Price Determination in the Australian Food Industry A Report

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Industry risks The key area of risk for the industry is the ability to maintain margins due to: • competition from imports; • the high cost base of the processing sector; • the low level of growth in the category; and • increasing share being captured by generics. In relation to imports, a potential area of risk relates to the development of free trade agreements such as that with Singapore. These may pave the way for increased imports of bottled oil. To date, the refiner industry has used its skills in management of inward logistics to provide a competitive advantage particularly in the food service and commercial sectors. The high cost base of the processing industry – both crushing and refining – is a key issue when compared to the very competitive South American industry. The economies of scale obtained by these plants and increasing shipment sizes allow crude and refined oil to be landed in Australia at very competitive values. To combat this, the crushers have continued to focus on pushing costs down through: • controlling core costs of steam, electricity and repairs and maintenance – these account for about 20 per cent of processing costs; • increasing volume to reduce per unit fixed costs; and • reducing origination costs, for example, the joint venture by Cargill with Graincorp and Allied to form Australian Grain Accumulation. Another way for the crusher to improve margins is vertical integration of both oil and meal. This is common practice globally where crushing, refining, packing and even consumer marketing are integrated into the one operation. This has not yet occurred in Australia. For the crusher, managing price risk on raw materials is a key issue. The crusher can do this by hedging oil against Chicago, meal against Chicago, seed against Winnipeg or a combination. However, all have inherent difficulties. Price Determination in the Australian Food Industry A Report Another area of risk for the industry is the increased focus on reducing fat in the diet. This tends to have greatest impact in the retail sector as consumers cut out fat that is visible – such as margarine on bread – but continue to eat invisible fat – such as fast food and processed foods. The fat used in the retail products sector tends to be price driven and therefore palm and tallow – both high in saturated fats – are the largest volume players in this market. Value-adding The industry has looked to product innovation to drive growth in margins and reinvigorate the market. This has included: • products targeted to the functional food market in the form of margarines that are enriched with plant sterols to provide health benefits. Since entering the market these products have quickly increased sales and now account for 3 per cent of the market. These products retail at around three times the value of the standard product; • margarine blends with olive oil to create improved image and health awareness. This segment of the market is growing strongly and retails at a premium to the standard product; • margarine blends with butter; and • blends in cooking oil – for example, olive/canola and specialty products such as monosun and monola – as ways of adding value and expanding markets. This has also included product variations such as Asian oils suited to particular uses such as stirfrying. 86
EGGS Analysis of the determinants of prices and costs in product value chains EGGS – OVERVIEW Background The industry has been undergoing structural change since production and marketing was deregulated, commencing in the 1980s. This saw a reduction in production, lower margins in the early supply chain and a greater share of returns in the retail sector. Of egg production output, 65–70 per cent is consumed in the household sector which is showing no growth. Other sectors of consumption – food service and industrial and commercial uses – are showing slow growth. The domestic egg market has suffered as the egg has lowered its profile as a major source of protein and other sources have gained important ground. The fresh egg category is also under pressure from the increasing demand for health and convenience foods, which the egg sector has not been able to successfully overcome. The industry structure It is estimated that 40 per cent of eggs are sold through major retail chains, 35–40 per cent through the box market and the rest into the route trade and convenience retail segments. The box market is characterised by small retailers who have the ability to make the local decision on purchase terms and prices. There are seven major egg marketing groups in Australia, employing a range of different business models in terms of integration of production, grading, packing and marketing. The national industry has progressively evolved from state-based supply regulation. Today, despite rapid expansion of certain packing and marketing enterprises, none of the groups is capable of servicing retail on a national basis. Cage eggs are 83 per cent of retail grocery sales. Free range represents 11 per cent and barn eggs the remaining 6 per cent. Major factors affecting prices • Egg prices in the domestic retail market are strongly driven by the interaction of supply and demand over time. Figure 93. Birds in egg production, 1994–2002 ’000 birds 15,000 14,000 13,000 12,000 11,000 10,000 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: Australian Egg Corporation Ltd Price Determination in the Australian Food Industry A Report 87
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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
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 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 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
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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