Factors Determining the Price of Beef in Australia - Example

Marketing Margins Student’s Name Subject Professor University/Institution Location Date Marketing Margins Goodwin (2005) explains that the beef industry is the second largest agricultural industry in Victoria, with around $ 1.37 billion gross value of agricultural product. During 2011-12, domestic beef consumption was approximately 31.7 kilogram per capita which has fallen from 34.6 kilograms in 2009-10. In early 1980s, the number of cattle fallen in Victoria was 2.78 million to 2.36 million in 2011. According to Bezawada (2013) the most geographical intensive industry in Victoria is beef cattle industry. In his study, he explains that the Victorian fresh, veal export, chilled and frozen beef in 2011-12 was $ 606 million which represent 12.3 percent of the Australian $4.94 billion. In Australia, completion on food market margin has grown to be a continuous public concern in particular to primary producers, consumers and policy makers. Nominal retail and farm gate prices are the focus of many observers. The factors that contribute to this include the recent high rising retail food prices with comparatively stable farm prices, and therefore leading to an increase concentration in retail food sector. This paper critically looks at an updated quantitative analysis of the competitive behavior of the marketing margin in relation to beef commodity in Australia, influence of market margin on the price level and behavior on beef commodity. It also provides a conceptual and empirical framework for appropriate price discovery mechanisms for analyzing market margin and competitive structure within the beef marketing chain in Australia. Market margin is related to a profit margin in that it reflects the relationship between the amount a customer pays and the amount the company had paid for the product. Figure 1.1 shows the real and nominal marketing margins for beef during 2007-2012 in Australia. The illustration below shows how the nominal retail prices have gone up quickly than nominal beef prices in the last few years, therefore the nominal marketing margins increasing. For instance, the nominal beef marketing margins have risen from 500 c/kg in 2007 to 2150 c/kg in 2012. Chung and Griffith (2009), proves that during 2007-2012 the livestock prices and retail beef prices in Australia were greatly interrelated. Hence, the appropriate measure is real marketing margins, which gives description for the real cost of supplying the marketing services which go hand in hand with the price of the live animal in producing a retail beef commodity. To calculate the real marketing margin, the nominal margin is divided by an index of the changing value of money over time. Real and Nominal Beef Marketing Margins, 2007-2012 (Figure 1) The real marketing margins beef has shown consistent increases. Several previous studies have observed various competitive structure aspects of food marketing margin in Australia. Department of Agriculture in Australia and Leonard (2004, 2007), developed a model and applied it in Australian beef market with the main focus on the status of this particular market. Research Institute on Livestock Pricing at Victoria Australia convened a conference in 1997 based the focus on realigning price discovery mechanism to a more valuable system. According to Alford et al. (2006), price discovery is a process whereby the buyers and sellers arrives at a transaction price of a product for a given quantity and quality for a given at a given time. Weldegebriel, (2012) in his study describes some factors that influence price discovery such as market behavior, market structure, market information and pricing reporting and risk management alternative. In Australia, the historical price discovery in the beef sector has not been acceptable to producers. According Alford (2006), pricing discovery provides the means for achieving price determination and thus the equilibrium demand and supply for the market. According to Sckokai et al. (2012), pricing mechanism has different form and structure which are natural basis for classification which include the precise mention of base price, frequency and timing of exchange, location of exchange, price of substitute, the level of the market considered, the information expressed (nature of information and market level to which the information is transferred), management of risks (price risk market access risk and relationship risk). Price mechanisms have definite propositions for risks on behalf of buyer and seller which relate to price and volume (supply), obtaining access to marketing channels and quality of the product Sckokai et al. (2012), discusses in length the relationship between price level in perpendicularly related markets and their relationship through pricing mechanism formula, beef pricing throughout Australia, pricing systems with discounts and premiums for weight, yield and quality. A base price is naturally quoted with deductions for lower grade in commodity product. According to Goodwin (2005), the marketing margins influence the price level in different ways. Competition in trading plays a significant role in the price discovery process (Broderick and wright, 2011) state that, where there are two or more parties with self-interest, competition will always be there. Competition is one of the determinants in setting a price in marketing margin. Alford (2006), clearly put forward that, the market demand and supply will tend to be stable where there is free competition and there will be equality in market price and natural price. In other words, competition plays a very important role in market supply and demand rules Oro and Pritchard, (2011), emphasize the effect of competition setting price level. Competition encourages creativity and innovation activities and therefore compelling manufactures to lower the production cost, and in return making the prices to descend forcing the industry profit to come to an average level. Government intervention is another factor in marketing margins that influences the price level of beef in Australia. The government regulation came from the argument of economic thoughts of free market and governmental intrusion (Sckokai, 2012). The main focus of economic discussion has been on the quarrel of the market mechanism as to what the role of government should be on marketing margin and the price level. Many economic flows are born out of government intervention. When government introduces public goods in the market, they affect the price of the commodities in the market. In the case of beef product in Australia, the price level is affected through government intervention in that, the public commodities such as construction and maintenance of roads where the beef commodities are transported through need cost. On the study on limit market mechanism by Oro and Pritchard, (2011) government intervention has had a deep influence upon price level. There has been increasing concern over the Australian market power because recently there has been a relative increase in retail prices with the producer’s prices being relatively stable. This has led to an increase in the market margin leading to changes in the competitive behavior of the beef as one of the leading commodities for export in Australia. Beef market in Australia is highly competitive which means that the setting of beef prices in Australia is dependent on decisions made under competitive bargain. There is competition among the policy makers, the producers, the retailers and the competition. This competition dictates the behavior of beef in the market in relation to the market margin and market power. The perfectly competitive market facilitates the achievement of the social welfare of all the participants in beef market. Recently it has been noted that the producers have maintained stable prices for beef production in the market while the retailers have constantly increased the price of beef to consumers. This trend in the market has affected the behavior of beef as a commodity in the market, the cost of beef to the retailers has remained constant it is increasing to the consumers. This means that the retailers have been enjoying a larger market margin thus are able to supply more while the consumers due to unstable prices may substitute the consumption of beef with products that have relatively stable prices. Being that the market is competitive other consumers may shift to those retailers whose prices are lower than others thus affecting the behavior of the commodity beef in the market. Therefore, in the Australian market the competitive price determination mechanism is used in setting of beef prices since the forces of demand and supply is affected by the level of competition in the market. The prices for beef change towards those with lower prices Australian market is leading in beef export in the world, it is therefore important for the Australian government to control the export prices through the agreement price discovery mechanism. This means that Australia enters into agreement to all the countries where it exports its beef so as to ensure relative stability of prices. This means that the market power for beef will be stable and controlled. Price discovery is very important in the beef market in the Australian economy; it is a search process as Digal & Ahmadi (2002) brings out. Availability of information set the stage for the market that consequently affects the search process. In essence, pricing mechanisms helps in discovering the reference price with specific conditions and attributes. It is as a result of this that beef prices keeps on changing because of frequent adjustment processes initiated by the presence of new information in the market of beef. The market players do not have same information on the developments of beef market, each trader assess the market in different way because of the availability of information. Bindon & Jones (2001) argues that future prices decrease or increase mostly because of many factors that affect the sellers and buyers expectations about the beef will be worth in the future. Availability of information and developments in demand and supply affects the perception and judgment in the prices of beef in Australia. Of late, the beef market has been very competitive and these have become a major economic benefit. This has been necessitated by availability of information and transparency to the majority of the traders. McAlpine & Laurence (2009) continue to explain that issues of price determination have been emphasized more by the recent events unfolding in the livestock market. Price determination, the observance of market price influenced by demand and supply at aggregate level, of beef in Australia is directly influenced by the thinness of the cash markets especially in the livestock market. The current beef market context in Australia implies that the perceived prices in regions is balanced or equaled by the transfer costs of the beef. Lloyd & Rayner (2001) expound that this also applies in the international market where difference in currencies between the Australia and importing countries make it favorable or unfavorable for the countries to import. Rise in the Australia’s currency it makes it hard for the importers to purchase beef from Australia, thereby lowering their demand. This is a controlling factor in the international market for beef. In order to maintain a stable demand and supply of beef in the international market, currency must be observed and future trends predicted so as not to produce more than the market demands leading to oversupply. Conclusively, there are various factors which considered in determining the price of beef in Australia. Factors such as demand and supply, availability of information, currency fluctuations and weather patterns play a significant role in market for beef. It is therefore the duty of every market participant to be aware of these factors. References Alford, A., Hegarty, R., Parnell, P., Cacho, O., (2006) The impact of breeding to reduce residual feed intake on enteric methane emissions from the Australian beef industry. Animal Production Science, 46(7), 813-820. Bezawada, R., & Pauwels, K. (2013). What Is Special About Marketing Organic Products? 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