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Rural and Regional Affairs and Transport References Committee
04/08/2015
Effect of market consolidation on the red-meat-marketing sector

MACLEAN, Mr James Charles Kenneth, Managing Director, Allied Beef

[14:17]

CHAIR: Welcome. I invite you to make a brief opening statement before we go to questions.

Mr Maclean : Allied Beef is a cattle partnering, production and marketing business based in Toowoomba. We operate in Queensland and New South Wales and do a little bit in Victoria. As you will note, I did not make a submission to the inquiry. I suppose I am here as a guest in relation to the inquiry. Whilst I did not listen to most of the presentations prior to lunch—

CHAIR: That is because you were not in the room?

Mr Shearer-Smith : That is correct.

CHAIR: It came out sounding like you were not interested, so I just thought I would clarify that so you do not get knocked out in the car park.

Mr Maclean : No, potentially I would have been very interested. I think a number of issues with regard to trade between producers and processors can be improved, as was previously highlighted by Mr Chappell. However, I probably generally have a feeling that the relationship between the processing sector and the producer sector is actually not broken. I think it has evolved over time, and certainly the consolidation that has occurred in the processing sector has occurred on the back of economic outcomes and commercialisation of ideas and strategies of different businesses. In my opinion, it is a completely free marketplace and people can trade or deal with whoever they want. In addition to that, whilst the processor is at the end from the conversion of a live animal to a boxed beef product, from a producer's point of view there are various different avenues that they can choose to participate within the beef industry to look at maximising their potential earnings.

A major part of the sector does not take the cattle through to slaughter. One could argue that what they get paid is a result of what, potentially, a customer of theirs may get paid, but I think the fact is there are a hell of a lot of cycles in all commodity industries, and the beef industry is certainly one. I think the opportunity, moving forward, is that the consolidation has all occurred in the processing sector and supply chains are going to mature and develop, and a lot of that will come in the form of producers becoming more relevant to either their lot-feeding or their custom-processing customers. I think that is where the major change in the supply chain dynamic is likely to occur, moving forward.

CHAIR: Mr Maclean, I want to bring you back to where you said that producers are free to trade with anyone. On the surface, yes, one will not argue with that—that is the truth. But what did come out with a previous witness earlier today is the difference in distance. For example, if you want to sell your cattle to the closest processing plant, here is the price. If you are not happy, you can go somewhere else. Someone said it cost them an extra $10,000, I think it was. So would I be a little bit cheeky if I were to say, 'Look, that is not quite as crystal clear as you have put it'? They are free to trade, but wouldn't the tyranny of distance restrict them from even having the opportunity? They may chase a greater return of cents per kilo, but the truth of the matter is they are knackered. They cannot go any further, because they have to use the closest facility, in certain examples?

Mr Maclean : No, I probably disagree with that. Cattle generally, across Australia, travel a large distance and there is an economic cost of travelling cattle an extended distance. But, from a market price, the producer or lot feeder or anyone selling cattle, I would like to think, generally determine what their net farm gate result is of going to various customers. So, if that producer is located at, say, Charleville, west of Roma, their cost structure to send cattle to the Victorian border is very similar to their cost structure to send cattle to Brisbane. Therefore they have the ability to send those cattle south or east, and so whilst there is a hell of a lot of distance in both pathways they have the ability to determine what the specifications of a particular customer are and what the pricing arrangements are and can direct those cattle whichever way they want to.

CHAIR: I raise this not only because it was raised with us earlier this morning—I mentioned the $10,000 figure in transport costs or whatever it was—but I know that Senator Williams, in his fantastic representation of the people in his area, was really wound up like a clock. Senator Williams will talk for himself. Was it Scone?

Senator WILLIAMS: Scone, yes.

CHAIR: Senator Williams, I may be completely off track here and I may seek assistance from you—you know the area far better than I ever will. You know the complexities that are faced by growers. It just seems for me, being an ex-truckie, a little bit cute. Mr Maclean, do not take it personally, but I still think that if I can get $1 here and I can get $1.50 there, but it costs me an extra dollar to get that $1.50, that is not as simple as saying it is a free market and you can choose your pick. They do not have that opportunity. But, if I am wrong, correct me.

Senator WILLIAMS: Chair, the witness is saying that, if you were in western Queensland, by the time you truck them to Dinmore over near Brisbane, you could truck them to Inverell or you could truck them to Scone, which is actually shorter, or no further. So, when you are out in the sticks, because of the distance you have to travel them anyway, you actually have a choice of a few abattoirs going east, south or whatever.

Senator O'SULLIVAN: Yes, but joining the chair, if you are in Georgetown you are going to drive past four abattoirs before you get to any of those. You are not going to do that.

Senator WILLIAMS: No, as an example we should say south-western Queensland.

Senator O'SULLIVAN: Mr Maclean, earlier anecdotal evidence suggested that, if someone gives a grid price on Sunday night and it has to be accepted by that producer on Monday morning, and they do not accept it when they have logged in, that could be it between you and that particular processor. If that is correct, these things do not lend themselves to a conversation about a free market.

Mr Maclean : I would disagree with that. To me that is a selling process, and I think progressive producers are marketing what they are doing across to a number of chosen customers. There were processing plants, and I think the number back in the seventies was 500 export plants and now there are 63 or 64. I think that commercial interests have meant that those plants, whether they were located in regional areas or other coastal areas, have been there and have served a purpose within a period of time. I would suggest that the main reason a number of regional plants have not sustained an extended life in the last 30 to 40 years is the seasonalities that are experienced in those areas.

CHAIR: What about the live export trade? In Western Australia we had them up and down the coast. I am sorry to cut in. I remember that when live export kicked in it was because we did not have enough freezer space—that was what we were first told in Western Australia. We have subsequently seen the closure of all of those abattoirs in the north of WA, and we are nowhere near as big an industry as you are here in Queensland. I would say that that would have a great impact on it, Mr Maclean. Would I be wrong there?

Mr Maclean : About the impact of the live export competition?

CHAIR: Is that why there are a lot less facilities?

Mr Maclean : I fully agree with that, 100 per cent. A live exporter has the luxury of, effectively, coming into a market such as Australia and taking cattle out when the price fits with the chosen market that those cattle are being directed to, and when the cattle prices of Australia are not fitting with the chosen market they have the discretion to go to other markets that they can move cattle out of. A processing plant that is located at Innisfail, unfortunately, does not have the luxury of bringing those cattle from Western Australia or bringing those cattle from another region. They really have to process and process efficiently from that particular area. Over time, what history would suggest is that those plants have become uneconomical because a lot of those plants have been owned by the major processors that are still operating today, and they have chosen to shut them as a result of the economic benefit and the improved commercial outcomes of consolidation into bigger plants.

Senator O'SULLIVAN: Let's accept everything you have said—let's accept that this attrition of these processing plants has occurred for reasons that are not illegitimate reasons. Does it not follow that, because of the misfortune of these plants no longer being profitable and closing down, the consolidation of bigger operators and there being fewer of them give them an edge and an advantage that brings disadvantage to the producers? It may be an explanation for it. Do you accept that principle? It is almost inescapable, Mr Maclean.

Mr Maclean : I did not hear their presentations this morning, but I have a belief that the larger processors with international presence in marketplaces bring a lot to the table. If you look at the Roma processing plant that used to be here back in the eighties, it was previously owned by a group of producers and it was shut down. I suspect that one of the major reasons in relation to that comes back to the market access and the larger—

Senator O'SULLIVAN: That is not why mills shut down the sugar industry. It shut down because the producers who owned the co-ops did not invest in their co-ops—they took and did not give back. When they left the farm they were no longer farmers. They were persuaded to sell their shares to a third party. I do not want to take everyone's time on this, but there are some principles in life that cannot be denied. If you want tension in a market, you want people competing for the product—No. 1. If you want to sell your cattle for slaughter, the closer it is the better it is for you—there is no question about that. If you get to choose an operation on the same cost basis across the road from the abattoir down here versus going up to Georgetown—everything else is the same; the cost of the land and the whole gamut—you are not going to Georgetown. These are inescapable issues. I think that the sooner in this inquiry we start to drive those stakes in the ground, the better. It is not a perfect world and we are not going to come up with perfect solutions, but we cannot keep gravitating and shadowboxing around these things—that fewer abattoirs or bigger abattoirs are better for the industry. It may be that that is the only choice we have. I am sorry, I am editorialising, and I should not have.

Senator WILLIAMS: What was the question?

Senator O'SULLIVAN: There is no question. I was just carrying on.

Senator CANAVAN: I take your point that consolidation is driven by a desire to achieve scale economies and to reduce costs. Why is it the case that, after this consolidation process in the last couple of decades, the average cost of killing a beast in this country is higher than it has ever been and it has not really achieved the outcomes that perhaps were the original reason behind doing it? We are constantly told we are the most expensive country in the world in which to kill a beast, yet we have had all this consolidation. What went wrong?

Mr Maclean : I am not an economist, but I would suggest we are probably the most expensive country in the world to do a lot of things, and that is driven by a number of other factors. Whilst on direct comparisons, and I certainly do not have the knowledge or the expertise of some previous speakers in regard to cost structures of processing cattle in Asia versus processing cattle in Australia versus South America versus the US, our cost structures are what they are. Anybody can set a plant up tomorrow if they choose to.

Senator CANAVAN: That is not what we have heard, and I am an economist and I do agree with the sentiment that consolidation in and of itself is not necessarily a bad thing. The real issue is: is the market contestable and are there barriers to entry that stop people coming in to take advantage of any excessive profits now? Clearly in the last few years there have been profits made in the processing sector and large margins, yet no-one has really done, except for Darwin, which is in a totally different market from here, although there is a lot of talk about people coming. The evidence we are hearing is that there are barriers to entry. The AUS-MEAT standards and the AQIS accreditation standards do restrict entry to the processing sector and therefore do have an affect on the competitive tension that Senator O'Sullivan was talking about. But from your perspective those barriers do not exist or are not material?

Mr Maclean : With any large business development there is a lead time. Whilst the plant in Darwin was certainly built relatively quickly, but if you go back to two years ago I would argue that a number of processing plants were losing money on the product they were processing, and whilst dynamic—

Senator CANAVAN: Two years ago?

Mr Maclean : Two years ago.

Senator CANAVAN: I was working in one at the time that was making huge money, but it may be a longer time back, I do not know. But two years ago I think they were doing all right.

Mr Maclean : We certainly have seen what I would consider to be a major expansion in the throughput capacity of plants in the last two years, and that is utilising improved operating efficiencies in those plants. As you say, whilst there is a fair degree of discussion on new plants that at this stage have not materialised, other than Darwin, a number of customers that we are supplying cattle to regularly have all increased their throughput in their plants over the last 10 years, excluding the last two years. If you look at most of the major plants in southern Queensland and northern New South Wales, they have all increased their throughput capacity.

Senator CANAVAN: There is no doubt that they have increased their throughput capacity. It just does not seem to be proportionate to the increase in profit. I worked in one. There was still a lot of potential to make more money through more shifts or more throughput, and it did not happen, and I do not really know why.

Mr Maclean : Yes, I certainly think that everybody has been going as hard as they can to process as many cattle as they can. I am a meat trader, although I certainly worked in an abattoir previously in trade, but I think things are changing to the supply chain moving forward, as other industries have. Certainly, in the historical sense, trading is quite opportunistic. When I was with the processing plant we made 50 per cent of our profit in one week of the year. So we traded for 52 weeks, and 50 per cent of the profit was made from one week. That example just shows the volatility in earnings.

Senator CANAVAN: My concern is: while there is no doubt there is some degree of choice and ability for producers to select where they send cattle, it is also the case that exactly what you would expect to see in a consolidated and anticompetitive market with excess capacity is high margins being made but people not processing beef at night or not doing it on every day of the week when, potentially, they could. The economist in me sits back and thinks, 'Why aren't they doing that?' It is very much in their interest to restrict the quantity of supply to push up the price, or push up their margin, in this case, and to push down the price to produce and supply. But you do not see it? You think they are going as hard as they can?

Mr Maclean : Up until about a month ago, yes—since supply started to tighten. And probably from Easter—more than a month ago—is when we saw the sort of numbers get to nearly 180,000 on the east coast. In my opinion, every plant was pushing things as hard as they could in relation to their volume.

CHAIR: Before I go down the table, Mr Maclean, this morning we heard examples of gall bladder stones going for $20,000 to $30,000 a kilo. We have heard from Senator O'Sullivan cases of where bulls' pizzles were $50 a kilo. For foetal blood, which is quite attractive, I do not have a price.

Senator WILLIAMS: Two hundred and sixty five dollars a litre, I think, Chair.

CHAIR: Okay. I do not know how many litres there would be in a carcass. And then, of course, there is offal. When you look at that and you compare what the growers are getting per kilo for their cattle, has that system—where none of this other stuff was paid; it was just the meat—been around forever, or has this just developed? To the best of your knowledge, Mr Maclean, is this just something that has happened? Did someone think of it a couple of years ago?

Mr Maclean : Beef processing, or animal processing, is quite unique. You have one product go into a plant and you have, potentially, 100 or more coming out the other end. With value creation, the companies have to extract as much value from as many parts of that carcass as possible from a processing point of view. What areas of value-adding they do themselves may, in some cases, reflect the capital improvements they have to do to do that. I am a strong believer that those additional bonuses that come from some animals in some cases are paid to producers. But, in most cases, it comes in a general mix of income that goes back out in a general mix of payments to producers. Again, whilst the processing sector has had an extremely profitable period for the last couple of years, I do not believe that those minor factors are contributing to that in a material way.

CHAIR: I just wanted to raise it—if there is no later question—because it seems a lot of money.

Senator O'SULLIVAN: In your comment you regarded that as a minor factor.

Mr Maclean : If you are looking at a plant that is potentially processing 7,000 cattle a week, the gallstone earnings or foetal blood earnings are not going to be material—

Senator O'SULLIVAN: No, no. Put them aside. I have heard this frequently, and you can debunk it if you like: there are those for whom the offal alone—or those additional things—is considered to have a similar value to the cost of process. Can you debunk that? That would put them in the value scale of hundreds of dollars, which is not minor.

Mr Maclean : It is. But do you say that is additional to everything else that realises a value?

Senator O'SULLIVAN: If the heart of the chair's question is: it used to be. I had the experience: when I paid a contract kill on a beast for my own purpose, I got the entire beast back—all the offal—and sometimes I got a consideration for the hide. Now, that is a while ago—a good while ago. We have had evidence before us this morning that that has been the experience of others—they got cheques back. They got their full beast back—100 per cent—and a cheque. Now they pay the cheque and get, I think, 36 per cent of the kill. So all of that 'other' goes into consideration of process. I do not want to get into a debate, but in the minds of most producers I do not think that they are thinking that this is sort of just a little incidental side plan for the process. I think they think it is a very substantial part of their operations and profitability.

Mr Maclean : Again, I think the history of meat processing in Australia has shown the consolidation or the numbers of parties that have actually gone out of business because the commercial earnings are presumably not there. It means that the pot of gold that is in processing, that has certainly been there for the last couple of years, has actually not been there over a sustained period. There are plants that are currently either having investment go into them or are being sold at values that are certainly 10 times what they would have been five years ago. It is quite a unique period of time that I believe we have been in from a beef processing point of view.

CHAIR: I am certainly not out there to throw spears at the processors. As I said earlier, they employ a lot of people, they keep a lot of communities going—I understand that. It is just quite alarming now that we have an industry on its knees—and this is not something that has just come up today; we have been hearing this for the last couple of years—and as the years or weeks and months go on it is getting worse and worse and worse. All we are trying to work out is how the heck this can be done. I do not think there is anything wrong with the processors wanting profit, but I also think it is just as fair for the producers to be able to say, 'We want to be sustainable.'

Mr Maclean : I agree 100 per cent. I think, again, it comes back to my belief that the market not being controlled by the processors. We have had a 100 per cent increase in price of cattle that we are selling today compared with two years ago.

CHAIR: I think we are probably in the same ship here. It gives me the screaming abdabs when I hear that Australians want the cheapest, best product they can get, but the buggers do not want to pay for it. At the end of the day, they have to pay. It is as simple as that.

There was a wonderful article in The Sunday Times—which is not a fantastic paper, let me tell you. If you are reading The Sunday Times you are either hung over to the max or you are trying to check your golf score. But I saw an article by Matt Moran. Matt Moran came out to defend the absolute travesty that the return to the farm gate is shocking. He is trying everything he can to uplift Australia's meat and vegetables. But you know what? Consumers are going to have to pay. It is all very well having the free marketeers go ,'Oh isn't this wonderful, we can screw the living daylights out of our farmers.' And you guys might get the living daylights screwed out of you at certain times—our truckies, our plumbers and who cares? Someone has to pay for it. This is what gives me the shits because everyone wants to hide behind our small family businesses being sustainable. Christ, I had to get that off my chest!

Senator O'SULLIVAN: I have one qualifying question for you, Mr Maclean: do you believe there is any collusion in the sale yards at all?

Mr Maclean : No, I do not.

Senator O'SULLIVAN: You do not. Would it surprise you to know that in the world of cattle production you are probably the only one who believes there is no collusion in the sale yards? I am serious. I move around—I am a producer myself. You are the first one ever to say to me that there is no collusion in the sale yards with purchasing. The first one. I have talked to hundreds now in preparation for this inquiry and our last inquiry.

Senator CANAVAN: I am a bit surprised too that you say there is no collusion. It does surprise me how you could be that confident, given the number of sale yards in this country and the various players that are involved. The real issue I want to get to is that the market is not a monopoly—absolutely not, there are multiple players—but we are never going to have everything perfect, either. Presumably, there are other things we can do to make this market more competitive and operate more efficiently. I am interested: do you have any ideas, with your experience in the industry, about how we could make it more competitive? How can we lower barriers to entry? How can we make sure that everybody has a fair ability to receive a fair return on their work and their product?

Mr Maclean : I believe the opportunity is in the hands of the production sector. Allied Beef is a producer in its own right. We produced 70,000 to 80,000 cattle of our own in the last 12 months that we supplied to customers. I think, as a producer we need to become more relevant to our chosen customer. The more relevant we are, the better value transfer we have from our chosen customer.

Senator CANAVAN: But there is nothing in your life and your business that we on this side of the table make difficult for you when it comes to expanding your business, running your business and becoming a bigger player in your business? All of those things would stop competition occurring to the optimal degree. You have no ideas; it is running perfectly; it is the most perfect of all worlds.

Mr Maclean : I would prefer not to pay any tax! As I touched on at the start, there is the review of AUS-MEAT, as Greg Chappell highlighted. The continued development of what I suppose I would call a trading platform between two parties is being undertaken, and that certainly has merit.

Senator CANAVAN: We heard evidence that on the AUS-MEAT committee—the language and standards committee, if I have that right—four of them are processors and only one is a beef producer, and that those standards set by that committee can play a big role in new abattoirs being able to be established. Do you think it is right that the processors have such a disproportionate share of the AUS-MEAT language and standards committee?

Mr Maclean : No, I think it certainly would be better if it was back to how it was originally set up from an AMLC perspective. Let's hope that changes over time to give the production sector more of an influence into that.

CHAIR: I do not know what you are whingeing about, because I am reading The Land and it says 'Red hot cattle market climb continues'. It is going through the roof.

Senator Canavan interjecting

CHAIR: No, it certainly does not say that!

Senator O'SULLIVAN: It is like the hiccups: you just wait long enough and it will stop.

CHAIR: On that, I take the opportunity to thank all those who came here today. We do appreciate your input. To the hardworking committee of Jane and Trish, thank you very much. Rod, another great effort, mate. That concludes today's hearing.

Committee adjourned at 14:46