Price Determination in the Australian Food Industry Food in the Australian Price Determination Price Determination in the Australian Food Industry A Report A Report Prepared by Whitehall Associates DEPARTMENT OF AGRICULTURE, FISHERIES AND FORESTRY Price Determination in the Australian Food Industry A Report Prepared for the Australian Government Department of Agriculture, Fisheries and Forestry by Whitehall Associates © Commonwealth of Australia 2004 This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism or review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgment of the source is included. Major extracts or the entire document may not be reproduced by any process without the written permission of the Executive Manager, Food and Agriculture Business, Australian Government Department of Agriculture, Fisheries and Forestry, GPO Box 858, Canberra ACT 2601. ISBN 0 642 539073 This publication should be cited as: Spencer, S 2004, Price Determination in the Australian Food Industry, A report, Australian Government Department of Agriculture, Fisheries and Forestry, Canberra. Design and formatting by Mirrabooka Marketing & Design Pty Ltd. Copy-editing by Roger Green, Bad Business. Other portfolio publications of possible interest include: ABARE 2003, Australian Food Statistics 2003, Australian Government Department of Agriculture, Fisheries and Forestry, Canberra. BRI Australia Pty Ltd 2003, The Australian Baking Industry: A Profile, Australian Government Department of Agriculture, Fisheries and Forestry, Canberra. Food News Bulletin, (published quarterly), produced by the Australian Government Department of Agriculture, Fisheries and Forestry, Canberra. A Report Smith, P. and Jahan, N. 2003, Australian Food Processing Industries: Distribution of Employment, Australian Government Department of Agriculture, Fisheries and Forestry, Canberra. Disclaimer Views expressed in this publication are not necessarily the views of the Commonwealth. This publication is made available on the understanding that the Commonwealth is not thereby engaged in rendering professional advice. Before relying on material in this publication, users should independently verify the accuracy, currency, completeness and relevance of the information for their purposes and obtain any appropriate professional advice. References to non-Commonwealth organisations do not constitute endorsement by the Commonwealth of those organisations or any associated product or service. The Australian Government Department of Agriculture, Fisheries and Forestry seeks to publish its work to the highest professional standards. However, it cannot accept responsibility for any consequences arising from the use of information herein. Readers should rely on their own skill and judgment in applying any information for analysis to particular issues or circumstances. Cover images courtesy of the Australian Government Department of Agriculture, Fisheries and Forestry New Industries Development Program’s Made in Australia magazine and the photographers Nadine Shaw QLD, Alan Seaton NSW, Leigh Atkinson – ImageMakers ACT, Don Brice SA, James Rogers WA. Price Determination in the Australian Food Industry Food Determination in the Australian Price ii ACKNOWLEDGEMENTS The study into price determination in the Australian food industry was initiated by the Minister for Agriculture, Fisheries and Forestry, the Hon. Warren Truss MP in 2003. An external steering committee for the project comprised representatives of the Australian Food and Grocery Council, National Food Industry Strategy Ltd and National Farmers Federation. Internal portfolio reference group representitives from line areas and ABARE provided feedback on the draft report. Staff in the Food Policy and Communications Section of the Department’s Food and Agriculture Business Group managed the project. The project was conducted by Steve Spencer, Director of Whitehall Associates who wishes to acknowledge the assistance of the following people who provided consulting input and valued insight: Ewan Colquhoun of Macarthur Agribusiness, Rosemary Richards of Bowman Richards & Associates, Martin Kneebone of Retailworks and Professor Gordon MacAulay of the University of Sydney. Roger Green of Bad Business copy-edited the final report. Price Determination in the Australian Food Industry Food Determination in the Australian Price A Report iii FOOD AND AGRICULTURE BUSINESS GROUP The Australian Government Department of Agriculture Fisheries and Forestry is the Commonwealth agency with portfolio responsibility for food production and processing policy. The Food and Agriculture Business Group facilitates integrated policy development, innovation and stakeholder engagement across the agriculture and food industries. The Food Policy and Safety Branch of the Group, which includes the Food Policy and Communications Section, develops and implements policy with the aim of facilitating a globally competitive, innovative and export oriented food processing and beverage industry. The section works cooperatively with and has regard to the mandates of the National Food Industry Council (NFIC), National Food Industry Strategy Ltd (NFIS Ltd), the Primary Industries Standing Committee’s food sub-committee, and industry. The section is also responsible for disseminating information to food industry stakeholders on issues of interest and importance including sectoral profiles, international and domestic trends, emerging issues, statistics, developments in food policy and programs, and decisions by government and food agencies. Contact details Food Policy and Communications Australian Government Department of Agriculture, Fisheries and Forestry GPO Box 858 CANBERRA ACT 2601 Telephone: +61 2 6272 4161 Email: [email protected] Internet site: www.daff.gov.au/foodinfo A Report Price Determination in the Australian Food Industry Food Determination in the Australian Price iv CONTENTS Executive Summary 1 1. Introduction 9 2. Principal determinants of prices and costs in agrifood products 15 3. Analysis of the determinants of prices and costs in product value chains 19 Dairy products 19 The meat sector 36 Fresh horticulture products 53 Processed fruit and vegetables 66 Grain and oilseed products 74 Eggs 87 Sugar products 94 Rice 99 4. The performance of Australian food companies 106 5. Grocery retail 113 6. Issues for consideration 122 Industry Food Determination in the Australian Price Competition and market power 123 Producer integration 124 Transparency and visibility 125 Value-adding and innovation 128 Adjustment 131 Bibliography 137 A Report v FIGURES 1. Overview of the approach 12 2. Corporate profitability 14 3. Food prices: Key concepts 15 4. Major drivers of prices and costs in agrifood products 16 5. Milk utilisation, 2001–02 19 6. Milk product mix 20 7. Growth in large pack sizes, litres sold per quarter, average 21 8. Growth in private label milk, 2 litre, litres sold per week 21 9. Packaged milk: Major drivers of prices and costs 21 10. Whole milk, 2 litre, supply chain map 22 11. Retail versus farmgate packaged milk, $/litre equivalent in nominal amounts 23 12. Supermarket segment retail prices, milk, 2 litre, 1998–2003 23 13. Supermarket sales, packaged milk, 2 litre, % of retail sales value 24 14. Shares of supermarket sales of cheddar cheese 25 15. Sales in supermarkets, cheddar, 1kg and 500g, tonnes per annum 25 16. Natural cheddar cheese: Major drivers of prices and costs 26 17. Natural cheddar cheese, 500g and 1kg, supply chain map 26 18. Retail price of cheddar cheese, 1998–2003, 500g and 1kg, $/kg 27 19. Retail price of cheddar cheese packs, $/kg 27 20. Retail versus farmgate cheddar cheese prices, $/litre equivalent nominal amounts, 1998–2003 28 21. Share of retail dollar, cheddar cheese, margin analysis over time 29 22. Share of supermarket sales of spreads, 2002 30 23. Supermarket sales of spreads, tonnes 31 A Report 24. Dairy spreads: Major drivers of prices and costs 31 25. Dairy butter and blend spreads, supply chain map 32 26. Retail selling prices, dairy spreads, 500g tub, 1998–2003 32 27. Influences on farmgate environment, 2002 33 28. Milk prices, 2 litre packs, $/litre, July 2003 34 29. Meat consumption, kg/person, 2002 36 30. Share of meat output 37 31. Market share, meat, June 2003 37 32. Processing meat 38 33. Beef production, tonnes, 1997–2002 38 34. Beef: Major drivers of prices and costs 40 35. Rump steak, grassfed, 1kg, supply chain map 41 36. Farmgate, retail and wholesale price trends, cents/kg, 1998–2003 41 37. Shares of retail beef prices, 2003 42 38. Value and cost-adding from farmgate to retail, beef 43 39. Lamb market sales, ’000 per annum, 1997–2002 44 40. Consumption in the domestic meat market, kg/person 45 Price Determination in the Australian Food Industry Food Determination in the Australian Price vi 41. Lamb: Major drivers of prices and costs 46 42. Leg of lamb, supply chain map 47 43. Farmgate OTH, wholesale and retail lamb trends, cents/kg, 1999–2003 47 44. Share of pork product market, 2002 48 45. Pork: Major drivers of prices and costs 49 46. Pork products, supply chain map 50 47. Farmgate, wholesale and retail pig meat trends, 1998–2003 50 48. Value and cost-adding from farmgate to retail, pork 52 49. Gross value of production, fruit and vegetables, $m, 2001 53 50. Fresh fruit: Major drivers of prices and costs 55 51. Fresh vegetables: Major drivers of prices and costs 56 52. Fresh fruit and vegetables, generic,