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Right time for beef industry to utilise forward marketing, says bank report

by Beef Central, 13 June 2017

THE time is right for the Australian beef industry to embrace forward marketing agreements as a tool to manage price and volume volatility and improve business planning, a recently-released research report suggests.

Unlike other agricultural industries, the use of forward marketing arrangements – which lock in agreed prices and/or volumes for future delivery of product – is limited in Australia’s beef industry.

However, according to a report issued by Rabobank, while there was no prohibitive reason to stop the uptake of forward agreements, it would take a change of mindset to make it more commonplace in the beef industry.

Two earlier Beef Central articles published last year discussed the growth in interest in forward contract in slaughter cattle in Australia, and highlighted programs offered by 11 of the largest processors in the country. Access both story links at the bottom of this article.

Author of the recent report, Rabobank senior animal proteins analyst Angus Gidley-Baird, said the Australian beef industry was undergoing significant change – with increased volatility, rising global competition and pressures for safe and reliable supply – making it increasingly important to manage price and volume variability.

“And it is even more critical this year, with local beef producers making investment decisions around whether to rebuild herds in a high-priced market,” he said.

“In this environment, the use of forward marketing agreements could give producers some security around future prices and volumes, to help provide a more informed investment decision when purchasing cattle.”

Mr Gidley-Baird said forward marketing agreements were designed not to “beat the market at pricing”, but to provide more certainty by achieving a sustainable margin.

“Most producers send their cattle to the saleyards with the aim to get the best price on the day,” he said. “This is usually a production-based decision, with market prices and seasonal conditions also playing a key role.”

Mr Gidley-Baird concedes in years gone by there was less need for forward contracts, as there were fewer national and global pressures, as well as a lack of objective measurements and specifications, making it difficult to forecast production and pricing.

Increasing relevance

His Rabobank report says together with increased and ongoing volatility, there have been a number of market developments and initiatives in the beef industry which now make forward agreements more relevant and applicable.

“First and foremost, the need to manage volatility has increased,” Mr Gidley-Baird said.

“Not only do forward agreements allow producers to secure a future price, thereby giving them more certainty, they can also help processors and others in the supply chain manage supply variations.”

He said the ability to objectively measure traits had also improved, with the development of grading and objective carcase measurements that provide the tools to create specific identifiers for forward contracts.

The use of forward contracts is relatively common in other agricultural industries, such as the grains and dairy industry and there has been increased uptake in the lamb industry in recent years, he said.

“This indicates that forward contracts can work in an extensive livestock industry, however there is very limited use of forward agreements by producers in the beef industry at this point.”

A number of changes must occur however, to facilitate the increased use of forward contracts, Mr Gidley-Baird said. These included a change of mindset to focus on margin rather than price, increased collaboration between supply chain parties, a commitment by all players in the supply chain from the producer to the retailer, and an agreed industry structure or dispute process.

Managing risk

Mr Gidley-Baird said while forward marketing agreements do help manage risk, they should not be seen as a ‘silver bullet’, but rather as one of the many marketing tools available, as they invariably will not suit all operators in all situations.

“As there are delivery risks associated with forward marketing tools, it would be unwise for any beef producer to forward market all of their product,” he said. “For example, a producer may look to trade 30 percent of their sale which could provide a level of security, while still allowing for variation in production.”

 

Click on the links below to read Beef Central’s earlier articles on forward contract:

 

Source: Rabobank

 

 

 



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