L.ADP.2004-Assessing the market’s appetite for Australian cattle benchmarks and risk transfer

Summary

In February 2020, MLA commissioned Agree Commodities Pty Ltd (AgRee) to produce a White Paper describing the Australian cattle industry’s awareness, willingness to change and appetite for improved price risk management, with a focus on relevant benchmarks and the viability of a derivatives market to allow for risk transfer.

A series of three ‘roundtable’ discussions were convened via video link with strong participation from all sectors of the red meat supply chain and complementary service sectors, including finance, industry groups and professional services.

While there was a wide range of awareness around risk management, the general sentiment was that there is industry-wide value to improved understanding of risk management, price transparency and associated price-risk transfer tools and close-out mechanisms.

Objectives

The White Paper was created as a joint effort between MLA and an independent consultant with knowledge of the beef cattle sector, technology innovation and successful risk management adoption in other industries globally. 

The industry was asked four central questions:

• Consensus: Does industry consensus exist around the value of benchmarks and price risk management?
• Obstacles: Where does the industry see obstacles to the creation of benchmarks and adoption of derivative based price risk
  management?
• Preconditions: Under what conditions would the industry actively engage in a livestock pricing derivative market?
• Expectations: Given MLA’s areas of expertise and competency, and its role in the red meat and livestock industry, what expectations does the industry have in MLA supporting the creation of benchmarks and facilitating the development of a livestock pricing derivative market?

Key findings

Three main recommendations were outlined in the White Paper:

1. Risk awareness: The creation and adoption of a series of risk frameworks, standards and scorecards by which the industry might improve risk culture and accountability.

2. Data: Active engagement with existing (and future) MLA initiatives to address market transparency issues in the latter stage cattle market, primarily through data-sharing.

3. Risk transfer: Feeder futures contract design and implementation.

Benefits to industry

The distribution of this White Paper and its findings will help create a better appreciation of the Australian cattle industry’s awareness, willingness to change and appetite for improved price risk management, with a focus on relevant benchmarks and the viability of a derivatives market to allow for risk transfer.

MLA action

MLA is using the information and recommendations gathered from this project to create stimulated public commentary around livestock price risk management.