DESPITE numerous studies and investigations over the past 20 years, no anti-competitive conduct has been found to support allegations of red meat processors misusing market power, according to an independent study released this week.

This was one of a suite of important findings in an independent study carried out by economist Dr Selwyn Heilbron.

Commissioned by the Australian Meat Processor Corporation, Dr Heilbron completed an analysis of the nature of competition in the Australian red meat processing industry. His report  follows a previous similar analysis he carried out in 2016, providing updated information in terms of industry structure and practices, competition policy inquiries and decisions, and new economic research on the competitive nature of industry operations.

His report was based on research using public data sources supplemented by a series of structured interviews with a range of beef processors who were asked to provide their insights on the nature of competition in the industry.

Some of the other key findings from his report included:

• There is significant competition for livestock from processors and other buyers and a range of options for managing and marketing livestock.
• Red meat processors carry considerable market and operational risk and uncertainty when undertaking the process of purchasing domestic livestock, and processing and selling meat products on domestic and export markets.
• Processors require scale to compete in a global market, however, concentration does not equal anti-competitive conduct.
• Mandatory price reporting can have unintended consequences.
• Supermarket service kill arrangements are increasing as major retailers (not processors) purchase the livestock for processing, reducing the ability of processors to influence prices paid to producers.
• There is an ongoing need to reduce processor costs to ensure they remain globally competitive.

The nature of competition in the Australian red meat industry had been subject to high levels of scrutiny by governments and others for decades, the report noted.

Since Dr Heilbron’s original 2016 report, the industry haa continued to be subject to scrutiny. The food and grocery industry, of which red meat processing considers itself a part, is subject to recent and ongoing inquiries by Federal and State Governments and other parties including:

• Competition Review (Treasury 2023)
• The Senate Select Committee on Supermarket Prices (2024)
• ACCC Supermarkets Inquiry (2024)
• Independent Review of the Food and Grocery Code of Conduct (Treasury, 2024)
• Queensland Select Committee Inquiry into Supermarket Pricing (Qld Parliament 2024)
• ACTU Inquiry into Price Gouging and Unfair Pricing Practices (2024).

While these investigations focussed predominantly on retailers, red meat processors were also subject to scrutiny, the report said.

Most concerns on the part of some livestock producers and organisations about competition in the industry made a link between levels of perceived concentration in the industry and abnormally high margins, the report said.

“This in turn was linked to concerns about the extent to which prices paid for livestock are not transparent. In effect, the allegation has been that processors use their superior information and market power to depress prices for livestock below market levels,” it said.

Despite the number of investigations and studies to date, no anti-competitive conduct had been found to support the allegations.

The conclusion of Heilbron’s 2016 report was that the concerns were based on a view of the nature of competition in the industry which does not reflect the reality of how processors operate and how they compete.

“The information available to processors in determining what prices they are able to offer for livestock is far from perfect,” the new report said.

“Processing entails considerable risks, both factors that can be quantified and uncertainties that cannot. Concentration in a market does not equate to anti-competitive conduct. Processing by its very nature needs to be more concentrated than other parts of the supply chain.”

There will always tend to be tens of thousands of farmers, but smaller numbers of processors because processing is capital and workforce-intensive and requires sufficient scale to be competitive in the global market.”

Processors required a steady supply of livestock to match plant capacity and market demand, the repoirt said. However, turn-off from individual farms was typically seasonal, and often influenced by climate.

“Therefore, processors must spread purchasing across many properties and broader production regions.”

Service kill

Since Heilbron’s 2016 report, there had been a significant increase in supermarket service kill arrangements with various processors in the industry, particularly amongst the two major supermarkets (Coles and Woolworths) that predominantly procure livestock either directly from producers or via saleyards, and pay processors a fee to have animals custom killed.

“The same arrangements are available to producers wanting to retain ownership and market their products,” Heilbron’s latest report said.

The report quoted a 2022 Beef Central article estimating that up to 30pc of total Australian beef processing throughput at the time may be under service kill arrangements. 

“This trend reduces the ability of processors to influence prices paid to livestock producers,” Heilbron’s report said.

“When not operating under service kill arrangements, processors undertake three main activities: buy (livestock), make (process/manufacture), and sell red meat and other co-products.”

At the buying stage, livestock producers had a range of options for their livestock through the life cycle of production, and in the methods they use to sell their animals – just as there were a range of ‘bidders’ via each selling method and a range of activities or choices that a producer can make to improve or increase sell prices by producing animal specifications to meet particular demands, the report said.

“The livestock production sector involves many beef producers of different sizes, capacities, and profitability. But differences in producer profitability reflect their costs, rather than prices received for livestock,” it said.

“Processors, accordingly, have a range of options in buying, and in determining the prices that they can affordably offer for livestock.

“Processors generally undertake a procedure that involves a great deal of risk and uncertainty. They have different scale and cost structures, and on the sell side, they are all price-takers in a highly competitive international market.

The international market drove the prices that processors could afford to pay for livestock, since exports accounted for around three-quarters of output, Heilbron said.

Some parts of every carcase may be exported, and some remain in Australia. These carcase components are typically sent to multiple customers in multiple countries. It is that mix of global customers that creates quite different opportunities for different processors – hence an identical carcase will be worth different amounts to different processors.”

“This is why carcase utilisation and market access are so critical in making processors viable.”

The ability to maximise carcase balance and create value increased with processor scale, the report said.

“The scale allows a business to service more markets/customers consistently and reliably with more unique cuts. Hence, scale creates value on the sell-side, which then makes processors with scale more competitive on the buy side.”

The dynamics of the industry and the supply chain were driven by supply (available livestock) and demand (internationally, for beef).

Significant competition for stock

There was significant competition for livestock from processors/buyers, the report argued.

“There is no evidence of market power on the buy side, rather it is a function of what processors can afford to pay against the competition. Red meat processing is a manufacturing sector using a diverse range of inputs that vary by factors such as size, breed, and condition,” it said.

“Not all livestock are the same; not all processors are the same, and not all sellers of finished products are the same. Not all markets are the same in terms of access, risk and the costs of servicing these markets. Processors’ estimates of how much they can afford to pay for livestock rests on many assumptions – what they might sell the products for, what their processing throughput will be, what the supply of livestock will be – and if these prove to be incorrectly calculated, processors will find themselves suddenly losing money,” Heilbron said.

As noted above, a single livestock carcase is disassembled and components including meat, by-products and offal are directed to multiple international markets, the report explained.

“This increases complexity and the risk of losses. These losses may continue because processors need to maintain throughput, otherwise unit costs will rise. If they are eventually forced to shut down plants, major financial costs are incurred and resources lost (notably skilled labour) which may not be easily regained, if at all.

“Moreover, at the time of purchase of the livestock, much of the purchased value is at risk, when currency, unrealised sales, logistics and geopolitical circumstances are all taken into consideration (the processor being exposed to each of these risks in combination).

When assertions about concentration and excessive processor margins mentioned above were made in 2013-14, figures were cited showing a sharp rise in the gap between prices received by processors for some beef exports and the prices paid to livestock producers for some cattle.

However, this reflected an exceptional set of circumstances, Heilbron submitted, with record sales of cattle (oversupply) during a serious drought in Australia and high prices for beef in the US market.

More recent figures indicated the spread between the price of cattle and beef had reversed to become sharply negative, and well below the long-term trend.

Domestic market

This also illustrated how the domestic livestock market can behave and act independently from the global red meat market for considerable periods of time.

“Processors cannot remain in business indefinitely losing money, whatever the short-term imperatives to maintain throughput are,” the report said.

“A continuation of negative conditions would see the less cost-efficient processors go out of business. Even more cost-efficient processors would consider alternative options during sustained periods of negative returns.”

US Vs Australian concentration

Concerns expressed by some stakeholders about concentration and the level of transparency in pricing have led to pressure for action to enhance competition, Seilbron noted.

“At its extreme, this has included calls for mandatory price reporting as occurs in the US. However, concentration does not mean a lack of competition, and the level of concentration in the US is far higher than in Australia.”

In 2017 the ACCC estimated that the four largest Australian operators accounted for 51 percent of total beef processing in Australia. This compares to the US where the top four process more than 80pc of animals, according to USDA data.

There were potentially unintended adverse impacts of mandatory reporting, Heilbron warned. For example,it could facilitate anti-competitive practices such as price signalling in concentrated markets, and equally signal to meat buyers prompting a race to the bottom in pricing. Both would adversely affect livestock producers as well as processors, it said.

“Concerns about some features of price reporting stem from industry-agreed practices and standards. If technological solutions can be found that enable more accurate information to be disseminated in a manner that is cost-efficient (and there are structured R&D programs underway to do this), then there is no reason why they should not be adopted,” the report said.

The Australian red meat processing industry was both labour and capital-intensive. It had higher cost of production compared to major international competitors like the US, Brazil and New Zealand.

The foreign exchange market is the same for all processors with export sales typically made in US dollars. The seller of the end product competes and bears the risks of selling into highly competitive domestic and international markets.

“Once the ownership of the animal passes to the processor, the commercial and operational risks (inclusive of quality and cold chain conformance risks) are borne fully by that processor and seller who aims to maximise the return based on the price paid for each animal,” Heilbron said.

“Given that processors are price takers, having the lowest cost for processing is a key means by which processors compete. Interventions that increase risks and costs therefore undermine competitiveness and reduce the capacity to afford paying prices for livestock. Unfortunately, the cost structure of the local industry is relatively high internationally, and has been made worse by government-influenced taxes and charges and other policies such as industrial relations. These have been exacerbated by workforce shortages. The red meat processing industry is an important one not only for those directly involved, but also more broadly for regional, state and national economies.”

The unintended consequences of policies applied to one part of the industry would inevitably flow on to others, Heilbron warned.

“In particular, the economic fate of processors as major buyers of Australian livestock is intimately tied to that of livestock producers, and vice versa. There are major challenges posed for policymakers by smaller producers who have difficulty in fully participating in the development of the livestock industry and meat industries (and indeed other agricultural industries), where economic forces generate competitive advantages for those able to realise the benefits of scale.”

“Policy can accommodate this process or hinder it. Where competition in the industry is strong, there is no justification for using competition policy to hinder economic forces and limit the potential gains in efficiency and competitiveness of the industry.”

Two-tier industry

Since the original Nature of Competition report in 2016, the major areas of concern in relation to processors had been consolidation and allegedly consequential market power, and concerns about prices not being transmitted along the supply chain.

It was evident from the review of competition policy and laws mentioned in the report that the policy stance of the competition regulator tended to discourage consolidation amongst the largest processors, although apparently not amongst smaller operators, Heilbron said.

“The competition regulator’s policy approach has essentially resulted in a two-tier industry – one where mergers are allowed and one where they are discouraged. Yet there has been no substantiated evidence that would justify such an approach, and no analysis of the adverse impacts on the sustainability of an industry that depends on international competitiveness for most of its sales, through restricting the scale of its larger operators.

New merger rules stated by the competition regulator are unlikely to make mergers with larger processors easier to achieve.

This had implications for resource allocation and competitiveness, Heilbron said.

Scale economies are of critical importance in red meat processing, as the industry is faced with high fixed costs that need to be spread over as much volume as possible, consistent with the availability of complementary resources such as labour and availability and access to markets for products.

A problem is that competition policy in Australia focuses exclusively on competition in the domestic market, whereas export meat processors (which sell around two-thirds of production) operate in an international marketplace.

Competition policy that restricts or bans mergers and acquisitions by the larger processors completely limits their ability to achieve scale through acquisition, and hence undermines their competitiveness, the report claimed.

“One of the reasons why US processors have much lower costs to operate than their Australian counterparts is that they are much bigger. Scale also helps maximise export value and service large global customers.”

“Networks of plants also help manage/spread risk and seasonality. Accordingly, the original study concluded that there did not appear to be an economic justification for changes to competition laws that serve to tighten regulation relating to anti-competitive conduct, market definitions and price reporting.

Click this link to read full report.  The nature of competition in the red meat processing industry.