Call for beef agreements
Lock-in margins to help producers forward plan
FORWARD marketing agreements are virtually non-existent at the beef cattle producer level, and it is time for a change.
Rabobank analyst Angus Gidley-Baird said in a recent report that while forward marketing wasn’t a ‘silver bullet’, the need to manage volatility had increased.
“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,” he said.
“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.
“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.”
Increased ability and use of objective measurements have made forward contracting a more feasible option in beef cattle, Mr Gidley-Baird’s report said.
Parties right along the supply chain should be working to make such agreements commonplace in the industry.
For producers, this meant a change in the approach to marketing cattle, as well as a clear knowledge of production costs.
“Knowledge about costs allows prices to be negotiated around sustainable margins, rather than using them to try and beat a market driven by supply demand,” the report said.
For industry, the relative lack of forward contracts now means they should consider developing industry standards, Mr Gidley-Baird said.
“Furthermore, across the whole supply chain, there is a need to show leadership and promote a more collaborative approach that can help minimise volatility, develop specific products, and provide security of supply,” the report states.
Agricultural risk product provider Riemann began offering forward contracts against cattle prices in September last year, and in October 120,000kg of beef
was traded through the system.
These are cash-settled forward contracts settled against the Eastern Young Cattle Indicator, with maturity dates out to two years.
However, there has been little utilisation of the system since, and other forward marketing options available around the imported 90CL price, and the beef cut-out price, have not been traded on at all.
Mecardo livestock market analyst Matt Dalgleish said forward contract agreements such as Riemann’s could be a
real benefit to everyone in the industry, but they just weren’t attracting the interest.
“It would allow producers to be able to lock in their margins much more effectively and make better trading decisions if they had access to that type of transparent option, giving them more market price information to compare what they are getting offered elsewhere,” he said.
And there would also be benefits for processors being able to manage price risk, Mr Dalgleish said, as well as secure supply further in
advance.
“In a liquid forward market they could do forward delivered contracts with regular producers out as far as a year in advance at a certain rate and secure supply long term, but then go into forward market and trade out of that price risk if they needed to.”
It also allows producers, and processors, to have access to the whole marketplace, regardless of location, as being cash settled the stock can be delivered locally but the market price risk can be offset
with a participant anywhere.
Mr Dalgleish said Riemann’s wool contract product was relatively well supported, with trades going through on a regular basis.
But any livestock equivalent was missing big business involvement.
“The difference is because the participants in wool market are trading physical wool with each other all the time and already have relationships with each other, they are happy to extend credit and counter party risk is not as big of a concern,” he said.