If you are one of the many cattle finishers or sheep farmers depending for your livelihood on EU direct payments, don’t expect the markets for your animals to come to your rescue any time soon, says Dr Pat McCloughan, the economic consultant retained by the IFA to investigate the state of irish meat processing sector ahead of the proposed ABPGroup/Fane Valley Group/Slaney Foods merger.
He found that price bargaining power is tilted in favour of the processors — hardly a surprise, when just six big processors buy two of every beef three cattle, from as many as 100,000 individual farmers with some beef cattle around the country.
There are also about 200 local abattoirs, averaging under 500 cattle each slaughtered per year.
But with only six big buyers, and transport costs limiting their geographic reach, it’s not surprising that Dr McCloughan found that farmers do very little switching from processor to processor. He also found very little price variation to tempt farmers to supply a different factory.
Usually, there is less than 2% variation in base prices quoted or paid by processors across the country.
Even quality bonus payments or penalties are much the same across the industry.
As a result, farmers choose a particular plant or set of plants to deal with, taking into consideration the convenience of location, and the longer-term relationship.
That does not make for strong competition in the market.
But if farmers were to become more mobile and move supplies around, any gaps in supply at factories could be easily filled by the biggest beef farmer in the beef industry, which is the processing sector.
According to Dr McCloughan’s report, ABP has facilities to feed and fatten 20,000 of its own cattle per year (a significant proportion of which are Hereford and Angus cattle).
ABP also hires or contracts facilities, and may have at least another 20,000 cattle available under this arrangement. Thirdly, ABP has contract supply and price arrangements with cattle feeders, obliging feeders to deliver certain volumes at certain times of the year.
Therefore, ABP can control the supply of nearly 1,000 head of beef cattle per week, on average, mostly premium, in-spec steers and heifers.
Dr McCloughan said this additional cattle supply available to ABP not only gives them added bargaining power with farmers, but also flexibility and competitive advantage.
Farmers are also up against Kepak’s estimated 7,500 cattle per year supply; about 2,500 feedlot cattle per year owned by Moyvalley, and Liffey’s substantial grazing and feeding facilities in Kells, Co Meath for about 1,000 cattle.
Is any big new processor likely to come in and make cattle and sheep buying more competitive? Unlikely, because it would take around four years to select a site, sort out all the planning approval and licences, and become operational.
The only changes in the market for 20 years or more have been been acquisitions or exits. There has been very little or no foreign investment in Irish beef processing.
Dr McCloughan reported back to the IFA that it all adds up to a “predictable or muted” competitive environment.
And the proposed transaction in which Anglo Beef Processors Food Group would acquire 50% of Slaney Foods is likely to weaken competition even further.
What can be done to improve competition?
It was noted that there is no transparency of wholesale prices at which Irish meat processors sell to retailers.
In contrast, in the US, it is mandatory for processors to provide this information twice daily across all of the different cuts.
There is no mention in the report of the beef farmers’ producer organisations (POs) which Agriculture Minister Simon Coveney gave legal recognition to last February, for the first time in Ireland.
Setting up a PO enables farmers to collectively negotiate cattle prices with processors, or input prices, and to pool resources to improve on-farm efficiencies.
However, little has been heard of POs in the meantime.