Allan Barber: Price-setting an arcane business

So-called schedule prices for animals sent to the meatworks often appear to bear little similarity to what farmers expected or wanted.

Farmers, as business people, naturally expect prices received to produce a margin on the price paid for the stock months earlier.

However, the week's schedule price only represents what the processor is willing to pay for slaughter at today's exchange rate.

Meat exporters don't buy forward exchange or take out forex cover on product they don't yet own, because they aren't in the business of currency speculation.

Factors such as grass growth and market outlook play a part in setting the saleyard price, but the biggest factor is simply the current slaughter price converted to live weight.

Therefore the price paid for replacement livestock is mostly dictated by the slaughter price at the time of purchase, which will have changed when those animals actually go to the works.

In default of other signals, the schedule has a disproportionate influence on what farmers are prepared to pay for replacement stock.

So it's little wonder meat companies are the villains of the piece whenever the slaughter price fails to come up to scratch.

But it's not entirely realistic to blame past decisions on the meat exporter when the market has changed, although companies have a duty to inform suppliers of forecast market conditions and type of product the markets are looking for.

An explanation of the schedule-setting process might help to gain a more realistic understanding of all the factors involved.

The weekly schedule is an arcane ceremony indulged in by meat processors behind closed doors, which, to an external observer, may appear to emit smoke signals akin to the output from a papal enclave.

At its simplest level, the schedule is set for each species by feeding in the current market returns for each part of the animal including meat cuts, hide or pelt, offals and renderables, adjusted for weight ranges and weekly exchange rate movements.

Farmers wonder why meat companies are so coy nowadays about announcing their schedule publicly.

AgriFax, the information service that publishes weekly comparisons of slaughter statistics, market returns and company schedules, has found it increasingly difficult to access the information it needs to provide a comprehensive service.

The meat industry thrives on rumours of higher prices being offered to neighbours by the same or another processing company.

That's why the meat processors got totally sick of being on public trial every week and set about reclaiming control from the rumour mill by communicating their schedule only to their own suppliers.

Sensible farmers will always make sure they have an extended grapevine so they can keep a close eye on the state of the market.

It pays to support one or at most two processors, not shop around, and to work closely with them.

In recent weeks there have been calls from some farmers for a return to centralised marketing and sales, with processors being restricted to processing stock from a designated catchment area. This suggestion only surfaces when market, therefore schedule, prices fall sharply, but it indicates a complete lack of understanding of market forces and their impact on livestock prices.

It also ignores the fact that for considerable periods of the year, when there's too much capacity for the available stock, companies pay more than market returns justify.

I've never heard suppliers complaining about being paid too much, but then they reckon quite rightly only a fool would pay more than he can afford. I wonder why it doesn't apply when the boot's on the other foot.

* Allan Barber is a freelance writer, business consultant and former chief operating officer at Affco.