By Andrew Woods | Source: ABS, ABARES, MLA, ICS
The structure, in terms of the supply of different meats, of the Australian meat industry has changed markedly during the past 25 years. This article looks at the effect of changing market share on the relative prices of the main two red meats produced extensively in Australia, with the view of helping to understand where the ‘natural’ price levels for extensively produced meats lie.
To set the scene Figure 1 shows the share of domestic consumption in Australia by major meat class from 1991 through to 2015. Chicken has shown the best growth, increasing from 22% to 41%. Pork has increase also from 18% to 24%, while beef has decline from 38% to 26% and sheep meat from 22% to 10%. Sheep meat and beef accounted for 60% of domestic consumption 25 years ago. Now they account for around 40% of meat consumption in Australia.
What of price? Figure 2 shows retail prices for these four meat categories for the same period of time, along with a weighted average meat price. The comparison is not a perfect one as the chicken price is effectively an undressed price while the red meats are an average price of various cuts. However it is the change with time that is the key piece of information to the gleaned. Beef, pork and lamb prices have all trended up in nominal terms while chicken has risen at a much slower rate. In 1991 the retail price for chicken was close to that of lamb. Intuitively this makes sense, as the relative supply of a meat falls so the relative price rises.
Figure 3 takes the last point and expresses it in graphic form. It shows the basis (difference) between the lamb price and the weighted average meat price (shown in Figure 2) along the vertical axis with the proportion of domestic consumption accounted for by sheep meat along the horizontal axis. The relationship is quite strong. As the relative consumption of sheep meat has fallen in Australia the basis to the average meat price has moved from a discount of 30% to a premium of 30%. Figure 4 shows a similar analysis as Figure 3, but for beef price and consumption in Australia.
Clearly the trend in meat consumption has favoured the intensively produced meats, with chicken the leading meat (the polyester of the meat markets if you will allow a fibre analogy). The relatively cheap chicken will put downward pressure on the prices of other meats; otherwise chicken will steal more market share. All is not lost as Figures 3 and 4 show there is a trade-off to losing market share in that the relative price can increase. Ultimately the outcome for beef and lamb prices will be a balance between maintaining market share at the cost of matching the trend in chicken prices and giving up some market share in order to pick up an increase in price premiums to the average meat price.
The beef and sheep meat industries face strong competition from the intensively produced meats for market share, which they have been losing. This competition for market share will continue. As market share has been lost the price of red meats relative to the average meat price has lifted, most spectacularly for lamb, so all is not lost.
However higher prices with lower (relative) supply, as a strategy, can only last for so long. The weighted average meat price is unlikely to rise dramatically, which means the beef and sheep meat industries need to focus on productivity in order to maintain profit margins.
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