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5 reasons why transparency is important in the cattle industry

Posted by Matt Dalgleish on 14 April 2016
Matt Dalgleish

The Australian Competition and Consumer Commission (ACCC) announced in early April of a market study into the cattle and beef industry to be undertaken this year. Issues covered by the study are wide ranging but a particular aspect of the investigation that caught our eye was the focus on greater transparency with regard to profits and margins along the beef supply chain.

The lack of information and transparency regarding processor operations, unlike in the US, means many participants in the beef supply chain in Australia are left in the dark. As there is no mandatory reporting of prices in Australia beef price information is largely gathered from saleyards across the nation. Given that approximately 30% of cattle slaughtered in each year are purchased through saleyards the current system does not accurately reflect the entire industry.cattle_auctoin.jpg

Since 1999 processors in America have been required to undertake mandatory price reporting to the United States Department of Agriculture (USDA). Processors advise the USDA of how much they pay beef producers and the prices they receive for their wholesale cuts. The USDA report shows producers precisely where the money is going throughout the beef supply chain.

Under this system processor margins are regularly reported on allowing for all industry participants to have a clear understanding of what is going on within the industry which deters anti-competitive practices, promotes efficiency and improves profitability across the entire beef sector.

Mecardo processor margin cut-out model

In order to shed some light on this aspect of the beef supply chain the team at Mecardo developed a cut-out model to analyse processor margins. Figure 1 highlights the various cuts available from a beef carcass which have been used to calculate a theoretical total cow value.  

As seventy-five percent of Australian beef is exported the cut-out model primarily uses monthly beef export prices in Australian dollar terms from the major beef trading partners such as US, Japan and South Korea in order to derive an approximate value of each cut-out piece of the carcass. In addition, co-product prices are used to derive a value on the associated by products of the slaughter process which is added onto the total cow value.

 cutout_diagram.png

The total cow value figure is used to indicate potential average revenue per head of cattle to the processor on a theoretical basis. Processing costs such as labour, plant operating costs and the initial purchase price of the cattle can be determined on a per head calculation to arrive at a total cost figure. The total cost per head of cattle purchased can be subtracted from the total carcass sale value to arrive at a processor margin calculation per head.

Although the modelling behind the theoretical cut-out model is robust and appears to give an accurate picture of processor margins there is no substitute for the transparency that would be evident under a mandatory reporting system.

Read our most recent cut-out analysis

Benefits of a more transparent beef industrytransparency.jpg

  • Transparency will encourage greater trust among industry participants allowing for fairer and more efficient negotiation between relevant parties within the beef industry, such as between producer and processor, workers/unions and processors, agents and producers/processors, processors and their customers.

 

  • Transparency will allow for a level playing field among industry participants which will encourage competitiveness. The current system means that producers have limited knowledge of the price processors receive for their beef products and this leads to a belief by producers that they get a raw deal when it comes to the proportion of the retail price they receive.

 

  • A better understanding of the factors that impact pricing grids/grading/proceeds from co-products allows producers to negotiate more effectively or use collective arrangements to bargain when there is a disparity in bargaining power.

 

  • Improved knowledge of processor operations could highlight best practice procedures within the industry leading to a benchmarking program that would assist less efficient processors to improve practices and improve profitability.

 

  • Greater clarity and understanding of the factors that affect the industry brings confidence to all participants, allowing for greater confidence in marketing and investment decision making.

 

An assessment into the effects of the mandatory reporting system on the beef industry conducted by the USDA uncovered substantial gains flowing through to producers, processors and consumers, all of whom benefited from having more transparent information on prices.

Some industry participants have expressed concerns that a system of mandatory reporting could pose problems for the Australian beef industry, putting at risk any competitive advantage currently held by allowing access to private information about how much beef is being produced and at what cost.  However, this argument should not impede the progress of a transparent mandatory reporting program as information on beef export prices and production levels is already openly available and the data gathered need not include specifics from a particular processor.

Topics: Australian cattle industry, beef price

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