THERE is no evidence of significant market power in either input or output markets for beef or lamb in Australia, an important new independent economic study has found.

This finding implies that red meat consumers are not suffering from changes in prices along the chain, which is the primary focus of interest in the red meat industry for competition and consumer laws.

This was one of many important findings contained in a new independent economic study compiled by consultants SG Heilbron Economic and Policy Consulting.

The study, commissioned by the Australian Meat Processor Corporation, carried out a detailed analysis of market cycles and price transmission in the Australian red meat sector. The study’s findings provide relevant evidence and insights to debates about competition in livestock and red meat markets in this country.

Over the past two decades, the nature of competition in the Australian red meat industry has been a focus of scrutiny and policy attention at various levels of government. The Australian Competition and Consumer Commission and other arms of government including the Senate and the House of Representatives have been part of eight separate inquiries, market studies and investigations, and numerous decisions on commercial transactions in the industry impacted by competition regulations.

AMPC’s report released today is divided into two segments:

• Part 1 presents findings with regard to The existence of cycles in the beef and sheep meat markets.
• Part 2 presents findings with regard to Price transmission in the beef and sheep meat value chains .

A separate economic study by Heilbron, looking into the nature of competition in the red meat processing industry, is covered in a separate report on Beef Central today.

Analysis of Market Cycles and Price Transmission in the Red Meat Sector

The study was carried out by noted economists Dr Selwyn Heilbron who carried out a similar study for AMPC back in 2016; and Professors Garry Griffith and Bill Malcolm from the University of Melbourne. The trio considered five-decades worth of market data, looking for long-term statistical correlations in market data including cattle and sheep prices, throughput and meat prices.

The analysis has been released in two separate reports:

Part 1: Analysis of Market Cycles

Analysis of both annual and quarterly data found no statistical evidence of the often mentioned ‘8-10 year cycle’ in the Australian beef industry, which has been found to exist in the United States’ beef industry.

The analysis found the Australian and US markets have become uncoupled, moving independently based on external factors. The only significant correlations between current and lagged values were found in beef and mutton slaughterings and prices (around four years, peak-to-peak).

The report said the results were indicative of much shorter-term red meat industry variability in Australia, more likely to be caused by changes in world market conditions on the demand side, and by changes in environmental conditions on the supply side, than by the decisions of livestock producers based on belief that the past will continue into the present and the future.

For the beef price series, the four-year cycle found in the annual data was not confirmed in the Heilbron report’s analysis using quarterly data. Nor was there any significant seasonal cycle in beef, although there was some evidence of other significant very short-term regular patterns.

“While the real price of beef is moderately negatively correlated with beef production, the fact that beef prices do not follow the same cyclical patterns as domestic production variables suggests a much greater influence of world market conditions on domestic beef prices. This seems logical given the high proportion of Australian beef production that is exported,” the report said.

For lamb markets, the short-term quarterly analysis confirmed the findings of the annual analysis showing no evidence of cyclical behaviour apart from cross linkages with the beef industry through prices. However, the analysis did find significant 2-3 year cycles in the mutton sector prices and quantities. In addition, there were found to be significant annual cycles in all these series.

“Any suggestion that red meat processors can pre-empt market cycles, beyond short-term and seasonal trends, is not supported by evidence,” the report concluded.

“While there may still be ‘cyclical tendencies’ evident in industry data such as a graph showing an apparent regular movement of prices of a farm product up and down over a previous time period, these tendencies are not statistically significant,” it said.

“Such tendencies should not be called a ‘cycle’. It should not be presumed that such patterns will happen in the future, and it should not be the information on which to base decisions about future production levels.”

The broad implication of the Heilbron analysis is that other external influences on world and Australian beef markets (human and animal health related disruptions, exchange rates, trade disruptions, political instability, market access, drought and flood and the growing industrialisation of production), have become increasingly significant and relevant in recent years, and have effectively outweighed the cyclical tendencies embedded in expectations processes and biological lags.

The result of the analysis suggested the need for more attention to be paid to risk management in light of uncertainties in the future about these external influences, the report said.

Click here to access the report.

Part 2: Analysis of Price Transmission

In the second part of the Heilbron report, titled Analysis of Price Transmission, statistical analysis of both annual and quarterly livestock and retail price data in the study found that prices are efficiently transmitted along the beef and sheepmeat supply chains from producer to retailer over a period of 6-9 months.

The process examined the way prices moved along the aggregate supply chain from producer to retailer. The question asked was whether there was any market power in the aggregate supply chain (for example, a sustained increase in the price differentials, that being the difference between the prices of livestock and meat) in the domestic market that could not be explained by changes in supply chain costs or other disruptions in the market.

In each case, the analysis asked whether there was market power in the market for inputs (ie having to pay for livestock from producers, and in the market for outputs, ie selling meat to consumers).

“There was no indication of increased price differentials between the farm and retail stages of the chain that are not explained by cost increases, suggesting price changes at one end of the chain are being fully reflected at the other,” the report found.

“Thus, the real price differential between farm and retail has remained relatively constant.”

Consistent with previous studies, the analysis did show evidence of short-term price levelling as retailers sought to protect customers from the larger fluctuations seen in livestock prices.

“Thus, retail meat prices are more stable than livestock prices. However this is only a short-term response, as in the next quarter part of that contraction in the price differential is given up and the price differential moves in the same direction as the farm price,” the report said.

These findings were consistent with previous studies suggesting there is no significant market power in either input or output markets for beef or lamb, the authors said.

This implied that consumers are not suffering from changes in prices along the chain, which is the primary focus of interest for competition and consumer laws.

“The fact that price transmission is efficient indicates that price transparency is sufficient to enable efficient operation of the market,” the report said.

“The general picture of real marketing price differentials for beef and lamb indicates a reasonably flat and consistent trend for each meat, and in some cases, the real marketing price differentials had declined,” Heilbron’s report said.

“The consistency of real marketing price differentials over time, despite the significant structural changes to these industries, re-affirms earlier, similar studies that found an absence of market power.”

Click here to access the report.

• See today’s separate story on The nature of competition in the red meat processing industry