The latest Senate enquiry into the power of processors has some fascinating submissions brought forward.
One of the most interesting submissions brought forward was by the Victorian Farmers’ Federation VFF. What producers want is a simple clear, adaptive and realistic marketing structure that can deal with markets as it exists now and is capable of keeping pace with the evolving consolidation and rationalisation in the processing sector and retail market. Just like the ASX agriculture markets require proper regulation covering market structure, market integrity and rules of conduct.
The system for regulating agriculture markets in Australia is fragmented, outdated and ineffective, in fact there is very little difference between the structure of livestock markets that we have now as opposed to the early 1900’s. To me the big change is the end dollar which has seen more going to processors and less to producers.
Possible solution is to give the Australian producers the ability to exercise market power by equalising the bargaining power of market participants through a transparent market trading structure using market conduct and integrity rules.
The complex supply chain means that market power can be revealed in a number of ways such as non-competitive terms as well as generic information on prices which may be too general to be of much assistance.
For their part Swift maintain over the hooks prices are negotiated on cents per kilogram basis, they also maintained that MLA has a comprehensive database of all prices paid. At this point I’m little confused as to what database they’re talking about and with whom are they negotiating. However they may be referring to the Eastern Standard Indicator or saleyard prices which are made up of many factors and prices including store stock. Hardly a good guide to what one could expect when looking for over the hook prices. They also go on to quote the ACCC findings in 1997/ 1998 which to my mind was simply a disgraceful report which would not stand up to basic scrutiny. This company is also the master of discounts, they pay on sides of beef and if the carcass is not split exactly down the middle then savage penalties are applied. This is just one example of many.
Swift also comment on producer and processor relationships. The productivity capacity and profitability of the producer is critical to the supply chain. Surely if they were serious when the Eastern Standard Indicator came down to $2.80/kilogram, which in most cases would be below the cost of production, they had the option of paying producers a price that was above the cost of production. Processors are very good at pointing towards the high costs of wages in Australia compared to overseas, this may be true. As opposed to this from a 600kg live beast in Australia one could expect 312kg (52% dressing) while in the US at 63% dressing gives 66kg more at $6/kg is $369 more. (Forget the $/kg difference)
It was interesting to watch one well known publication suggest that the processors who were paying $3.40 at one stage were making only 5 cents per kilogram. Since that time overseas markets for beef and by-products have stayed about the same as well as the AU dollar. Would it be possible that the same processors are losing $2.55/kg if they are paying $6/kg?
New South Wales farmers understand that processing facilities are private facilities and are not subject to third-party access obligations. However the trend reduced access to service kills has had a significant impact on competition. Farmers’ ability to access service kills is one of the central means by which they are able to increase the value of their produce. Service kill arrangements could be considered within the scope of mandatory code of conduct for the operation of the red meat supply chain.
AusMeat as a former staffer Greg Chapple is quoted as saying “I’m horrified by its inflexible approach and AusMeats currently suffers from process worship rather than the outcome customer focus.” MSA consumer-based grading incorporating cook and cut is a unique vehicle to provide the beef consumers with a non-failing beef eating experience. The implementation was hijacked at the 11th hour with independent grading being handed to the processing companies so that processing companies now referees a carcass cut outcome. Why would this happen? It still hasn’t happened in the US because USDA graders grade carcasses as third party independents.
This Senate Inquiry will be a fascinating look at the machinations of the workings of the red meat processors and others critical in the supply chain.