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Introduction
Good morning, and thank you for the invitation to speak to you regarding the Australian Competition and Consumer Commission’s recent inquiry into the Beef and Cattle Market in Australia.
The beef and cattle industry is of immense economic importance to Australia. According to estimates from the Australian Bureau of Statistics, and the Meat and Livestock Association, in the 2016–17 financial year the domestic expenditure plus export value of the Australian beef and cattle industry was approximately $16.85 billion, which we can all agree is a substantial sum of money.
More than two-thirds of Australian beef is exported, Australia being the world’s third largest exporter of cattle and beef, producing 3 per cent of the global beef supply.
Beef cattle are produced in every state and territory of Australia, with more than 50 per cent of all Australian agricultural business operating beef cattle enterprises, making beef production the most common agricultural activity in Australia, employing around 200 000 people.
Farmers running beef cattle manage more than 75 per cent of the total area of agricultural land in Australia.
The cattle industry has generally been pretty profitable over recent years, with historically high prices and reasonable seasonal conditions. Encroaching drought conditions in Queensland and more recently in NSW have led to increasing cattle disposals, higher feedlot numbers, and an upturn in slaughter numbers. Prevailing seasonal conditions this coming spring and summer will be critical, but the past few good seasons and prices have at least allowed farmers to build cash reserves, as evidenced by high Farm Management Deposit levels.
When you consider the figures, and the stakes involved — if you’ll pardon a pun — it becomes clear why it is important that we get the regulatory settings for this industry right, so that despite the season farmers retain confidence in the future of the sector, and the Australian cattle and beef sector remains globally competitive.
Future expansion in the sector will need to occur via productivity growth, there being limits to the extra land and water available to run cattle. For this to occur, it is critical that cattle producers have sufficient confidence to invest the necessary capital that will be needed to achieve this growth. A key factor in maintaining confidence and investment is that farmers receive accurate and timely market information, and can make efficient investment and production decisions.
With this in mind, today I will be discussing the outcomes of our Beef and Cattle market study, and providing an ACCC perspective on the response our recommendations have received from industry participants.
Overview of the Beef and Cattle Market Study
The ACCC enforces the Australian Competition and Consumer Act 2010, or CCA, and other legislation to promote competition and prevent the misuse of market power. Over the past two years it has had a particular focus on the agriculture sector.
In 2016–17 the ACCC conducted a market study of the cattle and beef sector to examine issues relating to anti-competitive conduct, market structures, transparency and efficiency in the supply chains. Our engagement was broad, and significant:
- we received 85 submissions,
- held five public forums, and
- consulted with a wide variety of stakeholders including industry associations, producer representative bodies, producers, agents, commission buyers, processors, supermarkets, feedlot operators, live exporters, and more.
Prior to the study, the ACCC was aware of broad concerns about the sector that had arisen during our review of JBS Australia’s acquisition of Primo Foods, and our investigation into an alleged collective boycott by cattle buyers at the Barnawartha sale yard.
The recommendations arising from our market study have generated significant media coverage and industry discussion, so I thought there might be some value in discussing the main findings.
The market study of the cattle and beef market in Australia concluded that competition is generally quite strong in the sector, although there are a number of issues that could be addressed to improve the state of competition.
The first of these concerns over-the-hook sales, whereby cattle farmers sell cattle direct to processors. Our study identified that around 90% of slaughter cattle are sold via this market channel, with price generally determined on the basis of a pricing grid, the weight of the carcase, and a grade that is assessed by the processor.
The concern expressed by cattle producers during the course of our study was that OTH pricing grids are increasingly complex and difficult to obtain, interpret and compare; that some producers have a lack of confidence in the consistency of grading, and that processor feedback can be complex and makes price comparisons difficult.
The degree of concern cattle producers had about these issues varied by region and by market. Noting that, these issues have the potential to reduce competition for slaughter cattle, and disadvantage cattle producers trying to negotiate prices.
This is compounded by the fact that the market reports available for over-the-hook sales rely on voluntary quotes provided by processors, rather than actual transactions.
The ACCC recommended that more resources be devoted to educating cattle producers about pricing grids and carcase grading; that market reporting for over-the-hooks transactions be upgraded and based on actual transactions; and that available technology be implemented by processors to implement objective carcase grading.
All these measures could assist in addressing the information asymmetry that exists between processors and cattle producers, and improve competition in the sector.
The saleyards
In our market study we noted that a shift was occurring. Not only are the majority of slaughter cattle now bypassing saleyards, but there are also fewer saleyards, and the ones that do exist are becoming larger.
There have been several openings and closures of saleyards in the last 12 months including:
- In January 2018 the Western Victoria Livestock Exchange (WVLX) opened at Mortlake. The saleyard expects an annual throughput of more than 200 000 cattle. The opening has triggered speculation that other south-west Victorian saleyards including the nearby Warrnambool saleyards will be forced to close as a result.
- The Goulburn saleyard closed in April 2017, following the opening of the South Eastern Livestock Exchange (SELX) in Yass in August 2016. Brendan Abbey, the director of the SELX, claims that during the first 12 months of the SELX three of the ‘five or six council yards’ in the area (including the Goulburn saleyard) closed.
- In May 2017 the Longreach saleyards were added to AAM Investment Group’s Queensland operations with the signing of a 30 year lease. Prior to this a cattle sale had not been held at Longreach since May 2014.
- A number of saleyards in Victoria, NSW and WA closed and reopened in 2016–18. Several of these reopened under new ownership.
These developments have the potential to improve the efficiency of the saleyard system and enhance competition, it being likely that large-throughput saleyards will generally attract a stronger field of competing buyers.
However, our study identified some endemic problems with saleyard markets that we believe need to be addressed.
These included that commission livestock buyers often act for multiple purchasers with overlapping orders, and in doing so reduce competition. Complaints were also raised that livestock agents are known to act for both buyers and sellers simultaneously, and hence have a conflict of interest, often undisclosed to the vendor. Both these practices have the potential to reduce competition for farmers cattle sold through saleyards.
Both commission buyers and livestock agents assured the ACCC that neither of these situations ever occur. However, in the course of our inquiry we obtained data from a number of auction sales, and analysis identified that both practices were relatively common.
It also became evident that a lack of consistent livestock agent licencing requirements across states meant that there are limited available mechanisms for the industry to self-regulate to address these issues.
I need to make it clear that our report recognised that commission buyers are an important part of the industry, and bring efficiencies in cattle procurement — especially in the case of smaller saleyards. However, the way these buyers operate reduces competition, and cattle producers are well aware of this and become angry when they see their stock knocked down with only very limited bidding occurring.
Rather than recommending that commission buyers be regulated, we recommended measures to increase the transparency of livestock sales and reduce the likelihood of conflicts of interest occurring. It will also allow principals and producers to make informed decisions about the commission buyers or saleyards that they use for cattle transactions.
In our report we recommended that saleyards, commission buyers, auctioneers and agents should provide the MLA with information that enables regular standardised market reports for each reported saleyard. These reports should include information about the identity of buyers, and the proportion of stock purchased by each buyer.
We also recommended that state governments adopt nationally consistent livestock agent licencing (creating the potential to deregister agents for unacceptable behaviour), and that buyers’ registers be established and displayed detailing the commission buyers operating at sales and the principals they are buying for.
There has subsequently been some criticism from industry organisations that these proposals are impractical and unnecessary, and impose increased regulatory burdens on an industry that has to constantly reduce costs to remain competitive, although I would note that standardising licensing is generally supported by the industry.
In responding to these criticisms, I note that immediately at the conclusion of wool auctions a complete buyer and price report is provided, that equity markets routinely make such information available, and that buyer registers are a regular feature of many auction markets, in particular in the real estate sector. Exactly why such arrangements would be considered a major burden on livestock sales is unclear.
Saleyards are an important marketing channel for cattle. Small-scale producers, in general, have a greater reliance on saleyards, particularly in southern Australia where saleyard auctions account for almost two-thirds of beef cattle sales.
The selling preferences of cattle producers are shaped by operational efficiencies and the confidence they have in the ‘fairness’ of available marketing options. If saleyard operators and livestock agents want to retain and increase saleyard throughput, then these issues need to be addressed. Using the excuse that these practices have always occurred doesn’t fix the problem or increase producers' confidence in the saleyard selling system.
The ACCC perspective is that the proposed reforms would impose little if any additional cost, and would ultimately help to protect the integrity and efficiency of cattle markets in Australia.
They would also provide an effective way to respond to instances of unacceptable practices that have the potential to damage the reputation of all involved in the industry.
The response from industry
We conducted a review of progress in relation to our report findings a year after it was released, and reported on progress in May 2018.
At that time, we determined that the cattle and beef industry had generally not responded to most of our recommendations, with some exceptions.
We did note that Meat and Livestock Australia has dramatically improved its market reporting systems, making it much easier to access and compare information. However, further improvements have been restricted by the unwillingness of processors and other major cattle buyers to provide relevant market information.
We also noted that some processors have started to make their price grids more readily accessible. This now includes Bindaree Beef, Thomas Foods International and Teys-Cargill. This is a welcome development, and should help to improve livestock producers' understanding of slaughter cattle quality and value.
There are also continuing developments in implementing Objective Carcase Measurement, with technology being installed in some processing works and trials occurring.
However, apart from these areas, little progress have been made and there is limited enthusiasm by industry leaders to bring about further reforms.
So why the lack of progress?
Toward the end of the market study and during the period of this review we noted that cattle market conditions were stronger than in the lead up to the study. This may have removed some of the impetus created by producers to reform cattle markets.
However, cattle markets are cyclical and the MLA’s Cattle Industry Projections indicate that beef and cattle prices are likely to come under pressure in 2018 as international export competition intensifies and supply increases, in combination with poor seasonal conditions here in Australia. This could have implications along the supply chain and re-focus attention on the problems identified during the market study.
Notwithstanding the possible reasons for inaction, a common theme arising from our consultation for this progress report was that the industry wished to see concrete supporting evidence of the ACCC’s recommendations before taking steps to implement them.
This suggests that the value of market transparency, and the relevance of our recommendations, is either not well understood or does not suit the interests of those industry participants who are in a position to improve it.
Market transparency is a compelling reason in its own right as it is a prerequisite for a functional market and effective competition. The better informed producers are in making production and investment decisions, the more productive cattle markets will be.
Progress has generally been made where there are existing industry structures or systems in place that can be improved on or utilised: for example improving market reporting or communication and education activities about interpreting grading feedback.
In contrast, there has been little or no progress on recommendations which require cooperation between supply chain participants. The ACCC’s view is that much of the inaction appears to relate to entrenched industry positions and roles, a desire to keep the market opaque, and a lack of bargaining power from producers limiting their ability to push for change.
We have also noted that the Red Meat Advisory Council has been reluctant to vigorously pursue the recommendations made in our report. Consequently, we will engage directly with Commonwealth and state governments through the Agriculture Ministers’ Forum to push for implementation of our recommendations.
Conclusion
The beef and cattle industry is economically very important, both for regional Australia, but also for the national economy. Issues that affect the sector have an impact in every state and territory in Australia, and on the majority of Australian farm businesses.
It is critical that competition issues in the sector are regularly assessed, to ensure that continual improvements in efficiency and productivity occur, and the sector remains globally competitive.
If we get this wrong, then farmers will be less productive, and beef and cattle competitiveness will suffer on a national level, and that is bad for the producers and processors, bad for the economy and ultimately bad for everyone.
Production and investment decisions made by cattle producers are an important determinant of industry efficiency. The better informed about relevant market conditions producers are in making those decisions, the more productive the sector will be.
The ACCC Cattle and beef market study concluded that competition is generally strong throughout the sector, but there are specific issues that need to be addressed. A key way to address these, without adding regulatory burdens or additional costs, is to improve the information flows through the sector, specifically in relation to cattle and beef prices.
Improved and more equal information flows and transparency would provide clearer signals about allocation of farm resources, production, sales, processing and marketing, helping markets to operate more efficiently. Producers would have better access to the information required to make well informed business and risk management decisions, negotiate more effectively, and adapt to changing market signals or consumer trends.