The beef with beef
When you pay the market price for a piece of beef at the butcher shop or supermarket, you probably think you are getting a fair deal.
But do you ever stop to think if it is a fair deal for the farmers who breed and grow the animals that produce the beef you enjoy?
Well, in Australia it's not. Beef producers are not being paid enough to sustain their business, their families and their land. The great tragedy is that while producers are going broke, consumers are paying more than double what they should for beef at the butcher shop or supermarket.
Beef could be half the price in the shop, and farmers could get 20% to 30% more for their cattle.
In the US, farm gate prices for cattle are 25% higher than in Australia and retail prices for beef are about half. And to add insult to injury, in Japan you can buy Aussie beef - better than what you and buy in your local supermarket - for about $25 per kilo. And that's after the 38% tariff has been added to the import price.
So what's going on? In a nutshell, our processing between farm gate and retail is very, very inefficient.
So why is it inefficient? Because we haven't invested in the machines, people and systems to make it efficient. We still trade cattle in saleyards, kill cattle in ancient abattoirs, distribute beef quarters and break them down into retail cuts in the back of butcher shops located on expensive space in retail precincts.
We have not industrialised our processing. We do not have a grading system to describe beef by eating quality and reward producers and processors of superior products.
And why haven't we invested in meat processing? Because it doesn't pay.
And why doesn't it pay? It doesn't pay because Coles and Woolworths, who account for about half of all beef sales in this country, have no interest in innovation. It's easier to spoil the profits of tens of thousands of beef farmers and hundreds of processors - it takes little capital, little brainpower and there is little risk.
The two supermarkets are basically a duopsony, locked into a price war, primarily with each other, to offer consumers the "cheapest" price beef. With their massive market share and cheap prices culture, they dictate quality and price terms to their suppliers.
The exercise of market power is a subtle process. It's the net sum of thousands of transactions over decades. There are no corporate thugs or standover merchants. They don't need them because their power is almost absolute. It's just polite business, where the choices are clear - "supply on our conditions and at our price or we won't buy your product".
When the major supermarkets account for half the volume in livestock, wholesale and retail markets, there are few other places to buy and sell. When producers or processors try to trade somewhere else they have to match the supermarket prices because they are the "market price".
Producers have little bargaining power when it comes to selling cattle. Cattle ready for slaughter are very perishable. Producers must accept the price offered at a saleyard, as returning cattle is uneconomic and the stress of handling significantly reduces the value of the animal.
Selling on-farm necessitates inspections and negotiations. Each handling and every single delay devalues the cattle and the buyer knows it. The farmer gets paid less and the buyer pays less for less.
The power of a duopsony is magnified where they can buy a product as a commodity and sell it with a brand - preferably a house brand. (The supermarkets have not obviously supported the introduction of a national grading system that would differentiate cattle and beef on the basis of eating quality, as it would favour producers of better quality cattle and marketers of niche quality products.)
The poor profitability of meat processing and production is illustrated by the fact there are no listed Australian owned meat processing companies (Swift Australia is owned by Brazil based JBS Friboi) and only one listed beef production business, AACo.
The supermarket strategy of screwing suppliers for the "cheapest price on the day" for an undifferentiated product has been great for shareholders in Coles and Woolworths. It's been fantastic for shopping centre developers. It's also been great for a couple of smallgoods manufactures, transport companies and a hand-full of favoured suppliers.
But at what cost? Consumers are paying about three billion dollars per year too much for their beef, which is about $400 per family. Meanwhile, farmers are going broke producing beef.
Where to now? There is nothing wrong with markets. They foster inventiveness and creativity and are inherently more flexible than a command or strictly managed system of exchange. But markets need to be managed to ensure they are competitive so they can realise their potential to deliver choice and efficiency and fair prices.
It's the responsibility of the federal government to ensure Australia's domestic food markets are competitive. Legislators have a duty to ensure markets work in the best interests of producers and consumers, not just merchants.
The Australian government is not in unchartered waters. There are legislative models in the USA, UK and EU - all successful market economies that have laws that constrain excessive market power in the interest of efficiency and the wider community.
A small change in the law will pay massive and lasting dividends to all Australians. Families will benefit from lower beef prices and producers of quality cattle will benefit from clear market signals and where appropriate higher prices.
The market place is the single biggest interface between food producing rural and food consuming urban communities. Markets must be fair, competitive and transparent if they are to serve the nation.
On a deeper level, this discussion is about building community. It's about breaking down the communication barriers merchants construct to separate consumers from the origins of their food.
It's about bringing the massive and increasingly insular urban community closer to the small rural communities that underpin their food chain. It's about giving food a provenance and values not just a price.
by Athol Economou
Source: Argentine Beef Packers S.A.