Forward supply contracts for the WA sheep meat sector

Page last updated: Thursday, 27 July 2023 - 4:13pm

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Commodity marketing arrangements

In Australia, the majority of sheep market sale transactions are made on a spot market basis either at livestock saleyards through the public ‘open cry’ auction system conducted by livestock agents or through the online livestock sales platform AuctionsPlus, or as on-farm negotiations between producer and purchaser.

The Australian sheep industry generally does not have a well-developed and consistent physical forward contracting system beyond the short-term range (between one and four months) that involve producers and either the processing or the live export sector. However, there are forward contracts (of between one and four months) offered by sheep processors to attract the required supply of sheep in months that are historically difficult to supply or to supply specific market demands. The live export sector may also offer producers forward contracts (of between one and six months) to ensure the supply of specific classes of sheep required for religious events in the Middle East.

Forward supply chain arrangements can refer to agreements between relevant parties in the physical sheep supply chain for the delivery of physical sheep supply at specified standards and protocols at some time into the future. These physical supply chain arrangements may include specific contracts or ongoing agreements, or arrangements as agreed between parties.

Key impacts of forward contracts are:

  • consistent supply, quality, volume and timing to specification
  • long term investments along the supply chain
  • the major retailers operate a direct carcase procurement model from processors. This demonstrates that hitherto, this model is working to the optimum advantage for the WA sheep industry, major retailers and processors.

Price discovery and risk management

The presence and availability of open saleyard market auctions is a distinguishing feature of the sheep and cattle sectors in Australia for the purpose of price discovery, transparency and market reference indicators. Saleyards create and promote spot market transactions for price discovery and marketing comparison purposes. Open saleyard auctions do not play as significant a role in other agricultural commodity sectors in Australia that operate with forward supply contracts, namely pigs, dairy, horticulture, and grains.

The primary functioning of the WA sheep market upon spot, short term marketing makes supply and associated pricing relatively volatile and unpredictable with an absence of future price discovery beyond typically one to two months. In the sheep supply chain, in the majority of cases, the producer takes on production risk, the processor or live exporter takes on receiving adequate supply and price risk and the wholesale, retail and importers take on price risk to meet customer specifications.

The WA sheep industry production is highly seasonal due to climatic, management and economic factors. The WA and global sheep industries do not have a hedging market or suitable commodity cross hedge to guide future price discovery in the months outside of peak supply that can facilitate price and financial risk management for both ends of the supply chain, from producer through to processor and end wholesale and retail customers.

The lack of a futures market in the sheep industry is important, because in the absence of a liquid and operating futures market, the central management decision challenges of price discovery and financial risk management require alternative and innovative approaches for the development and design of forward supply arrangements and contracts within the industry.