Options for better supply-demand processing and pricing balance

Livestock producers understand the cyclical nature of livestock prices. However, the price declines we have seen in the past 12 months have been faster and deeper than many were expecting. There is no shortage of commentators trying to predict when better prices will return. The current consensus appears to be that cattle prices are likely to recover sooner than sheep, largely due to conditions in the US, while views on goats are mixed.

As producers are acutely aware, livestock pricing trends are out of their control and our industries are now operating in a more complex, demanding and uncertain global trading environment than they have in the past. For livestock producers, there are a plethora of climatic risk management tools but few options for dealing with volatile market conditions.

Australia is a high-cost country competing against countries with lower costs of production in the global animal protein and natural fibre markets. Heavily trade exposed industries such as ours which export over 70 per cent of beef and sheep meat, 98 per cent of wool and 95 per cent of goat meat every year could benefit from effective market risk management tools.

The competitive nature of the value chain and the significant industry investment over time has enabled the livestock industry to create sufficient domestic and global demand for premium food and fibre products. What we haven’t been as good at in the past is information sharing and creating trust through the value chain, which is what is needed to develop appropriate market risk management tools that will be widely adopted.

There have been a few attempts at establishing risk management tools for cattle, such as futures and swaps, with limited success. Unsuitable livestock pricing benchmarks, guarantee of supply due to climatic factors, transparency and overall complexity have been recurring themes.

The livestock industry can learn from price transparency and stabilising income streams and/or input costs that exist across other industries. These factors have proven to add measurable value to economic outcomes such as increasing enterprise profitability and greater access to capital, and in contributing towards environmental, social and governance (ESG) standing.

Just as taxation measures like loss carry back/forward offsets and Farm Management Deposits provide income smoothing options, risk transfer tools that trim the profit peaks and loss troughs that are inherent in the counter cyclical livestock industry value chain can enable more stable pricing structures.

The desire to investigate suitable options around this often depends on whether producers or processors are in the peak or trough of the cycle. For example, producers are rightfully frustrated that they are now being charged skin disposal fees when the prices received for their livestock are below the cost of production at a time when processors are making good returns. Similarly, up until about a year ago processors would likely have welcomed hedging options that helped them adjust to the rapid rises we saw in livestock prices.

The immediate focus for producers will be on managing their production costs to reduce potential losses while we are in the downward part of the livestock pricing cycle, but in the medium to longer term it makes sense to look at developing tools that can better manage the supply-demand processing balance and associated pricing risks for producers.