Australian Lamb/Sheepmeat – Commodity or Premium Product?

The Australian sheep/lamb meat industry is at an exciting point in development. Australia exports a multitude of products to over 65 countries, while also continuing to supply 45% to the higher value domestic market. Australia’s reputation internationally is “clean and green” and a key comparative advantage.

Australia has not experienced issues like the horse meat scandal, FMD or BSE but there are challenges, particularly in relation to how chains coordinate to capture and create consumer value. The nature of Australia’s climatic variation has created a production led, not a consumer driven chain. Animal variation, combined with speculative pricing and a history of distrust between producers and processors has seen the evolution of the physical saleyard system as the dominant way animals are transacted and prices established. This mechanism has a traditional history and has worked to provide processors with supply and a simple method for producers to ensure perceived competition.

The challenge for industry is whether this system is the best long-term mechanism for creating a quality focussed industry. Can it give producers transparent price signals to incentivise value on farm, which may be difficult to distinguish outside the normal ebb and flow of price variability relating to supply associated with Australia’s climate variability? Unlike global competitors, saleyards have become the cornerstone of Australia’s system, as illustrated by the main price indicator (ESTLI) being based on reported saleyard prices.

The problem with the saleyard system is it averages animals on guestimates of live weight, fat cover and dressing percentage. It creates additional transaction costs, with yard fees, transport costs and buyers and agents on both sides of the transaction. This limits understanding and communication flow. On a collective industry level, saleyards increase biosecurity and welfare risk, while also damaging the product through unnecessary stress of loading and unloading of animals.

So, with these unnecessary additional costs of transacting product this way, why is over 60% of finished product transacted through saleyards which then directly filters into how the overthe-hook prices are established?

• For producers, the reasons are varied, but focus on the following key areas:
• Lack of trust going direct with processors that animals are trimmed and not harshly discounted.
• Costs of saleyards outweighed by the additional upside benefits of perceived competition.
• Simplicity and tradition that saleyards offer smaller lot sizes.
• The advice from agents to gain maximum competition in saleyards.

Saleyards are reflective of a larger more systemic risk of the systems that have evolved over time, where perfectly rational behaviour at an individual level destroys potential collective chain value. There will always be a role for saleyards, store markets and secondary product, but the key question for industry to decide is: Should this averaging system be the mechanism to set the price of the finished animal?