The Australian Beef, Mutton and Lamb Industries Unlike the Australian wheat and wool industries, the beef

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industry has traditionally operated in a marketing environment largely free of domestic government intervention, or involvement by some form of statutory authority. The suggestion of establishing a buffer fund scheme for beef has, however, been put forward on several different occasions and, while not being taken up, has motivated some debate amongst agricultural economists - see, for example, Parton (1978) and Bain (1978).

The lack of direct intervention in the beef market has not, however, ensured that the operation of that market, for our purposes, has closely replicated the simple model described in Section II. Firstly, beef is not an entirely homogeneous product. For example, it can be readily categorised into table beef and manufacturing quality beef, and the domestic market is a much more

important outlet for the former than the latter - see, for example, Bain and Longmire (1980), Hinchy (1978), Harrison and Richardson

(1980), B.A.E. (1982). Further, the main export markets for Australian beef - U.S.A., Japan and more recently, South Korea - each impose quotas on the volume of imports. In the high price markets, such as Japan, such import quotas would almost certainly

represent an effective constraint on the volume of imports. The beef price differential between the U.S. and Australia, however, has tended to be less marked, so that it is not necessarily the case that the import quota imposed by the U.S. would be effective at all points in time. For more detail on these arrangements, see, for example, Reeves and Longmire (1982), Longworth (1976, 1978), Houck (1974), B.A.E. (1982).

It is instructive to assess some of the implications of these arrangements in the context of Figure 11(2).

FIG.11(2)

Q

In Figure 11(2), S*S* and are two alternative,

hypothetical positions for the Australian supply curve for beef. DBCD is the demand curve for beef facing Australian producers. The horizontal region in the demand curve represents the level of

imports allowed into the U.S. market under quota. In particular, the length of the horizontal region, BC, represents the volume of the quota, and its height ie p^, is the Australian equivalent of the U.S. price. The import quotas imposed by other, higher price markets, such as Japan, are not explicitly represented in the diagram, but could be readily conceptualised as shorter horizontal regions in DD at higher price levels than p . The lack of strict

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homogeneity between various grades of beef will be ignored for the moment.

Suppose that the relevant domestic supply curve for beef was SQSo . Also suppose that some exogenous shift occurred in its position to (say) or to S2S2« It is clear that the

change in output would need to be absorbed on the domestic market, with an appropriate change in the relative price of beef on the domestic market, p^. As the change in p^ would be in the

opposite direction to the exogenous change in beef production, then the direction of the change in the value of beef production, and the direction of the change in the value of domestic sales of beef, may be in the same or in the opposite direction to the change in the volume of production - depending, of course, on the price elasticity of demand across the relevant arc of the demand curve. Further, as the overseas import quota is effective in this case,

the volume of exports would be unchanged. Provided that the quota was held by domestic residents, the value of exports would also be

unchanged and quota profits would rise or fall inversely with p^. On the other hand, if the quota was held by an overseas resident, the value of the export revenue would rise or fall in line with the movements in p^> while quota profits accruing to the overseas

quota holders would again move inversely with p

Alternatively, suppose that the relevant domestic supply curve was S*S*. In this case, the import quota imposed by the overseas market would be ineffective. In other words, the market clearing price would be the local equivalent of the price on the export market, p^, and the exportable surplus available at that price

5 The case of a domestically held quota is of relevance for beef exports to the U.S., while the institutional arrangements for beef exports to Japan and Korea conform more closely to the case of an overseas held quota.

would be less than the permissable level of exports under quota. Consider an exogenous movement in S*S* which left its point of intersection with DD somewhere in the horizontal region of DD. It is clear that the analysis undertaken with the simple model in Section II would carry over to this case. In other words, the change in the volume of production would be entirely absorbed in an equivalent change in exports, with no change in the price paid by domestic consumers or received by producers.

This latter scenario may be made a little more complex once some account is taken of the lack of strict homogeneity between the various grades and categories of beef. In particular, even where overseas import quotas are ineffective, sharp exogenous changes in the volume of beef production could still impose some pressure on the price of those grades of beef which are largely absorbed on the domestic market. The extent of such pressure, however, would

almost certainly be less than in the case where overseas import quotas were effective and hence where the change in the volume of production needed to be absorbed entirely on the domestic market.

We can now proceed to consider some implications of an exogenous change in the price of beef on overseas markets. Suppose, initially, that the relevant supply curve was S*S*, so that the overseas import quota was ineffective. Also suppose that p increased to p \ so that the demand curve became

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DB^C^D and hence the quota remained ineffective. It is clear that the change in p^ would flow through to the local price paid by domestic consumers and received by producers. The value and volume of production would change, as would the value and volume of local sales, and the value and volume of exports. In other words, the corresponding analysis undertaken with the simple model largely carries over to the present case.

Now suppose that the relevant supply curve was SqSo , so that the quota was effective in the initial situation. Also suppose that, as drawn in Figure 11(2), the quota remained

effective following the price change. It is clear that the price received by producers and paid by domestic consumers, and the volume and value of production and local sales would be

unaffected. If the quota was held by domestic residents, then export revenue would rise or fall in line with movements in p^. On the other hand, if the quota was held by overseas residents, export revenue would be unchanged ie. the overseas quota holders would continue to pay price p in order to obtain supplies on the domestic market.

As before, the fact that beef is not a strictly homogenous product would slightly complicate this analysis of an exogenous price change. In particular, in those cases where the quota was ineffective, so that a change in p flowed through to the

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domestic price, the extent of the change in the domestic price would tend to be relatively less for those grades of beef which are absorbed primarily on the domestic market.

In the analysis of the Australian wool market in Section IV, it proved useful to adopt a broader definition of 'exogenous overseas developments' than one which focussed simply on price changes on overseas markets. The same would seem to apply in the present case. In particular, as well as considering changes in p , it is also useful to consider changes in the size of the

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overseas import quota itself. The importance of examining this issue is further enhanced by the fact that the size of the import quotas imposed by the main markets for Australian beef have, in

fact, been varied quite sharply on a number of occasions - see, for example, Houck (1974), Longworth (1976, 1978).

In Figure 11(2), a change in the size of the import quota could be represented by a lengthening or shortening of the

perfectly elastic region of DD. Suppose that the relevant supply curve was S*S*, so that the quota was ineffective, and that it remained ineffective following the change in its size. In that case, the change in the size of the quota would have no bearing at all on the beef market. In other words, the price paid by domestic consumers and received by producers, the value and volume of

production, the value and volume of domestic sales, and the value and volume of exports would be unaffected.

Suppose, however, that the relevant supply curve was S^Sq , so that the original quota was effective, and that it remained effective following the change in the quota volume. It is clear that the change in the length of the horizontal region of DD would shift the position of DD for all price levels below p in

particular, an increase in the quota volume would shift DD to the right to (say) DBC^D*", placing upward pressure on p and

conversely. Such a change in p^ would carry largely the same implications as those identified for an exogenous change in the world price in the simple model in Section II. For example,a rise in pd> following an increase in the quota volume, would raise the value and volume of production, lower the volume of domestic sales, have an ambiguous effect on the value of domestic sales, and be associated with an increase in the value and volume of exports.

Several other points, relating to the nature of the likely supply response in the beef industry, should be noted. Firstly, it

is intuitively appealing to conceptualise an exogenous decrease in beef production as being caused by, for example, a drought, and an exogenous increase in production as being associated with a

recovery from drought. In reality, the converse may be more correct. In other words, a drought may be associated with an increase in beef production as cattle numbers are reduced, with beef production falling during the early part of a recovery from a drought as cattle are held off the market in order to increase breeding herds. This, of course, does not affect the preceding analysis because the exact cause of the exogenous shocks to production was not at issue.

A second issue, however, may be of more consequence. It is widely recognised that the beef supply response to a change in the

relative price of beef may be perverse - see, for example, B.A.E. (1982). In other words, an increase in the beef price may lead to a decline in the volume of beef production in the short run as producers attempt to increase their cattle numbers, and conversely. Such an outcome could be readily incorporated into the analysis, but at the expense of some additional complexity - in particular, the supply curves would assume a negative slope. In any event, a more conventional supply response would probably remain relevant

for exogenous price changes which were widely interpreted by producers as being only temporary.

In summary then, the operation of the Australian beef market would seem to share several features in common with the simple model examined in Section II:

(i) exogenous changes in beef production may, at least in some periods, be largely absorbed in exports, with only modest pressure on domestic beef prices;

(ii) changes in the export price of beef, may, at least in some periods, largely flow through to the prices paid by domestic consumers and received by producers; and

(iii) while the existence of effective import quotas on beef imposed by overseas markets is a possibility not

recognised in the simple model, an exogenous change in the size of such quotas can result in changes in the

domestic price of beef which, once established, carry

largely the same implications as an exogenous change in the local equivalent of the world price, as examined in the simple model.

The main points of departure from the simple model are that: (i) exogenous changes in beef production may, in some

periods, be largely absorbed on the domestic market, requiring an appropriate change in the relative price of beef paid by consumers and received by producers. The

volume of beef exports would be unaffected and,

depending on whether the quota is held by domestic or overseas residents, export revenue may also be

unaffected;

(ii) an exogenous change in the local equivalent of the price on overseas markets may have little bearing on the price paid by domestic consumers and received by producers, and hence on the volume and value of production and domestic sales. Export revenue may or may not be

affected, depending on whether the quota was held locally or overseas.

Finally, the Australian mutton and lamb industries, while traditionally much smaller than the beef industry - see, for example, 3.A.E. (1980), - have market structures which, for our purposes, are broadly similar to that of the beef industry. In particular, like beef, these industries are largely free of intervention in the local market. While exports of mutton and lamb have been substantial, the local market has absorbed well in excess of 50 per cent of output in most years. In fact, the local market is of overwhelming importance to the lamb industry in all but the Spring months, when local production is at its peak. Further, access to export markets is subject to various

restrictions and imperfections. In consequence, weather induced fluctuations in mutton and lamb production have often been largely absorbed on the domestic market, necessitating an appropriate change in relative prices. Exogenous overseas developments,

however, can also exert some influence on the local mutton and lamb prices - for example, increased or reduced access to particular overseas markets, or the increased scope for exports of live sheep to the Middle East in recent years.

A degree of protection against imports from New Zealand has been provided and typically becomes effective during the non-Spring seasons of the year when local production experiences a relative decline.

Section VI Non-Traded Agricultural Commodities

It is interesting and instructive to consider a hypothetical market structure which is, in some sense, at an opposite extreme to

that considered in Section II - in particular, the market structure of a non-traded commodity.

FIG.11(3)

P ...

In Figure 11(3), DD is the domestic demand curve for the hypothetical commodity, and SS the domestic supply curve. p is

m the minimum price which would need to rule before imports of the commodity would be attracted. Similarly, exports would commence if the domestic price fell to p . For all market clearing prices between p^ and - such as p^ in Fig.11(3) - the commodity would be non-traded.

For our purposes, such a market structure carries a number of important implications. Firstly, consider an exogenous movement in the position of the supply surve, SS. It is clear that, provided

the new market clearing price remained between p and p the m rx ’ change in output would be absorbed entirely on the domestic

market. The value of production and real farm incomes may move in the same direction, or in the opposite direction, to the change in the volume of production. The volume of domestic sales would move in line with the volume of production, but the direction of the movement in the value of sales would be ambiguous. Finally, of

course, the value and volume of exports of the commodity would be unchanged at zero.

Alternatively, consider an exogenous change in p and/or m

Px » Unless such a price change was large enough to violate the condition that p < p^ < p , then it would have no bearing at all on the market - the value and volume of production and sales would be unchanged, as would the level of real farm income.

Also, of course, shifts in the position of the DD curve could result in changes in p^, and hence in the volume and value of production, the volume and value of sales, and real farm incomes. As noted in Section II, however, it seems reasonable to suppose

that such shifts in the DD curve would be a less substantial source of instability in Australian agricultural industries than would short term movements in, for example, the SS curve.

In the light of the above discussion, non-traded agricultural industries can be approximately identified as those industries for which exports absorb, at most, only a negligible proportion of output, and for which imports satisfy, at most, only a negligible proportion of domestic demand.^ On that basis, a number of the

7 Some industries, of course, may move regularly between the exportable and the non-traded category, depending on the season of the year. The most notable example is probably the lamb industry, as noted above.

relatively less important agricultural industries in Australia could be readily categorised as non-traded - see, for example, B.A.E. (1980). The list would include virtually all vegetable commodities - see, also, Jones (1982) - and a number of fruit

commodities such as citrus and bananas. Some other important fruit industires are more difficult to classify. For example, exports of canned peaches, pears, apricots and pineapples have been of some significance, which would indicate that those industries more closely resemble the simple model of Section II, rather than the present paradigm of non-traded commodities. The grape industry also represents an interesting case. For some grape varieties, fresh sales on the local market are important. However,

substantial quantities of other varieties are channeled into dried vine fruits, for which export outlets can be significant. The wine industry also absorbs large quantities of grapes. The wine

industry, in turn, could be conceptualised variously as an import competing, non-traded or perhaps an exporting industry, depending on the geographic location, the grape variety and the season - see, for example, O'Mara (1981).

The intensive livestock industries in Australia would also seem to largely satisfy the criterion of the non-traded paradigm.

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