Monday, 13 January 2014

Sunday night meat markets

The Feds' meat options paper (pdf), released on Friday, offers plenty of helpful discussion of industry problems and outlines some possible directions for reform. But I'm still very puzzled.

As I've said before, it's the processors that are really hurting in this sector. Farmers hold the whip hand because there is excess processing capacity. The Feds agree, pointing to the "Sunday night auction" where farmers call around to get the best stock price for the week.

You might think that farmers' advocates would be keen on this state of affairs, but wrong, totally. Procurement competition is most definitely a Bad Thing, for some reason.

Industry insiders must know that reason, because procurement competition (farmers having market power) is commonly cited as a problem. The rest of us are guessing.

The underlying economics looks like this.

  • everyone (potentially) gains if the marketers can tap some higher value markets
    • but those markets require a steady stream of product
  • processors would also prefer a steady stream of product
    • better capital utilisation
  • but unfortunately farmers are geared towards seasonal production that depends on uncertain weather/climate patterns

When the industry leaders say they hate procurement competition, I think perhaps it's really the absence of term contracted supply they hate, rather than the Sunday night market as such.

The Sunday night auction is a kind of spot market, though it sounds pretty informal. It serves a useful function and seems to have arisen spontaneously, which suggests that its enhancing efficiency. My inclination would be to enhance it rather than chastise farmers for using it.

But that's irrelevant to the main issue, which is persuading farmers to supply a nominated number of animals in a nominated week. That looks like a purely commercial challenge to me. Design a contract that pays farmers enough to get committed supply at a nominated time, which of course means paying more than farmers expect to earn on the spot market. Line up the buy and sell contracts and you're away.

So again, I'm really struggling to see how this is the farmers' problem. Yes, the hoped for solution will involve different behaviour, at least by some farmers (contract rather than spot supply). But why isn't it the processors that should be responsible for designing and offering these new contracts? And perhaps most critically: what's stopping them from writing those contracts now?

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