Allan Barber investigates how processors set their weekly schedule prices

By Allan Barber

The weekly schedule setting process is a hallowed meat industry tradition which determines what farmers will receive for their livestock during the week beginning with the Sunday evening phone calls from buyers.

The process itself remains almost a total mystery to those on the receiving end, but it delivers certainty of livestock value in any given week.

It enables a farmer to decide if it’s time to sell or worth hanging on another week or two, provided there’s enough feed and value to be gained from holding on.

The lead up to the weekly schedule is a fairly complex set of inputs to arrive at an assessment of what each species and grade are actually worth to a meat processor and exporter at the moment of purchase.

That is the first slightly unusual thing to observe about the process: the procurement price does not equate to the final selling price, which will only be known at a whole variety of different times in the future when the various cuts and components of the livestock have been sold.

The complex part of the exercise is deciding on the product and market formula which determines the value of each part of the animal going to a multitude of markets, the average market price for each and what proportion will go to each market.

Yield

There is also the meat yield percentage applied to the carcase weight which farmers have long complained about because it tends to be an average across all breeds and types.

There are meat processor initiatives, such as those offered by Alliance and Silver Fern Farms through FarmIQ, which provide more yield-based payment systems.

Then there are by-products such as the hide or pelt for which a weekly value is declared and the offals and rendered material, all of which have a value, but which the supplier doesn’t normally get credited for specifically, although this value may be included in the schedule calculations. Market prices for the by-products, or co-products as they are sometimes known, vary widely and sometimes aren’t sufficient for them to be worth recovering, in which case they end up being rendered, usually for chicken feed.

Exchange rates

The exchange rates, mainly US dollar, euro and pound sterling, ruling at the time of procurement are applied to this calculation, because normally meat exporters don’t buy forward exchange, but apply the week’s rate to livestock to be bought that week. In case outside observers wonder why companies don’t cover forward, it’s generally due to exporters not wanting to speculate on currency gains and losses without confirmed orders to cover the production yet to occur.

Market value

At the end of this exercise, in theory each meat company will arrive at a ‘market valuation’ for each species by grade. From this will be deducted fixed and variable overheads, administration costs and a notional profit margin and, hey presto, out pops the schedule for the week.

However this is unlikely to be the published schedule the companies will work to for a whole host of possible reasons.

For example fixed overheads depend on the total assets employed and the recovery obtained, labour rates and tallies differ, finance costs vary according to the level of debt, while not all market and product combinations are the same.

Seasonality

Then there is the seasonal effect which means a higher percentage of the final selling price must be paid out in procurement costs on the shoulders of the season. Conversely peak kills, caused by dry conditions and the onset of autumn, are good for the processors because they will drop the price paid as long as processing capacity is short.

The seasonal effect has a direct impact on the premium above schedule that meat companies are prepared to pay at any particular time. The theory implied by the payment of a premium is that the schedule is the true market price, while the level of premium is the extra amount required to obtain the desired number of head for that week’s processing.

There have been many attempts in recent years to move away from the weekly schedule and to lock in supply by contracts which attempt to predict what the return will be for a particular type and grade of animal which a specific market demands at a particular time of year. This process is akin to setting a schedule several months in advance to guarantee supply and making the price attractive enough for the supplier to make a commitment without swallowing up the market return.

Inevitably there have been successes and failures from both sides with this approach.

Contract commitments

If suppliers make a forward commitment at a fixed price, then fail to deliver the contracted volume in full, the processor may have a shortfall against its customer contract; alternatively in cases where the forward contracted price is exceeded by the ruling schedule at the time of supply, the processor may find itself in the position of losing contracted stock.

Contract law is clear on the topic – the terms of a contract are legally required to be met by both parties – but livestock trading is never quite as clear-cut as that, especially if the processor wants to have a continuing relationship with the supplier.

Livestock supply runs the whole gamut of options from spot trading based on the ruling schedule right through to contracts such as FarmIQ which covers the supply chain from genetics through to the finished livestock, and a whole host of other variations on the contract theme in the middle.

But the main issue is always the calculation of the final price paid which must include the schedule setting inputs outlined earlier, but which, in the case of forward contracts, must also be seen to represent a profitable return to the farmer. This contract price must also bear some relationship to the current schedule adjusted for known or anticipated market factors at the time of supply.

Therefore it can be seen from this summary that the process of setting the schedule owes as much to art – market knowledge, livestock supply, weather conditions, exchange rate forecasts - as it does to the science of statistics and financial calculations.

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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he run a boutique B&B with his wife. You can contact him by email at allan@barberstrategic.co.nz or through his blog at http://allan.barber.wordpress.com.