Opinion: Are supermarkets making cattle producers pay for retail price wars?

Jon Condon, 08/08/2012


If there is any evidence of food producers being made to pay for price wars between major retail supermarket groups, it’s hard to find in the red meat category.

Claims that farmers and the production sector in general are bearing the brunt of price wars between the dominant retailers, Woolworths and Coles, have resurfaced over the past six months, as both groups seek to win market share through sharp pricing and loyalty programs.

As recently as Monday, prominent forecaster and economic commentator, IBISWorld said in a report on private food brands:  “All of this discounting means that someone is bearing the cost for supermarkets to offer $1/litre milk and $2 loaves of bread. More often than not, farmer and producer margins are being squeezed as supermarkets discount heavily to increase store traffic.”

“Supermarket marketing campaigns, including the resurgence of loyalty programs like Coles’ Fly-buys, are further enhancing heavy discounting strategies – often to the detriment of suppliers,” IBISWorld said.

But do those sentiments apply to beef supply?

There is no doubt that both Coles and Woolworths over the past 18 months have applied big retail discounts on a wide range of popular beef items. In fact beef discounting pre-dated the much more widely-publicised bread and milk wars that followed, starting around November, 2010.

It’s worth looking at current prices being paid to livestock contract-holders by supermarket supply chains, however, to see if they reflect that retail price movement.

As so often applies, it’s worth pointing out that it’s hard to make absolute, direct ‘apples with apples’ comparisons between supermarket livestock pricing and the broader cattle market.

For one thing, both Woolworths and Coles pay their livestock contract-holders on a two-month (Woolworths) and one-month rolling average forward price basis (Coles) – not a spot market price.

A quick call to Woolworths contract holders supplying the company’s northern (Ipswich abattoir/Brismeats) supply network revealed a price for 70-day grainfed domestic cattle hitting the company specs this week of between 400c and 410c/kg. To be fair, that includes breed content limitations (maximum three-eighths Indicus) that do not apply to generic processor yearling grainfed grids.

Purists would argue that while Woolworths pays on boning group and an MSA-based grid, it no longer needs a breed component in its livestock spec, and should simply use MSA performance as the arbiter of product quality. Is that likely to happen? Probably not any time soon, in Beef Central’s opinion.

In Coles case, the pricing circumstances are obviously a little different, with a non-HGP requirement, but no breed or gender distinction in grids. Nor does the company pay on an MSA grid. Depending on circumstances, Coles cattle can be grainfed, grain-supplemented or grass. This week, the company is paying contract-holders a top grid price around 400c/kg (30-days forward price, on a rolling monthly average).

Australian Country Choice is this week understood to be killing Coles cattle priced as high as 410c from contract holders, but also a few additional ‘top-up’ crop-fed yearling cattle out of the spot market at closer to 350c.

Again, we can’t stress enough that Coles and Woolworths do not use the same grids and pricing structures, making direct pricing comparisons between the two, and with the broader market difficult.

But looking at typical Teys and JBS spot market grids for MSA cattle yesterday, the best money Beef Central could find was 365c/kg for lighter grainfed MSA steers 260-300kg (no breed distinction or HGP preference), and a little less for heavier cattle.

That’s a split of at least 35-45c from the current forward contract prices being offered by Coles and Woolies. At different times of year, that gap can open to as much as 50c/kg, Beef Central has noted.    

So why do the supermarket supply chains pay what appears to be over-the-odds money to secure suitable cattle?

The answer lies in the chilled cabinet display in any suburban supermarket. Virtually identical product is there day-in, day-out, winter and summer, through flood and drought.

In Woolworths case, it needs 9000 cattle a week, and they need to be like peas-in-a-pod.  Part of the answer in achieving that is evident in the company’s current MSA grading performance, understood to be above 98 percent compliance, well above industry averages. 

Securing that level of continuity of supply, and continuity of consistency, has a value in its own right, and both supermarket groups are prepared to pay it.

Beyond the market price itself, there is considerable value to the lotfeeder contract holder in that they can place steers or heifers on feed today, confident in the knowledge that they will receive a designated price (minus any discounts) at slaughter.

At times, contract holders say there may be ‘nothing in it’ in terms of net bonuses over the spot market. But at other times of year, many admit that there is ‘more in it’ than what there should be.

It’s been said before that a supermarket contract with one of the two majors can often represent the difference between long-term profitability or loss for a typical feedlot contract holder.

The fact that a Coles or Woolworths supply contract is as scarce as hen’s teeth and rarely become available indicate how much the livestock partners covet their supply arrangements.


MSA or VIAscan?

While on the topic of payment structures, Woolworths currently faces something of a cattle pricing dilemma now that it has adopted the MSA system, in that it already uses VIAscan imaging analysis for carcase assessment.

The two assessment processes, in terms of their use for price-setting purposes, are not entirely compatible. At some point, the company may have to make a call on which process it backs as a means of basing payments to cattle suppliers.

Some would argue that on a criteria like meat colour, which tends to attract the overwhelming bulk of criticism over inconsistency of manual MSA grading, grading on an objective VIAscan camera basis makes considerable sense, provided the technology is accurate and reliable.

That applies particularly on those meat colour assessments on the ‘margins’ between colour scores. In worst case scenarios, borderline grading calls on meat colour can cost a producer as much as $200 in value in a carcase.

In many football codes, when the decision is too close to call – even with a video replay – the attacking player gets the benefit of the doubt.


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