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Cattle price incentives needed to shift focus from volume to quality, says report

by Beef Central, 13 November 2017
7

Australia’s red meat industry needs to develop clear price incentives to encourage producers to focus on quality rather than volume, if it is to withstand intense competitive pressures from other global producers and proteins, according to a recently-released industry report.

A report by Rabobank titled ‘A change in focus for livestock marketing in Australia’ says new pricing mechanisms are needed to close the gap between what is produced (driven by volume) and what consumers want (reliable high eating quality), in order to capture value growth in the red meat market.

Rabobank animal proteins analyst Angus Gidley-Baird, the report’s author, says while Australia’s reputation as a provider of high-quality meat is strong, the industry needs to remunerate producers to reflect eating quality in order to shore up that position and to avoid competing in the commodity trade market.

“The red meat market is becoming more polarised,” he says, “and unless pricing mechanisms are developed to identify, measure and then monetise eating quality, Australian producers risk ‘losing their seat’ at the high eating-quality table.

“For this shift to a quality-based system to occur, the marketing of livestock in Australia needs to be modified, with new technologies developed to measure the traits that deliver the quality that consumers demand.”

Driving change from volume to quality

Mr Gidley-Baird said despite Australian livestock producers using a range of marketing options to sell their cattle and sheep, the key factor dictating the return from the animal is its weight.

“Currently 16 percent of cattle and 20 percent of sheep procured by abattoirs are purchased through the saleyards, with producers paid per beast or by weight,” he said.

“The remainder are brought through direct consignment, either through feedlots or from producers.”

While abattoirs use a ‘grid’ pricing mechanism – which has some parameters around age, weight and body conformation – it is only loosely attributed to eating quality, Mr Gidley-Baird said.

“Some abattoirs provide a premium for Meat Standards Australia-graded meat, which measures attributes such as carcase weight, rib fat and marble score, but the premium is often a single market rate for achieving MSA grading and doesn’t reflect the incremental improvements in quality along the MSA index,” he says.

“And, as a single measure, pricing based on the MSA index does not allow for the identification of individual traits that affect eating quality.”

Mr Gidley-Baird said while it was currently difficult to assess the eating quality of livestock on the hoof, advancements in technology would help drive the change from a volume to more quality-based system.

Price-setting mechanism

The report says for the red meat industry to move to a more quality-based marketing approach, it needs to have clear pricing signals to incentivise producers, and those along the supply chain, to improve quality.

“This will see the development of a more complex price mechanism, but it will be necessary to reward certain practices that consumers are willing to pay for,” Mr Gidley-Baird says.

He cites the US’s formula-based system as an example of a pricing mechanism which reflects quality attributes and has supported a dramatic improvement in meat quality.

“The system in the US was instigated by producers (feedlotters) who felt they were not getting rewarded for the improved quality they were producing,” he says. “The formula-based system uses a benchmark price (generally the weekly cash price) which is then adjusted depending on yield and carcase quality,” he says.

While US formula-based pricing shares aspects with Australia’s current grid system, Mr Gidley-Baird says, the US system has five grades for quality based on marbling, compared with those captured in Australia’s standard grid – weight, age, conformation and fat depth – which are only loosely aligned to quality.

Considerations for livestock producers

The report warns though that the development of an eating-quality-based marketing system and associated pricing mechanism does not necessarily mean improved returns for all producers.

“Producers need to balance the costs associated with the pursuit of improved eating quality, with the returns that might be available,” Mr Gidley-Baird says. “While it will allow the producer to make a more informed decision on what to produce, who to target and where to market, it won’t be for everyone.

“However, for those looking to improve their product quality and capitalise on new marketing approaches – investment in genetics, seeking out supply chain partners and the adoption of new marketing options should all be considered.”

 

Source: Rabobank



Reader's Comments


Comment
  • John Gunthorpe November 13, 2017

    MSA was developed last century after extensive eating tests to grade according to quality standards achieved by each carcass. There were 5 different ratings (stars) similar to the five in the USA. These still exist but as mentioned in the report premiums are denied to cattle producers.

    When the offtake of cattle to MSA lingered below economic levels, it was changed to make it acceptable to the large retailers so we are now paid if the carcass meets MSA specifications – yes / no. MLA argue that the processor is able to underwrite their brands by using the star rating to build a brand around a certain rating.

    However, Australian cattle producers are being short changed and the processors gaining an economic advantage under the current arrangements. The Australian Cattle Industry Council (ACIC) calls for the pricing grids to reflect the star ratings achieved by each carcass so our industry is rewarded for supplying beef quality that meets customer’s eating experience.

    Cattle producers who invest in genetics and feed management to ensure the animal is delivered to the processor / feedlot in optimum condition must be rewarded for this extra effort and cost. When ACIC is your peak body for grass-fed cattle producers, it will happen.

  • David Hill November 14, 2017

    Having initially read this article I like most would agree with the sentiments, the problem for producers such as myself hasn’t been the premiums on offer, it has been the fact that often the alternate category cipher(based on dentition, such as YG, YP, PR) would mean that the price outcome was more to do with dentition rather than eating quality. The Cattle Council of Australia (CCA) were strong advocates for the ‘beef industry language white paper’, as someone that fronted the industry discussion table looking for industry outcomes that would see producers rewarded for their efforts, I believe we are possibly on a journey that has been a long time coming. The critical outcome for me was the implementation of the alternate category cipher *EQG* which can be used as a replacement for dentition ciphers on product that has been graded MSA. I was recently informed that brand owners such as Teys were using the EQG cipher on MSA product going into Japan and Korea. I made a call today and was informed that the Teys grid had also recently changed to reflect these outcomes. Whilst I commend Teys and others for their efforts, industry must remember that there is a lot more to do, there are all those other markets out there that we have been supplying for years with the belief that dentition was an indicator of quality, dentition in some cases is actually written into the importing country protocols. MSA is arguably the the best consumer based grading system in the World, Mr Gunthorpe does MSA an injustice by comparing it to the US system. The US system basically grades the whole carcase on the grilling outcomes of loin cuts, MSA is a cuts based systems that grades on the cooking outcomes of each cut, with a score then given on the expected outcome by cook method. Marbling is but one of the attributes measured in MSA that will influence the ultimate eating experience of the consumer. One of the main drivers for the development of MSA was the fact that certain beef cuts were being sold as grilling cuts when they wouldn’t perform to a decent eating quality as grills. That is what is unique about MSA, the system is designed to allow beef cuts to be sold fit-for-purpose, with the consumer given the information that will allow then to make a purchasing decision on the eating quality outcome of the cut they buy based on appropriate cooking methods.
    It has been of a great deal of interest to me to listen and read the comments attributed to Mr John Gunthorpe recently, I would suggest to all those that believe he and his ACIC will deliver us to the promised land, that what we are talking about is nothing new, I am sure this was possible to a certain degree when he was the CEO of AMH. The industries price averaging system and the payment based on HSCW, dentition, and P8 fat have been with us since the late 1980’s, so I would ask what did Mr Gunthorpe do in his previous life as an industry leader to make things better for the Australian cattle producer?
    I am not going to suggest that I have all the answers, but I do at least have a basis understanding of MSA and how it may be best utilised to deliver outcomes for the whole of industry.

  • John Gunthorpe November 15, 2017

    I thank David for his comment and questions. However, CCA should not get hung up on ciphers but on getting their limited number of members payment from processors based on the quality of carcass they are presenting. When will CCA advocate for cattle producers and call their friendly meatworks buyer and demand fair payment for fair quality?

    I understand the difference between the US system and MSA – I have run abattoirs in both countries. In the US yield is as important as marbling in carcase grading. CCA’s failure with MSA is that they are not advocating for grass-fed cattle producers to be rewarded with additional premiums in the grid when higher star ratings are achieved.

    CCA also failed under the Red Meat MOU when they allowed MLA to undermine the MSA grading system by removing many of the factors developed by the MSA team in order to accommodate the large retailers. Now consumers can buy beef as MSA graded or not. Why should our consumers not be able to buy grades depending on the premium eating quality of the beef product? In the US the consumer can select different grades of beef depending on their expected eating experience. Why not here? Again CCA have failed to give leadership and were found wanting when the opportunity for action was available.

    Regarding my time at AMH, our management team worked to reverse the “them and us” attitude that existed in labour relations within the processing industry prior to AMH being formed in 1986. This was critically important to cattle producers as their turnoff programs were being damaged by the continual strikes in the industry. In 1986 we had a major strike at Rockhampton for 6 months. This strike ended the strong arm tactics of the CQ branch of the AMIEU at Rockhampton and ended in 50 of their number not gaining employment at AMH.

    The AMH management team also lifted the standards of work in all abattoirs under our charge by selecting the best practices of each abattoir and replicating these across the business. We also joined with AMLC and jointly funded a report from Ken Ohmae from McKinsey Japan to change marketing practices into that and other markets by increasing the use of company brands and stepping back from the Aussie beef approach.

    The management team at AMH kicked many goals in those early days and the flexibility achieved in employment conditions in abattoirs was probably the more significant to cattle producers. We are proud of this record and I am proud of the people who were members of this team. Unfortunately some of them have now passed on but their actions never resulted in other than an improvement for Australian cattle producers.

  • Andrew Negline November 16, 2017

    The lost opportunity for MSA and cattle and producers of Australia remains in the fact that the MSA system has not reached the consumer in its full glory.
    MSA needs to continue to reach the consumer via brands but also by adopting a consumer focused approach in its delivery including the language it uses.
    The gap for cattle industry representation remains in the fact that any representative body needs to have skills that understand the complete supply chain and to be able to develop their own customer/market intelligence rather than relying on others and then meet and exceed those consumer expectations learned.

    Andrew Negline
    Tilbuster Pastoral Co.

  • Tony Connellan November 17, 2017

    You’re not serious, John Gunthorpe!
    To suggest that AMH ‘changed marketing practices by increasing the use of company brands and stepping back from the Aussie beef approach’ patently colours history in a very different light than what the rest of us remember. You’re giving yourself way too much credit.
    AMH was in fact the last of the great ‘commodity beef’ processors. It had to be dragged kicking and screaming into the 21st century, finally embracing programs like MSA only ten years after the program was launched – and even then only because its major competitor was doing so.
    Sticking a different coloured lid on a carton of beef has absolutely nothing to do with beef branding. AMH’s lack of segmentation, and engagement with the end-customer in that era was shameful.
    It’s only been in the JBS era in the past six or seven years that the ‘AMH company’ has finally got out of the lowest common denominator commodity beef rut. Let’s not try to re-write history, please.

  • David Hill November 18, 2017

    Ah, John, it seems there are others out there who have a differing view of history to yourself.
    Far be it for me to suggest that you may not have the understanding of USDA grading that you claim, but here goes. you are right, USDA does have a quality grade and a yield grade. Quality grades such as Prime, Choice, and Select, etc, are based on Marbling and Maturity(ossification). Yield grades 1-5 are based on rib fat, rib eye area(eye muscle area), estimated KPH( kidney, pelvic and heart fat), and HCW(hot carcase weight).
    It would seem understandable that the consumer would make a purchase on the quality grade, and the producer would be paid on both, based on the brands requirements on both(this would be reflective of where the brand was looking for in regards to point of entry into the market, quality, yield or a mix of both)?
    My point was that MSA is a better system, I believe there is more to do also.
    It is my understanding that you were the inaugural AMH CEO in 1986, I again ask what did you do for the Australian beef producer in those days, considering that the volume system as we now know it, and what this article was talking about came a short time later. I refer you to the above comments made by Tony.
    you mention that CCA shouldn’t get hung up on ciphers, why wouldn’t we get hung up on ciphers when we have been supplying on the science(MSA EQ), and in a lot of cases paid on the myth(dentition EQ)? As far as advocating for the sweet spots on the grid around higher eating quality, I think you will find that situation in the grids of those wanting to go down the ‘value based marketing’ track.
    You also continue to take CCA to task over the Red Meat MOU, I don’t think to many current CCA representatives were around when that was drawn up, but I would suggest you look at the sector representation on the industry technical committees, that are prescribed in the MOU. Too blame those that have turned up to the industry negotiating table past and present for not getting their own way is a nonsense.
    In closing could I say that I wonder where this industry could be today if someone such as yourself had of addressed the ‘them and us’ between producers and processors 30 years ago???

  • Gerald Wyatt November 19, 2017

    One of the main factors that has prevented the beef industry (and many others for that matter) from progressing positively has been the time spent in debating, arguing etc. which method/system etc. should be be used to reach the required goals for that industry. At least, that is the impression of a retired beef producer who has seen the industry stagnated by politics and personal interests over many years. Certainly, we need these things to happen to formulate future planning. However, it has contributed to the delay in making the beef industry the powerhouse it needs to be in the food chain if it is to survive. As long as I can remember, we have been told that meat quality is the key to the ultimate success of the industry and I certainly don’t have any argument with that. The introduction of MSA was a good starting place in many respects. However, it is only part of the chain in producing good quality meat and ensuring that producers ultimately get paid for it. The introduction and perfection of DEXA would be another major step in the right direction because it should mean that producers are paid for producing good lean meat and not bone and fat as well. The current grid system that penalises producers on fat depth alone is not a fair system. Fat depth has little to do with meat quality. If processors were to measure the omega levels in the fat and pay producers for higher levels of omega 3 then that would be a fairer measurement and also win plenty of supporters amongst health conscious consumers.
    The production of quality meat starts with breeding and it seems from a simple ex producer’s perspective that we are making the task of producing a consistent, reliable, repeatable and balanced carcase more and more difficult by the continual promotion of cross breeding programs that result in larger and larger gene pools, which common sense should tell us will only increase inconsistency and add increasing variance to things like repeatability. Certainly, I have no issue with using a first cross to gain the advantages of hybrid vigour, but it needs to end there. I have evaluated many cattle over a large range of breeds and have found that the most consistent producers of quality meat always have a smaller gene pool behind them. I know that the goal behind cross breeding is to find the ideal animal and standardise it as a breed. That may be possible for one environment, but different environments require different characteristics in our cattle. I believe we currently have more than enough breeds and that all breeds have the potential to produce high quality meat if the correct selection tools are used. It is in the breeding paddock where we must make the right choices at the beginning of the process to improve our meat quality. It is here that we have identified some easily recognisable traits that will give us a strong indication of which animals will produce better quality meat and I believe that a combination of science and old cowboy wisdom can develop a system that will meet that goal. Certainly, we have to respect the fact that mother nature will always throw some curve balls at us in the breeding process. However, by following a tighter breeding program and identifying the traits that work most of the time, we can greatly improve our meat quality at a low cost and very effectively compared to where we are now. Then producers will have a justifiable argument to take to processors and retailers to improve their returns.

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