ISSUE: Is USA quota allocation anti-competitive?
THE POLL: The contention is that allocation of U.S. quota to individual processors is unnecessarily limiting competition in cattle markets and helping to depress cattle prices and should be stopped immediately. If you agree you can vote here to STOP Allocation or otherwise vote to RETAIN Allocation. (Poll results updated daily). If you would like to contribute a few words of comment to support your position, we'll publish the best of them below. (No names required, just sign with your profession and town, eg "Cattleman / Bourke".)
Read the article outlining the case (Article- 26/3/04)
Quota allocation recipe for
Without quota, many Abattoir operations will be required to curtail operations, notably in the south (Victoria) adding further downside to the producers disadvantage, as well as the numerous processors involved, who are already without quota to export to the USA market. Remember also this quota scheme rolls on into next year when it can be expected to impact further on the industry, if as expected Japanese imports of Australian beef ease somewhat.
This situation is serious beyond imagination, but for the time being the very buoyant Japanese and other Asian markets are masked the full extent of this issue. Domination by a few very large operators of quota ownership is a recipe for disaster and must be addressed for the future good of all sectors of the Australian beef industry.(Live-ex consultant - Penrith)
Uncompetitive behaviour constantly
Quota hurts producers
It's a price depressant
(CATTLEFACTS: 26/3/04) The USA Quota was filled last year (just) says Minister Warren Truss who recently said his quota allocation regime had achieved its objective of 'orderly marketing'. However, Cattlefacts has always maintained an opposite view to the Minister and the MLA/CCA cohort about the real effect of U.S. quota allocation.
Our belief is that the allocation regime is, in principle, a serious impediment in the Australian cattle market. Under quota allocation the only beneficiaries are processors. Quota allocation has handed them a reduced need to compete for U.S. type cattle and as a result their profits are being subsidised by lower prices to cattle producers. In our view, quota allocation is anti-competitive and it is a potential platform for cartel (monopoly) pricing behaviour in the cattle market. You don't have to be Einstein to come to that conclusion either. Here's why.
Quite simply, allocating portions of the U.S. quota to individual works is anti-competitive because it gives major U.S. exporters supply certainty for better than one third of the cattle they buy (the U.S. export component)- without the need to compete for them. They can sit back and let the other guy buy light, aged or slippery cows and so-called 'U.S. steers' at whatever price he sees fit, because when he runs out of his quota allocation they will get them anyway. That terminates competition in that segment of the market.
Around 90% of our U.S. exports are lean beef and trimmings from these types of cattle and this beef represents 50% of all our exports. If major processors don't have to compete for 50% of the meat destined for export they can use that as a lever to pull the remainder of the market down. Eg, on the back of lowered light cow and steer prices, rates for heavier types and other more valuable export categories can fall proportionally.
In fact quota allocation acts like a form of "captive supply". (ie, actual or virtual ownership of cattle by processors). The U.S. courts recently ruled in favour of multi billion dollar compensation to Idaho cattlemen against the largest beef processing company in the U.S. The courts agreed the company had used their captive supplies to reduce cattle prices to sellers (Since overturned, appeal pending). Captive supplies and their potential to corrupt markets has been high in the understanding and on the list of concerns of the American cattle industry for generations. Unfortunately, Australian industry administrators act as if they think the term refers to the number of stubbies in their beer fridge.
Some producers noticed the captive supply effect of quota allocation in action in the Australian cattle market from very early last year. They noticed works pulling the cow prices back to low levels while maintaining reasonable export steer rates. Once achieved, major buyers then crashed export steer rates to below $3.00kg OTH. They were then able to hold prime steer rates at between $3.05 and $3,25 for much of the year. In this third year of Quota allocation, some believe they are again seeing the anti-competitive effects of quota allocation expressed as lack of market competition by buyers and the resulting price dampening effect in cattle markets. They see the ani-competitive effects of allocated quota underlying this year's cattle price anomaly of extraordinary export demand, tight supply yet relatively average to low cattle prices.
Cattle prices are expected to be the product of supply and demand which in turn are influenced by many circumstances like the 'usual suspects' of exchange rates, seasonal effects and health issues etc. However underpinning all of this is the theory and necessity of market competition. If you fundamentally hobble competition with chains like quota allocation, then trying to reconcile cattle prices with 'the usual suspects' will make less sense. eg, small fluctuations in exchange rates will routinely and wrongly be blamed for everything from large cattle price movements to tooth decay. Sound familiar!
The official theory for allocating U.S. quota was that without allocation, large exporters would quickly fill the quota part way through the year, then some smaller works would have to close or alternatively, 'cow' buying would cease- reducing competition and prices. Allocation "smooths out supply" so the official mantra goes. Whatever that means! The reality is that cull cows, slippery cattle and underfinished bullocks are turned off all year and in all regions. If anything, in volume closer to the end of the year than the beginning. Unpredictable seasons play a bigger part in the timing and volumes of turnoff, than do buyers' needs. So much for the bogus "smoothing" effect of allocation. Rather than preventing the death of competition by allocating quota, administrators may have shot it dead by introducing quota allocation. What's more, all analysts agree that U.S. quota was unlikely to be filled last year and more unlikely to be filled this year, thus eliminating any present rationale for allocation.
If these beliefs about the anti-competitive nature of allocating U.S. quota are correct, allocation would represent outstanding incompetence at senior policy and industry levels. More so in our system that borders on neurotic about fair competition policy. The allocation of U.S. quota by Australian officials could have unnecessarily shot Australian cattle producers where it hurts most- their hip pocket. If so it's still doing it and Cattlefacts believes it should be stopped immediately to help competition return to the market.
You can contribute to our poll on U.S. quota allocation by clicking the STOP or RETAIN links below. If you would also like to make a comment we'll publish it on this "U.S. Quota" poll page. No names required, just sign with your profession and town, eg "Cattleman / Bourke". STOP U.S. Quota allocation | RETAIN U.S. Quota allocation
|About U.S. Quota
The USA allows imports from Australia of 378,000 tonnes of beef annually under a low tariff arrangement. This tonnage is known as the "U.S. Beef Quota". If this quota is filled during any year, and to inhibit further imports in that year, the U.S. increases import tariffs to 30% on tonnage excess of the quota received in the same year.
In adidition to that restraint the Australian Government through the Primary Industry minister Warren Truss has voluntarily instigated a Quota Allocation regime that is now in its third year of operation.
Allocation of quota means that a fixed (but tradable) tonnage of U.S. quota has been allocated to individual processors.
It is doubtful the U.S. quota was filled in 2003 (Although the Minister has said it was). Also tight supply of cattle in Australia makes it unlikely to be filled in 2004. Nevertheless, the Minister still retains the regime of quota allocation. Although the principle reason for applying it (ie, the liklihood of substantially exceeding quota) has apparantly gone.