The Australian Cattle Industry is in a sorry state.  A decade of mismanagement has sapped its intellectual and financial capacity.  It has come to the point where it is unlikely to ever again be; an Australian controlled and environmentally, financially and socially sustainable food supply.

The Economic Facts

Prices

Since 2000

• The retail price of beef has increased 50% from $10/kg to $16/kg
• Consumers are spending an additional $3billion on beef per year
• Domestic consumption of beef has declined 8.4%, from 37.7 to 34.5 kg per person per year

Yet

• The ‘nominal’ farm gate price of cattle has remained unchanged since 2000
  ($A1.80/kg LW in 2000, and still $A1.80/kg LW in 2012)

So …

• Cattle producers have not captured a single dollar of the additional $3b (an estimated $700 per head slaughtered) spent by Australian consumers
• Virtually all of this additional consumer expenditure was absorbed by the processing and retail sector (some as costs, some as margins)
• Cattle Producers’ terms of trade have decreased 30%.  (The ‘real’ farm gate price of cattle has declined about 30% since 2000.  Farm costs have increases 30%.)

And did Exports contribute?

Since 2000

• The volume (tonnes) of exports has remained the same for the past decade
• The value (A$) of exports has remained unchanged
• The unit price of exports (A$/t) has remained unchanged
• The combined value and volume of beef exports to premium markets in Japan and South Korea are currently at about the same levels as they were in 2004 after peaking in 2006 following the ban on US imports due to BSE

Japan and South Korea apply a 35% import tariff on Australian beef.  It  was originally applied in the early 1990s because Australian beef was too cheap. (The Japanese government still collects about $500m pa by counting the containers as they cross the wharf!  Good on them, if we are so stupid.)

Farm Productivity

 “ . . .  with productivity growing between 1% and 2.5% per year over the past few decades.  MLA’s investment in R&D . . . . . have yielded returns of $3.40 and up to $3.70 for every dollar invested”

Managing Director MLA, Scot Hansen, Corporate Plan 2012-15, August 2012

The reality is:

• There has been zero productivity growth.  Australia produces the same amount of beef in 2012 as it did in 2000 from the same number of cattle.  Based on Mr Hansen’s claims we should be producing 15-20% more beef from the same inventory or the same volume from less cattle.
• There is no evidence that MLA’s $700m of Producers and tax payers R & D expenditure has delivered any productivity gains for Cattle Producers.

The above statements by a Beef Industry Bureaucrat is delusional.

Processing Chain Efficiency

The US Department of Agriculture has for decades calculated the share of the retail dollar that is captured by the farmer.  It’s a relatively simple calculation: for a typical 220kg carcase you workout what the farmer was paid, and the gross value of the meat sold by a butcher.

The data shows:

• US farmers capture about 50%, of the retail value
• New Zealand farmers about 40% and
• Australian farmers about 30%.

(And, by the way, that’s not 20% more – it’s 60% more.)

US farm gate cattle prices are currently about 40% higher while average US retail beef prices are about half those in Australia.

This data suggests a mix of poor efficiency leading to high costs and/or a rip-off.  It also indicated a lack of innovation and investment and constructive competition.

(Finished steers in the US are currently trading at A$2.75 LW.  While a 430kg LW steer in Australia is about $1.90/kg LW. The average price in the US for USDA Choice Grade Rump is A$14.00/kg and lean mince is A$7.40/kg)

 So where is the industry now?

Debt

• In the decade since 2000 rural debt has increased from $30billion to $62billion while the value of farm production has remained unchanged at about $10billion²
• The Queensland cattle industry debt was $1billion in 2000.  It is now $9billion³.  (cattle numbers have remained unchanged)
• On a per head basis, in 2000 the Queensland cattle debt was about $70 per head.  Today, the average debt is about $750/head.
• It is estimated the first $350 of each animal sold in Queensland is needed to service debt. This is in addition to a 30% increase in operational costs since 2000.

² RBA, ³ QRAA

(I suspect there will need to be a lot of bail-outs presented as “foreign Investment” to solve this debt crisis)

Age: The Old and the Young

The average age of cattle producer is 58 and getting a year older every year.

Quite rightly, young people do not want to enter an industry with poor lifestyle and financial prospects.

Agricultural course have the lowest entry scores of any vocational course due to lack of demand.

Agricultural institutions are quite reasonably cutting back training options as demand for agricultural training declines.

Internal Issue

Monopoly

Coles and Woolworths account for about 50% of retail meat sales, yet meat accounts for less than 5% of their total sales. Coles is owned by Wesfarmers that also owns Bunning, Officeworks, mining and finance companies. Woolworths is also the biggest operator of gaming machines in Australia.

Two foreign owned companies account for half of Australia’s processing capacity. But Australia is only a small part of their business.

Brazil based, but also the biggest livestock processor in the US, JBS kills 8,000 cattle per day in Australia, less than one tenth of its global daily cattle kill of 90,000 head (in addition to 48,000 pigs and 7.6m chickens per day).  Cargill, a US based private company, employs 130,000 people in 63 countries. Its Australian operation accounts for about 1% of its US$119.5 billion global sales.

Power and price

The chronic lack of competition in the supply chain for beef has stifled innovation, undermined productivity gains, increased costs and reduced margins.

On the surface, it seems the Coles and Woolworths duopsony drive hard bargains with suppliers that seem to lower prices to consumers. But in reality they make their profits by screwing their suppliers, stifling innovation and investment and passing on the cost to consumers.

Their corporate culture demands they do this. Quite rightly, investors want their profits now. The CEO cannot choose to take the slow road to profit through long-term investments in education and technology in their supply chains, particularly in a segment of the business that represents a small proportion of sales.

Executives can and have to take shortcuts. They are obliged to stifle competition and innovations that may challenge their volumes or margins. If it remains within the law, executives and directors are absolutely obliged to do whatever provides the easiest, low-cost, low-risk, and quickest profit for the company.

After more than a decade of supermarket dominance, Australia has one of the most inefficient meat industries in the world.

Industry Structure

The Australian cattle industry is made up of mostly small to medium enterprises spread across the continent and operating in a wide range of environments.  Further, the cattle industry is physically and culturally isolated from its primary customers – multinational meat processors and its consumers – urban communities in Australia and overseas.

Due to its geographical fragmentation and it relative isolation the cattle industry, more than most industries, needs an insightful and effective platform for collective thought, planning and action.

The present arrangements – Cattle Council of Australia and Meat and Livestock Australia – have been totally ineffective.  After a decade of inaction and waste the cattle industry is in a perilous situation.

Conclusion

Australia’s pasture and rangeland resources are significant national assets. But to create food and value on an ongoing basis, cattle producers need sustainable prices.

Cattle businesses now operate in a commercial environment increasingly dominated by domestic and international corporations along with unprecedented environmental and financial challenges.

A responsive and competent platform for collective thought, planning and action is essential if cattle producer are to equitably and sustainable managed rangelands, produce cattle and compliment corporations in our joint goal – to delivery food to consumers in Australia and abroad.

Athol Economou – Nov 16, 2012