Recent commentary has maintained an unproductive focus on domestic retail meat prices. Not only is the emphasis on who gets what share of the retail dollar based on flawed principles, it distracts from understanding the real drivers of returns throughout the supply chain and, may, have unintended consequences.
After some gradual reductions, the major supermarkets dropped retail meat prices in the realm of 20% in recent weeks. If this reduction is based on market drivers and reflects the whole of supply chain cost of goods, then this makes sense. However, if it is based on wider political pressure and reflects a departure from market principles that is concerning, as it will undercut the profit margins of thousands of independent local butchers across Australia.
Livestock prices have kicked across Australia in the last week, as east coast rain has eased producer concerns of feed and water availability going into the summer. However, the heightened publicity on retail meat prices falling may make it difficult for the supermarkets to backtrack on discounts and pass on any rebound in livestock prices, as consumers have been prepped to expect cheap meat going into the festive season. While the supermarkets can sustain low meat prices to bring in shoppers and make it up elsewhere, independent local butchers don’t have that option and may find it hard to compete, especially if livestock prices continue to climb.
Limited metrics produce limited insights
Retail prices have garnered attention due to their apparent divergence with the livestock market, often expressed as the over-simplified ‘producer share of the retail dollar’. Australian red meat supply chains are complex and diverse. Tens of thousands of producers raise and finish livestock to a wide variety of specifications, which are then slaughtered and transformed into hundreds of products sold domestically and the world-over. Yet, the producer share of the retail dollar attempts to boil this complexity down into one simple number.
The producer share of the retail beef dollar is calculated from (1) the saleyard trade steer or trade lamb indicator and (2) an extrapolated indicative retail price from the Consumer Price Index. Animals purchased through the saleyard pathway reflect the ebb and flow of restocker and feeder buyer demand, making the apparent swings in producer share of the retail dollar overly sensitive to feed and water availability. The saleyard is not a good indicator of what supermarkets or processors are buying.
The indicative retail meat prices are calculated by indexing forward a basket of beef and lamb products from 1973 (i.e., in the case of beef, this basket was rump steak, silverside and chuck steak). While useful for tracking high-level trends, indexing forward a historical basket of goods cannot pick up changing consumer behaviour, especially as shoppers shift to more convenient and pre-prepared options. Put simply, the calculation for the producer share of the retail dollar glosses over structural changes in the red meat supply chain and Australian consumer behaviour, making drawing any conclusion fraught.
If these technical shortcomings can be overlooked as an ‘error factor’, and that’s a big ‘if’, the apparent drop in the producer share of the retail dollar reported recently must be read hand-in-hand with increasing cost pressures post farm gate. While costs for producers, processors and retailors have all clearly risen, the acute jump in wages and energy have been borne in greater proportion by the people and power intensive post farm gate businesses. After the consumer spends that dollar, what’s available to be passed back to the producer has been heavily eroded by input cost inflation.
The real drivers of low farm-gate prices
The focus on the produce share simply distracts from what people throughout the supply chain can actually do to make their business more profitable and resilient. While it may leave a bitter taste for producers to see the price of lamb cutlets retail at $50/kg and saleyard lambs below $5/kg cwt, both these prices are being driven by market forces.
At a retail level, consumers have clearly been willing to pay $50/kg for cutlets. This is thanks to the work industry, supported by Meat & Livestock Australia’s marketing team, has done in promoting red meat domestically. It is counterintuitive that some commentators are calling for this work in building premiums to be undone, simply because they want the consumer price to track the saleyard price more closely.
Moreover, retailers of meat seek to take volatility out of their pricing and make changes more gradually, softening the peaks and troughs in the underlying livestock market and incorporating a range of other costs into their decisions. Taken to the extreme, we would simply confuse and frustrate consumers if retail prices were as volatile as the weekly swings evident at the saleyard.
The livestock market, prior to the last week, had been overwhelmingly influenced by a massive increase in cattle and sheep turnoff (and supply expectations) after several years of herd and flock rebuild. The same supply chain structures, the same number of abattoirs, and the same mix of retailers were in place when livestock were at record prices in the last two years. What has changed, however, is a marked increase in turnoff: last week, the cattle kill was up 22% and the smallstock kill was up 34% year-on-year. These massive swings in supply are fundamentally driven by producers reacting to climatic conditions and their ability to capitalise on feed.
While supply is the number one factor driving farm-gate price, global demand has also softened. Given we export over 70% of red meat produced in Australia, international markets have a far greater impact on livestock prices than the decisions of the two major domestic retailers. Household cash reserves built up over the COVID years have dwindled or been depleted and high interest rates are beginning to hurt consumer demand.
Australia will always be able to find a home for our red meat products but if global demand has softened the value that can be captured, and which can then flow back to producers, is reduced. Average red meat export prices are back 20-40% on year-ago levels. Beef and sheep offal prices indicate double-digit percentage declines and tallow is back in excess of 20% year-on-year. Hides are near all-time low values and skins are almost worthless or in some instances represent a disposal cost. The drop in export meat and co-product prices reflects a significant portion of value that is no longer entering the industry – and yet some commentators have called for this value to be eroded further by pressuring domestic prices to be lowered too.
Markets must remain central to decision making
While blaming a retailer or processor for the plight of producers may be easy, it simply ignores the massive swing in supply-side fundamentals – a misdiagnosis that distracts from improving future resilience and profitability.
Moreover, dropping retail prices won’t help the backlog of livestock in the system and pressure on farm-gate prices. Processors don’t have an issue selling meat – exports have recently just hit a four-year high. The best way to alleviate the pressure on farm-gate prices is to expand working processing capacity. While there is more beef processing capacity coming online in south-eastern Australia, the primary way to slaughter more livestock is to better utilise current plants by adding more shifts and finding efficiencies. While government can play a role in easing some of these supply chain frictions (or simply not enacting policy that would make it worse), industry ultimately needs the markets to send the right signals so all participants can make the right decisions.
Processors must be free to make a profit in the current environment. Processors invest hundreds of millions of dollars into their facilities, with the knowledge that over the long-term they will be rewarded for the level of risk borne in the capital they have tied up. Processors wore the losses and paid through the teeth to keep plants operating and staff employed in the previous three years, with the expectation that the increase in supply and favourable trading conditions would eventually return. If these profitable periods are capped or undermined by intervention, it will destroy confidence in the processing sector, limit future investment and innovation, and ultimately lead to less capacity (and competition) during the next peak in turnoff.
Instead of eyeing each other’s slice of the pie, if all parts of the supply chain focused on improving their business and what’s within their control, the entire pie will grow. This is the beauty of the invisible hand of market at work.
There is, however, still need for collaboration. It’s been a rollercoaster few years in the livestock market. Unless we find ways to mitigate and manage the underlying driver of that volatility – climatic conditions – then we can only expect more to come.
