The “time is right” for Australia’s beef industry to embrace forward marketing agreements as a tool to manage price and volume volatility and improve business planning, according to a recently-released research report.
Unlike other agricultural industries, the use of forward marketing arrangements – which lock in agreed prices and/or volumes for future delivery of product – is limited in Australia’s beef industry.
However, according to the report Forward marketing agreements – Time to reconsider for the Australian beef industry, by agribusiness banking specialist Rabobank, there is no prohibitive reason to stop the increased use of forward agreements, but it will take a “change of mindset” to make it more commonplace in the beef industry.
Report author, Rabobank senior animal proteins analyst Angus Gidley-Baird says the Australian beef industry is undergoing significant change – with increased volatility, rising global competition and pressures for safe and reliable supply – making it increasingly important to manage price and volume variability.
“And it is even more critical this year, with local beef producers making investment decisions around whether to rebuild herds in a high-priced market,” he says. “In this environment, the use of forward marketing agreements could give producers some security around future prices and volumes, to help provide a more informed investment decision when purchasing cattle.”
Mr Gidley-Baird says forward marketing agreements are designed not to “beat the market at pricing”, but to provide more certainty by achieving a sustainable margin, although the adoption of this thinking requires a “change in mindset”.
“Most producers send their cattle to the saleyards with the aim to get the ‘the best price on the day’,” he says, “and this is usually a ‘production-based’ decision, with market prices and seasonal conditions also playing a key role.”
Mr Gidley-Baird concedes in years gone by there was less need for forward contracts, as there were fewer national and global pressures, as well as a lack of objective measurements and specifications, making it difficult to forecast production and pricing.
Increasing relevance
The Rabobank report says together with increased and ongoing volatility, there have been a number of market developments and initiatives in the beef industry which now make forward agreements more relevant and applicable.
“First and foremost the need to manage volatility has increased,” Mr Gidley-Baird says. “Not only do forward agreements allow producers to secure a future price, thereby giving them more certainty, they can also help processors and others in the supply chain manage supply variations.”
Mr Gidley-Baird says the ability to objectively measure traits has also improved, with the development of grading and objective carcase measurements that provide the tools to create specific identifiers for forward contracts.
The use of forward contracts is relatively common in other agricultural industries, such as the grains and dairy industry and there has been increased uptake in the lamb industry in recent years, he says. “This indicates that forward contracts can work in an extensive livestock industry, however there is very limited use of forward agreements by producers in the beef industry.”
A number of changes must occur however, to facilitate the increased use of forward contracts, Mr Gidley-Baird says. These include a change of mindset to focus on margin rather than price, increased collaboration between parties, a commitment by all players in the supply chain from the producer to the retailer and an agreed industry structure or dispute process.
Managing risk
Mr Gidley-Baird says while forward marketing agreements do help manage risk they shouldn’t be seen as the ‘silver bullet’ marketing tool, but rather as one of the many marketing tools available, as they invariably will not suit all operators in all situations.
“As there are delivery risks associated with forward marketing tools, it would be unwise to forward market all of your product,” he says. “For example, a producer may look to trade 30 per cent of their sale which could provide a level of security, while still allowing for variation in production.”
