effects the profitability of crushing. • Production variation greater for summer-grown oilseeds. 2. Value-chain integration • High level of integration from farmgate to consumer, with high levels of concentration at primary and secondary processing and retail. • Industry is characterised by very low economies of scale, in particular compared with international competitors, and this has significant impact on the cost base. • The ability to expand the crushing sector is constrained by domestic demand for oil and lack of competitiveness in international markets. 3. The marketing approach • There is a high brand presence with two of the largest consumer food companies involved in the marketing of oils and fats – Goodman Fielder and Unilever. • There has been increasing differentiation of products initially around poly and monounsaturated oils and seed type but increasingly on special health properties, for example, plant sterols. • The market is one in decline at the retail level and thus the focus has been on brands and product differentiation to lift margins. Export marketing Farm production Crushing Refining and packaging Marketing Distribution Wholesaling Retail Food service 4. Regulation and compliance • There are no major regulatory issues. There are still single desk arrangements in place in New South Wales and Western Australia for canola but this does not have a significant impact on the industry. • As many of the plants in the industry are old, they tend to be located in or close to metropolitan areas and thus, environmental compliance is an ongoing issue. • Increasingly food safety is an important issue and most plants would have a hazard analysis critical control path (HACCP) and/or ISO accreditation. • A key issue facing the industry at present is the potential introduction of genetically modified canola. This could potentially increase the cost base of the industry if segregation for genetically modified and non-genetically modified is required. 5. Trade impacts • The influence of exports is significant in canola and cottonseed but sunflower oil is regularly imported to fulfil requirements. • High levels of imports of palm oil for the low-cost end of the industrial market and olive oil at the high end of the retail market. • The influence of imports of finished products from developing countries has a significant impact on retail prices in Australia and the subsequent profitability of local processors. 6. Technology and innovation • The crushing industry is characterised by old technology with inefficiencies occurring in equipment operation and configuration. Australian plants have a high labour ratio compared to large overseas plants. • There has been one new greenfield crush site developed in recent years which is state-ofthe-art but still small-scale. • There has been a move to a more diverse product range to meet consumer needs and the industry is likely to see further development of specialised products, such as high oleic canola. This will require investment in segregation and identity preservation systems. 7. Retail market dynamics • Private label products are a major part of the market (50% of the market for cooking oil) and put downward pressure on prices. • Changing consumer patterns are having a major impact on demand. Consumption of margarine is declining as people substitute other sorts of spreads on sandwiches or go without. • The supermarkets demonstrate significant influence and in the case of cooking oil use the threat of imported finished product as a means of keeping prices down. Price Determination in the Australian Food Industry A Report 81
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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
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 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 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
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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
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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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