There has been quite a bit of consternation from Australian farmers this year that the price of sheep and cattle have been falling at the saleyard, but at the retail level red meat pricing has remained stuck in an inflationary spiral.
In the world of economics there is a concept known as “sticky prices”, which helps to explain why retail prices sometimes take time to adjust to price changes at earlier stages of the supply chain, such as the prices being paid to the farmer.
Enter the complex and sometimes mysterious world of supply chains. Picture it like a game of telephone, where one whisper gets passed down a long line of kids. However, in this game the whispers are products moving from farmers to consumers, and the kids are the various links in the supply chain.
The more kids in the line, the more chances there are for things to turn a little pear-shaped. Each link in a complex supply chain has its own costs and challenges to deal with. So when a price change happens at one end of the chain, it doesn’t instantly translate to a price change at the other end.
Just imagine you’re a coffee shop owner and the price of raw coffee beans falls. You might think, “Great, I can lower the price of my lattes and gain more customers!” But hold that thought for a second.
Those beans have to go through growers, pickers, processors, exporters, importers and roasters. Each stage in the supply chain might have its own sticky prices for a myriad of reasons such as transportation costs, labour costs or storage fees. If these costs don’t fall, the price of your latte is unlikely to budge.
Then there’s the issue of market transparency – or rather, the lack of it. Many parts of the supply chain are hidden from view.
If you don’t know why a price is high or how long it will stay that way, it’s hard to adjust your own prices. In the coffee shop scenario, maybe the roasters are dealing with higher energy costs or the pickers are demanding higher wages. If you don’t know about these issues, you might keep your prices high, just in case. And just like that another sticky price is born.
There may be other reasons why retail prices can be stubborn to change. Imagine as a restaurant owner having to change every price on a menu each day in response to changing input costs.
It is an impractical procedure, so most restaurants will just absorb the price volatility for a period of time. It is a concept which contributes to sticky prices that economists term “menu costs”. Changing menu prices too often can make customers become frustrated.
Additionally, there’s the matter of the restaurant’s competitors. Are they going to adjust their prices too or will they wait it out? This is what economists refer to as “coordination problems”. And let’s not forget fixed-term contractual agreements between suppliers and retailers, which can lock prices in for a set period of time.
Now, take all this stickiness and throw it into a deflationary world. Deflation is when prices are beginning to ease instead of increase. Those sticky prices, they’re like the scared kid at the top of a bungy jump who just won’t take the plunge.
And the murkier the supply chain is, the greater the reluctance to pass on price falls. This is because some members within the supply chain can capture more margin for themselves if they delay the reduction of the prices they charge their customers.
This brings us full circle to the current red meat prices at the retail level for the June 2023 quarter. The Australian Bureau of Statistics just released the consumer price indicators and the year-on-year data shows that retail lamb and beef prices are beginning to deflate, easing 1.2% and 0.9% respectively. After many months of falling saleyard livestock prices, the retail prices for red meat are starting to become unstuck.
But they are not falling as far as the saleyard prices.
The average cost of beef in the supermarket lifted by nearly 40% over the five years since 2018 and lamb prices grew by around 25%. In the same timeframe, the price of cattle at the saleyards nearly doubled. Meanwhile, lamb prices peaked in late 2021, reflecting a 40% rise from the prices seen three years earlier.
But cattle and lamb prices at saleyards have now regressed back to their 2018 levels. Does this suggest a potential reduction in red meat prices at the supermarket nearing their 2018 levels?
In short, no. Given the rising supply chain costs linked to labour, energy and transportation that affect the processing and retail sectors, it would be unrealistic to expect a significant drop in retail red meat prices. The sticky price will become stuck once again.
Matt Dalgleish is a former currency trader, commodity analyst and co-host of the AgWatchers podcast based in regional Victoria.
