Managing the painful transition to fairer beef prices.

Host: Dr. Ross Ainsworth

After more than 40 years of terrible prices, it is a delightful change to finally see producers getting a much fairer share of the value of their commodity. For four decades, the attractive margins have always been further down the supply chain with everyone else down the line relying on the producer to cut their prices to ensure that they could all stay afloat.

When the meat works can’t make a profit, the producer has to take a lesser price. When the live exporter can’t make his sums add up, the producer has to take a lower price. When the supermarkets want to capture some more market share, the producer has to take a lesser price. You all know the story better than me. But finally the boot is on the other foot and there are not enough cattle to go around and too many buyers wanting even more than before.

The problem is that if the producer squeezes too hard then the abattoir and the butcher shop and the live exporter will go out of business and the supply chain will be disrupted and producers will suffer along with the rest. Producers must have access to an intact supply chain or their business just wont work. Even though they have consistently been forced take the pain of cost reductions since the early 1970s’ it is simply not possible to do the same to all the middle men along the live cattle and beef supply chain.

The business models of those downstream from the producer are nowhere near as elastic as a pastoral enterprise which can stay afloat on the smell of an oily rag for decades and just keep getting more efficient and produce a better product despite being screwed in every direction from fuel to labour costs to lick prices to interest rates etc. Nobody else in the supply chain has the capacity to survive like the pastoral industry and to adjust to new challenges which come out of the blue. e.g. the Asian financial collapse in 1997 and the closure of the Indonesian trade in 2011.

The rest of the supply chain must adapt to this new supply and demand environment but it will take time, much longer than it takes the pastoral industry. The prime example here is the very end of the Australian chain, the Mum and Dad retail customers. They have been the primary beneficiary of declining beef prices for 40 years, eating the world’s best beef at close to the world’s lowest prices. Well bad luck for them, the picnic is over. The reality however is that consumers don’t have a very long memory and all they know is that beef prices are going up and they don’t like it. I see this happening all the time in Asia where retail prices have been steadily climbing for close to a decade.

Nobody likes to pay more for their food but given enough time, a good quality product that is desired by its consumers will achieve a higher price. The consumer simply has to go without for a while and then decide that the additional price that must be paid to get this product back to the dinner table again is worth it. I have been watching this carefully in Indonesia since about 2010 when the slaughter steer price was Rp22,000 per kg live weight. When that price rose to Rp24,000 per kg live weight everyone predicted the end of the trade. It took about 3-4 months for customers to return and pay the higher rates and this pattern has continued until today when the live steer price is Rp42,000 per kg live weight and the customers continue to line up and buy.

So Australian consumers will complain and blame anyone they can that the prices are unfair but given a few months of going without delicious Aussie beef they will decide that the small increase in price is worth it because it is such a magnificent product. They should also be reminded that their retail price in comparison to their earnings is still one of the cheapest in the world and probably always will be.

Abattoirs are an essential part of the supply chain so if they are prevented from making a profit because producers push their prices too high then they will go out of business. Producers in the north will know the reality of that proposition if they can remember back about 30 years when there were abattoirs all over northern Australia. They didn’t go out of business because they were making money, they just went broke because the numbers didn’t add up, even when they bought some of the cheapest cattle in the world. Everyone knows that Australian abattoirs have had a picnic for the last few years when cows were flooding onto the market because of the drought and world prices were booming but that was just good luck for them. If they are not allowed to make a profit today then they will be out of business tomorrow and producers will suffer the consequences.

Likewise live export companies have had a pretty good run for the last decade or two with the exception of the two collapses that I have mentioned above but they are a necessary part of the demand side of the northern industry and if they go broke because they cant make a profit then the producer will once again suffer the consequences.

I know it’s galling, but the simple fact is that when the chips are down the producer always has to be the final resting place of the price adjustment because the other parts of the supply chain just don’t have the resilience and capacity to take the knocks and survive that the pastoral industry does. The really hard part here is deciding what is a fair thing and how the new “sharing” of the profit along the chain should be calculated. In short, this is uncharted territory and nobody knows where the new fair split needs to be that will give the producers their more equitable share but not drive the other critical parts of the supply chain to the wall.

At the same time retail prices (in Australia and world wide) will be forced upwards which will ease the pressure off decreasing margins along the chain but will it happen fast enough? Unfortunately this can only be discovered by trial and error with some parts of the supply chain going under to provide the rest of the stakeholders with hard evidence that the share for this sector has become too skinny and cannot be sustained. When this happens, the industry will know where the limits are for that sector and so on until all parts of the chain have found their new sustainable pricing/margin range and the industry will settle down again into the new supply and demand environment which will survive until the next shock comes along and the process is repeated. And the Aussie consumer will be dragged kicking and screaming into a new reality where they pay a fairer price for beef but the process will be a slow one.

My prediction is that the Australian producer will never, ever be able to catch up with world demand for their high quality, disease free beef and therefore (apart from wars, volcanic eruptions and tsunamis etc) will remain in the very privileged position of being physically unable to reach a point of oversupply into the foreseeable future.

Ross Ainsworth
June 2016
www.seabeefreport.com

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