Adding Value to New Animal Product Supply Chains

Dairy goats, emus, rabbits, turkeys, sheep’s milk and silkworm

by Wondu Business and Technology Services

February 2008 RIRDC Publication No 08/013 RIRDC Project No WBT-4A

ii

© 2008 Rural Industries Research and Development Corporation. All rights reserved. ISBN 1 74151 602 1 ISSN 1440-6845 Adding Value to New Animal Product Supply Chain Dairy goats, emus, rabbits, turkeys, sheep’s milk and silkworm Publication No. 08/013 Project No. WBT-4A

The information contained in this publication is intended for general use to assist public knowledge and discussion and to help improve the development of sustainable regions. You must not rely on any information contained in this publication without taking specialist advice relevant to your particular circumstances.

While reasonable care has been taken in preparing this publication to ensure that information is true and correct, the Commonwealth of Australia gives no assurance as to the accuracy of any information in this publication.

The Commonwealth of Australia, the Rural Industries Research and Development Corporation (RIRDC), the authors or contributors expressly disclaim, to the maximum extent permitted by law, all responsibility and liability to any person, arising directly or indirectly from any act or omission, or for any consequences of any such act or omission, made in reliance on the contents of this publication, whether or not caused by any negligence on the part of the Commonwealth of Australia, RIRDC, the authors or contributors.

The Commonwealth of Australia does not necessarily endorse the views in this publication.

This publication is copyright. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved. However, wide dissemination is encouraged. Requests and inquiries concerning reproduction and rights should be addressed to the RIRDC Publications Manager on phone 02 6271 4165.

Researcher Contact Details David Michael Wondu Business and Technology Services Pty Limited Level 31, ABN-AMRO Tower, 88 Phillip Street, Sydney, NSW, Australia P.O. Box 1217, Bondi Junction, NSW, Australia Phone: 61 2 93692735 Fax: 61 2 62366050 Email: dmichael@wondu.com In submitting this report, the researcher has agreed to RIRDC publishing this material in its edited form. RIRDC Contact Details

Rural Industries Research and Development Corporation Level 2, 15 National Circuit BARTON ACT 2600 PO Box 4776 KINGSTON ACT 2604 Phone: 02 6271 4100 Fax: 02 6271 4199 Email: rirdc@rirdc.gov.au. Web: http://www.rirdc.gov.au Published in February 2008 Printed by Canprint

iii

Foreword The aim of the project was to increase knowledge about how value is added along the supply chains for some new animal products. This project is important to facilitate improvement to both the economic and technical efficiency of enterprises along the supply chains. It should also help promote innovative approaches to supply-chain development and management. The report extends the scope of the first-stage study (RIRDC Publication 04/166) for a further six new animal product industries: dairy goats, emus, rabbits, turkeys, sheep’s milk and silkworm, with dairy cattle and pigs included as comparative supply-chain data from traditional industries. In addition, fine greasy wool data are used as a comparison for silk. This project shows how value is added by collaboration between labour and owners of capital along the New Animal Products (NAP) supply chains. It identifies the relative strengths and weaknesses of the new animal supply chains with benchmarks from important traditional industries. The results should also facilitate negotiation of agreements between participants in the supply chains. It should also encourage better use of quality management systems in the NAP industries. This project was funded from RIRDC Core Funds which are provided by the Federal Government. This report is an addition to RIRDC’s diverse range of over 1700 research publications and forms part of our New Animal Products research and development (R&D) program, a key strategy of which is to strengthen development within and across industries by supporting creativity, innovation, commercialisation and integration along the value-added chain. Most of our publications are available for viewing, downloading or purchasing online through our website:

• downloads at www.rirdc.gov.au/reports/Index.htm • purchases at http://www.rirdc.gov.au/eshop

Peter O’Brien Managing Director Rural Industries Research and Development Corporation

iv

Abbreviations ABC Activity-based costing AGP Antibiotic growth promoters

BOD Biochemical oxygen demand

CFCW Cold-finished carcass weight

CRM Customer relationship management

ERP Enterprise resource planning

EBIT Earnings before interest and tax

EBV Estimated breeding values.

FAO Food and Agriculture Organization of the United Nations

FCR Feed conversion ratio

GMP Good manufacturing practice

HACCP Hazard analysis at critical control points (a formal process for minimising or eliminating food contamination in food processing)

HFCW Hot-finished carcass weight

ME Metabolisable energy

NAP New animal products (also an RIRDC program)

NLIS National livestock identification system

NPN Non-protein nitrogen

ROI Return on invested capital

SCM Supply-chain management

SG&A Selling, general and administrative expenses

SKU Stock-keeping unit

SMP Skim milk powder

Take-off In the supply-chain model, a take-off factor is the amount of resource used to produce each unit of end product

WMP Whole milk powder

XML Extensible mark-up language

v

Contents Foreword................................................................................................................................................................ iii Abbreviations......................................................................................................................................................... iv List of tables, charts and illustrations.................................................................................................................... vii Executive summary................................................................................................................................................ xi

Implications ...................................................................................................................................................... xv Recommendations ........................................................................................................................................... xvi

1. Introduction......................................................................................................................................................... 1 1.1 Background to the research .......................................................................................................................... 1 1.2 Study objectives............................................................................................................................................ 2 1.3 Research strategy and methods..................................................................................................................... 2 1.4 Scope of this study........................................................................................................................................ 4 1.5 Report outline ............................................................................................................................................... 4

2. New animal product supply-chain parameters .................................................................................................... 5 3. The turkey value chain........................................................................................................................................ 7

3.1 Background .................................................................................................................................................. 7 3.2 Drivers of competitiveness ......................................................................................................................... 13 3.3 The flow of products and yield from the turkey supply chain.................................................................... 15 3.4 Size and structure in the turkey value chain ............................................................................................... 19 3.5 Cost of production at the farm level ........................................................................................................... 20 3.6 Processing................................................................................................................................................... 23 3.7 The overall value chain for the turkey supply chain................................................................................... 24 3.8 Main messages from the turkey value chain............................................................................................... 26

4. The emu value chain ......................................................................................................................................... 29 4.1 Background ................................................................................................................................................ 29 4.2 The flow of products and yields in the emu value chain ............................................................................ 31 4.3 Size and structure in the emu value chain .................................................................................................. 35 4.4 Cost of production at the farm level ........................................................................................................... 35 4.5 Emu processing .......................................................................................................................................... 38 4.6 Product analysis.......................................................................................................................................... 40 4.7 Main messages from the emu value chain .................................................................................................. 42

5. The rabbit value chain....................................................................................................................................... 43 5.1 Background ................................................................................................................................................ 43 5.2 Drivers of competitiveness ......................................................................................................................... 46 5.3 The flow of products and yield from the rabbit supply chain..................................................................... 47 5.4 Size and structure in the rabbit value chain ................................................................................................ 53 5.5 Cost of production at the farm level ........................................................................................................... 53 5.6 Processing................................................................................................................................................... 56 5.7 The overall value chain for the rabbit supply chain ................................................................................... 57 5.8 Main messages from the rabbit value chain................................................................................................ 59

6. The silkworm value chain ................................................................................................................................. 61 6.1 Background ................................................................................................................................................ 61 6.2 The flow of products and yields in the silk value chain ............................................................................. 66 6.3 Structure and competition in the silk value chain....................................................................................... 70 6.4 Organisation of production and marketing in the silk value chain ............................................................. 73 6.5 Cost of production at the farm level ........................................................................................................... 73 6.6 Processing................................................................................................................................................... 75

vi

6.7 The overall value chain for silk .................................................................................................................. 76 6.8 Main messages from the silk value chain ................................................................................................... 79

7. The dairy goat value chain ................................................................................................................................ 80 7.1 Background ................................................................................................................................................ 80 7.2 The flow of products and yields in the dairy goat value chain ................................................................... 86 7.3 Size and structure in the dairy goat chain................................................................................................... 86 7.4 Dairy goat product analysis ........................................................................................................................ 91 7.5 Cheese production ...................................................................................................................................... 94 7.6 Main messages from the dairy goat’s whole-milk value chain................................................................... 94

8. The dairy sheep value chain.............................................................................................................................. 96 8.1 Background ................................................................................................................................................ 96 8.2 The flow of products and yields in the dairy sheep value chain............................................................... 103 8.3 Size and structure in the dairy sheep chain............................................................................................... 103 8.4 Dairy sheep product analysis .................................................................................................................... 108 8.5 The overall value chain for the sheep dairy.............................................................................................. 117 8.6 Main messages from the dairy sheep value chain..................................................................................... 118

9. The dairy cattle value chain ............................................................................................................................ 120 9.1 Background .............................................................................................................................................. 120 9.2 The basic dairy value chain ...................................................................................................................... 124 9.4 Product costs analysis............................................................................................................................... 133 9.5 Main messages from the dairy cow whole-milk value chain.................................................................... 136 9.6 Cheese production .................................................................................................................................... 136 Case study: Automation in dairy production enterprises .................................................................................. 137

10. Pig value chain.............................................................................................................................................. 138 10.1 Background ............................................................................................................................................ 138 10.2 Drivers of competitiveness ..................................................................................................................... 142 10.3 The flow of products and yield from the pig supply chain..................................................................... 144 10.4 Structure in the pig-meat value chain ..................................................................................................... 147 10.5 Pig-meat product analysis....................................................................................................................... 147 10.6 Cost of production at the farm level ....................................................................................................... 149 10.7 Processing............................................................................................................................................... 151 10.8 The overall value chain for the pig supply chain.................................................................................... 152 10.9 Main messages from the pig-meat value chain....................................................................................... 154

11. Discussion of overall results ......................................................................................................................... 155 12. Conclusions and recommendations............................................................................................................... 161

Recommendations .......................................................................................................................................... 161 References........................................................................................................................................................... 163

vii

List of tables, charts and illustrations Tables Table ES1: Supply chains’ costs, by resources used in competing meat producing industries ($/kg carcass weight) ........................................................................................................................................... xiii Table ES2: Supply chains’ costs, by resources used in competing dairy industries ($/kg CFCW)..................... xiii Table ES3: Supply chains’ costs, by resources used in competing fibre, textile and garment industries ($/kg of end product weight) ............................................................................................................................... xiii Table ES4: Supply-chains’ costs, by activities of competing meat producing industries ($/kg CFCW)............. xiv Table ES5: Supply chains’ costs, by activities of competing dairy industries ($/kgCFCW)............................... xiv Table ES6: Supply-chains’ costs, by activities of competing fibre, textile and garment industries ($/kg of end-product weight) ............................................................................................................................... xiv Table 3.1: World Poultry Livestock Numbers, 2005 .............................................................................................. 7 Table 3.2: World Poultry Meat Production (tonnes), 2005..................................................................................... 7 Table 3.3: World turkey meat trade, 2004 (tonnes) ................................................................................................ 9 Table 3.4: Turkey meat compared to beef, turkey, rabbit and chicken................................................................. 12 Table 3.5: Boneless turkey compared to boneless beef, pork, rabbit and chicken................................................ 12 Table 3.6: Turkey production enterprise: main enterprise assumptions ............................................................... 21 Table 3.7: Cost of producing turkey growers, from hen to sale (or transfer) 2006 .............................................. 22 Table 3.8: Turkey processing costs, 2.6 million birds/year .................................................................................. 24 Table 4.1: Emu fan fillet compared to boneless beef, pork, rabbit and turkey and duck...................................... 31 Table 4.2: Emu production enterprise: main enterprise assumptions ................................................................... 36 Table 4.3: Cost of producing emu growers: from hen to sale (or transfer) 2006 ................................................. 37 Table 4.4: Emu processing costs, 35,000 birds/year............................................................................................. 39 Table 4.5: Emu supply-chain products ................................................................................................................. 41 Table 4.6: Emu product supply-chain costs and revenue ($) ................................................................................ 41 Table 5.1: World rabbit livestock numbers, 1985 to 2005.................................................................................... 43 Table 5.2: World rabbit meat production (tonnes), 2005...................................................................................... 43 Table 5.3: World rabbit carcass weights: 1985 to 2005 (kg/carcass..................................................................... 44 Table 5.4: World rabbit meat trade, 2004 (tonnes) ............................................................................................... 44 Table 5.5: Rabbit meat compared to beef, poultry and pork................................................................................. 46 Table 5.6: Selected rabbit supply-chain issues at each activity ............................................................................ 51 Table 5.7: Selected Pel-Freez Biologicals from rabbit co-products...................................................................... 52 Table 5.8: Rabbit production enterprise: main enterprise assumptions ................................................................ 54 Table 5.9: Cost of producing rabbit growers, from doe to sale (or transfer) 2006 ............................................... 55 Table 5.10: Rabbit processing costs, 289,400 carcasses/year ............................................................................... 57 Table 6.1 World textile fibre production, 1980–2003 .......................................................................................... 61 Table 6.2 World production of silkworm cocoons, reelable (tonnes)................................................................... 63 Table 6.3 World exports of silkworm cocoons, reelable (tonnes) ........................................................................ 65 Table 6.4: Mulberry and silk production enterprise: main enterprise assumptions .............................................. 73 Table 6.5: Cost of production, from mulberry to silk cocoons (or transfer), 10 hectares 2006 ............................ 74 Table 6.6: Reeled fibre processing costs: 289,400 kg/year................................................................................... 76 Table 6.7: Comparative supply-chain costs, silk and woollen scarf ($/kg) .......................................................... 78 Table 7.1: World milk production, by species, 2005 (fresh milk) (tonnes) .......................................................... 80 Table 7.2: World cheese production, by species, 2005 (tonnes)........................................................................... 81 Table 7.3: Organisational classification of cheese production in France.............................................................. 82 Table 7.4: Cheese product categories ................................................................................................................... 83 Table 7.5: Goat’s milk compared to cow’s milk and human milk ........................................................................ 85 Table 7.6: Breakdown of annual cash income and operating costs ($/farm and c/litre milk produced) for the synthetic goat dairy farm of 300 milkers................................................................................................... 93 Table 8.1: World milk production by species, 2005 (fresh milk) (tonnes) ........................................................... 96 Table 8.2: World cheese production by species, 2005 (tonnes)............................................................................ 97 Table 8.3: Sheep’s milk compared to cow’s milk and human milk .................................................................... 101 Table 8.4: Food impact assessment of different milks........................................................................................ 102 Table 8.5: Assumptions: enterprise structure & performance, by species, 2006 ................................................ 109 Table 8.6: Cost of producing milk: by species, 2006.......................................................................................... 110 Table 8.7: Technical aspects and financial returns, by species, 2006. ................................................................ 112

viii

Table 8.8: Sheep dairy: milk processing costs .................................................................................................... 115 Table 8.9: Sheep dairy: cheese processing costs................................................................................................. 116 Table 8.10: Sheep dairy: yoghurt processing costs............................................................................................. 116 Table 9.1: Breakdown of annual cash income and operating costs ($/farm and c/litre milk produced) for dairy farmers (Moran 2002)................................................................... 133 Table 10.1: World meat production, selected species, 2005 (tonnes)................................................................. 138 Table 10.2: World pig-meat trade, 2004 (tonnes) ............................................................................................... 139 Table 10.3: Composition of pork, fresh, loin, sirloin (roasts), bone-in............................................................... 140 Table 10.4: Pig meat compared to beef, turkey, rabbit and chicken ................................................................... 141 Table 10.5: Boneless pork compared to boneless beef, turkey, rabbit and chicken............................................ 142 Table 10.6 : Pork product prices, August 2006 .................................................................................................. 148 Table 10.7 Pig Production Enterprise: Main Enterprise Assumptions................................................................ 149 Table 10.8: Cost of producing baconer pigs, from sow to sale, 2006................................................................. 150 Table 10.9: Feed conversion ratios (FCR), pig production................................................................................. 151 Table 10.10: Pig processing costs ....................................................................................................................... 152 Charts Chart 1.1: Adding value to new animal products.................................................................................................... 3 Chart 3.1: Turkey carcass weights: Australia and selected countries: 2005 ........................................................... 8 Chart 3.2: Carcass weight trends: by country ......................................................................................................... 8 Chart 3.3: World exports: turkey, chicken and duck meat: 1984 to 2004 .............................................................. 9 Chart 3.4: Per capita consumption of turkey meat: selected countries ................................................................. 10 Chart 3.5: Impact of turkey processing plant size on average costs ..................................................................... 14 Chart 3.6: Turkey— the ratio of liveweight price received to feed price paid: US: 1996 to 2006 ....................... 14 Chart 3.7: Feed conversion ratios — turkey toms, by age in weeks ..................................................................... 15 Chart 3.8: Turkey value chain activities ............................................................................................................... 17 Chart 3.9: Turkey value chain: yields of livestock and products .......................................................................... 18 Chart 3.10: Turkey meat product prices: $/kg ...................................................................................................... 19 Chart 3.11: Turkey supply chain activities: by cost ($A/kg HSCW).................................................................... 25 Chart 3.12: Value chain shares: by percentage of retail value .............................................................................. 25 Chart 3.13: Resource use: turkey value chain: farm to retail ................................................................................ 26 Chart 4.1: Selected organic emu and other organic meat cuts: $/kg retail level: October 2006 ........................... 30 Chart 4.2: The emu production, processing and service value chain.................................................................... 33 Chart 4.3: Emu value chain: the flow of animals, products and yield .................................................................. 34 Chart 5.1: Per capita consumption of rabbit meat: selected countries .................................................................. 45 Chart 5.2: Rabbit value chain activities ................................................................................................................ 49 Chart 5.3: Rabbit value chain: yields of livestock and products........................................................................... 50 Chart 5.4: Rabbit meat product prices: $/kg ......................................................................................................... 52 Chart 5.5: Rabbit supply chain activities: by cost ($A/kg) ................................................................................... 58 Chart 5.7: Resource use: rabbit value chain: farm to retail ................................................................................... 59 Chart 6.1: World silkworm cocoon production, reelable (tonnes)........................................................................ 62 Chart 6.2: Export prices: Silk cocoons, reelable: China (US $/tonne).................................................................. 64 Chart 6.3: Exports of silk waste (including yarn waste, discarded cocoons and garnetted stock): 2000–2004... 66 Chart 6.4: The silk production, processing and service value chain ..................................................................... 67 Chart 6.4a: Technological process for silk reeling................................................................................................ 68 Chart 6.5: The silk production process and co-product commercialisation opportunities .................................... 69 Chart 6.6: Silk production and processing conversion ratios................................................................................ 70 Chart 6.7: Comparative textile fibre supply-chain costs ($A/kg clean) ................................................................ 71 Chart 7.1: Milk and cheese: world: by country and product group: market shares: 2005 .................................... 81 Chart 7.2: Goat’s milk: composition by main constituents ................................................................................... 84 Chart 7.3: Dairy goat yields: Australia and selected countries: 2005 ................................................................... 86 Chart 7.4: Dairy goat value chain ......................................................................................................................... 87 Chart 7.5: Goat’s cheese value chain map ............................................................................................................ 88 Chart 7.6: Dairy goat value chain conversion ratios and product yields............................................................... 89 Chart 7.7: Dairy goat supply-chain costs: by activity: one litre package.............................................................. 92 Chart 7.8: Resource use: dairy goat value chain: whole milk: farm to retail ........................................................ 93 Chart 8.1: Milk and cheese, by country and product group: market shares 2005................................................ 97 Chart 8.2: Sheep’s milk: composition by main constituents ............................................................................... 100 Chart 8.3: Dairy sheep yields: Australia and selected countries, 2005 ............................................................... 103

ix

Chart 8.4: Dairy sheep value chain ..................................................................................................................... 105 Chart 8.5: Cheese value chain map..................................................................................................................... 106 Chart 8.6: Dairy sheep’s milk conversion ratios................................................................................................. 107 Chart 8.7: Farm labour productivity, by species ................................................................................................. 111 Chart 8.8: Return on invested capital (after tax), by species............................................................................... 111 Chart 8.9: Milk yield impact on ROI: sheep’s milk enterprise ........................................................................... 113 Chart 8.10: Parametric budget graphs: sheep’s milk enterprise: impact of price and yield ................................ 113 Chart 8.11: Impact of labour productivity on ROI.............................................................................................. 114 Chart 8.12: Milk processing costs, by plant size................................................................................................. 115 Chart 8.13: Dairy sheep supply chain costs, by activity ..................................................................................... 117 Chart 8.14: Resource use, sheep dairy value chain, whole milk, farm to retail .................................................. 118 Chart 9.1: Cow’s milk components..................................................................................................................... 121 Chart 9.2: Milk product exports, by category: Australia, 2001–2002 to 2004–2005 ......................................... 122 Chart 9.3: Generic cow’s milk and derivative milk products ............................................................................. 123 Chart 9.4: Dairy cow yields: Australia and selected countries, 2005 ................................................................. 124 Chart 9.5: Economies of scale in processing ($Us/litre processing cost only) ................................................... 125 Chart 9.6: Selected cheese product retail prices, Australia, May 2006............................................................... 126 Chart 9.7: Selected milk product retail prices, Australia, May 2006 .................................................................. 126 Chart 9.8: Selected yoghurt product retail prices, Australia, May 2006............................................................. 127 Chart 9.9: Dairy cow value-chain activities........................................................................................................ 128 Chart 9.10: Butter value-chain activities............................................................................................................. 129 Chart 9.11: Cheese value-chain activities ........................................................................................................... 130 Chart 9.12: Milk powder value-chain activities.................................................................................................. 131 Chart 9.13: Dairy milk and milk product conversion ratios................................................................................ 132 Chart 9.14: Dairy supply-chain costs, by activity, 2-litre package ..................................................................... 133 Chart 9.15: Resource use in dairy value chain for whole-milk production......................................................... 134 Chart 9.16: Capital-intensity through the dairy whole-milk value chain ............................................................ 135 Chart 9.17: Profit shares, dairy whole-milk value chain..................................................................................... 135 Chart 10.1: Impact of plant size and number of shifts worked: costs saved ....................................................... 143 Chart 10.2: Pig-meat supply chain, by product yield.......................................................................................... 145 Chart 10.3: The pig production, processing and service value chain.................................................................. 146 Chart 10.4: Pig supply-chain activities, by cost ($A/kg HSCW)........................................................................ 152 Chart 10.5: Value chain shares, by percentage of retail value ............................................................................ 153 Chart 10.6: Resource use: pig-meat value chain, farm to retail .......................................................................... 153 Chart 11.1: Comparative costs of production and processing............................................................................. 156 Chart 11.2: Feed conversion ratios by animal species ........................................................................................ 157 Chart 11.3: Farm labour productivity, selected dairy animals ............................................................................ 157 Chart 11.4: World production shares, by country group and animal species...................................................... 158 Chart 11.5: Comparative dairy production and processing costs........................................................................ 158 Chart 11.6: Milk processing costs, by plant size................................................................................................. 159

Illustrations Illustration 3.1: Whole bird with skin ................................................................................................................... 11 Illustration 3.2: Skinless whole bird ..................................................................................................................... 11 Illustration 6.1: Reeled silk scarf .......................................................................................................................... 77 Illustration 6.2: Pure merino wool woven scarf .................................................................................................... 77

x

Special note about underlined text This report was developed in a multimedia framework. Many words are underlined, and the underlines indicate that those words on the electronic version are either website-linked direct, or lead to a website link or a series of links somewhere nearby in the text.

Website URLs are all shown in blue, and are linked but, for easy reading on paper, they are not underlined.

xi

Executive summary What the report is about

The report extends the investigation into the supply chains of New Animal Product (NAP) industries which commenced with RIRDC Report 04/166.

Who is the report targeted at?

The industries covered are dairy goats, emus, rabbits, turkeys, sheep milk and silkworm, with dairy cattle and pigs included as comparative benchmarks from traditional industries. Background

The importance of supply-chain collaboration has been highlighted before, but it has now entered a new phase of pre-eminence. Four developments are set to change the structure, sustainability and outlook for NAP industries, especially those involved with food, though even the silk fibre, textile and garment market is likely to be affected by at least two of the factors: • Growing consumer demand for nutritious, low-fat food which is likely to result in declining

market share for foods that fail to meet consumer expectations. At the same time there will be growing opportunities to capture market share and, maybe, realise price premiums for those foods and industries that can meet the higher expectations of consumers.

• Increased feed-grain prices as a result of both unfavourable climatic conditions and growing demand for use of grains for industrial products like ethanol. This environment is likely to most adversely affect those animal industries with poor feed-to-saleable-meat conversion ratios and those facing competition in both export and domestic markets from imports, especially imports from countries with reliable access to low-cost feed supplies.

• Growing regulations in support of improved labelling and traceability systems that enable food to be traced from the food product to the feed used by the animal. Traceability systems are being called on to enhance both food safety, and security and animal welfare. Regulations are also growing as a measure to counter obesity with more stringent requirements for labels that better indicate fat, salt and sugar levels.

• Growing cost of labour and limited access to labour in some regions. This will mostly affect labour-intensive industries and labour-intensive activities in all industries, with increasing rewards for the adoption of labour-saving technology and measures that improve the productivity of labour. Improved flexibility in labour markets, including access to low-cost immigrant labour takes on added importance for animal processing industries.

These four factors are set to become permanent features of the industry environment and to result in more complex supply chains for NAP industries. The increasingly complex supply chains will feature numerous product differentiation possibilities, growing regulations that are likely to be subject to frequent changes, potential for sharp shifts in demand for products, and competition from new entrants capable of meeting consumer expectations. Aims/Objectives

The objective of the research was to increase the knowledge of industry stakeholders on how value is added along the supply chain, to improve awareness of relative strengths and weaknesses along the NAP supply chains, to improve information for negotiation of agreements between participants along the supply chain, and to improve information for quality management by operators along the supply chains.

xii

Methods used

Data were collected from mainly secondary sources as well as some existing own data and informed industry stakeholders.

Key findings

Effective supply-chain collaboration is likely to enable participants to deal with complexity and the four threats outlined above. Creation of an effective supply chain will, however, present new challenges for traditional operators. The first challenge will be the alignment of goals and strategies along the supply chain in a business model based on always meeting consumer expectations (quality, cost, time etc.) in the delivery of products and services and less on rivalry between buyers and suppliers. This may also mean developing improved employment conditions for those who require a reliable supply of labour.

These factors also offer significant growth potential for some NAP industries. The turkey industry is highlighted in the study as having great potential because it has one of the best feed-to-saleable-meat conversion ratios and is rated highly for the nutritious, low fat content of its meat. Moreover, it can compete against the traditional meats on cost as well as quality. But nearly all the NAP industries have potential providing they take their technical, marketing and financial efficiency performance to the highest possible level.

For NAP industries there is the constant challenge of overcoming the disadvantage of small size and being an attractive partner for a larger distributor or retailer. There are several ways of dealing with the size problem. One option is to form collaborative supply-chain networks that create sufficient volume and reliable supply to attract the interest of larger retailers with dominant supply-chain positions (the dairy cattle industry has used this approach to advantage). The second option is to simply focus on supply to one or more smaller, speciality stores. Third option is to market direct to the consumer through the Internet or through an Internet intermediary (everything from goat’s cheese to silk scarves and silk noils are being sold direct over the Internet), but the demands for effective collaboration over the Internet are just as important if consumer expectations are to be met. Final option is to focus on product differentiation and persuade consumers to increase their willingness to pay for the improved attributes.

The allocation of resources for product development and marketing is one of the most neglected areas for many NAP industries, but not all enterprises. An increasing share of the food market is being used for food services including restaurants, hotels, caterers and take-away food stores. The requirements for these markets are typically more precise in terms of quality, traceability, meat cuts and portion sizes and composition of the product (they often don’t want select cuts). Some enterprises are allocating up to 60% of their revenue to marketing and for those who have retail supermarket access they can expect at least 30%, sometimes 40% or more of end-consumer revenue to be absorbed by the retailer. The reward is market access. There is a temptation, and sometimes it’s unavoidable, to market to multiple marketing channels, instead of concentrating on a couple of good supply-chain channels. The problem with multiple channels is that they all require servicing, and with limited resources there is the danger that effective collaboration will be compromised, and soon after that the commitment of other partners to the supplier will also be doubtful.

A further area of neglect among the NAP industries is in the development of co-products. In the total supply chain the percentage of revenue from co-product sales may be typically small (less than 1%), but for a particular stage in the supply chain it can be the difference between viability and bankruptcy. Co-product revenue in some abattoir operations can actually meet the whole processing cost (e.g. waste from silk reeling). In the US, the company Pel-freez Biologicals has taken their rabbit-producing enterprise into new co-product areas and a different focus with, for example, the sale of rabbit brain powders for $10,000/kg and rabbit testicles for $25/item. For many NAP industries, however, the value of co-products has been unexplored, especially the biologically active compounds in the co-products. There is also a twofold impact of the co-product revenue stream in that there is often a saving in direct effluent cash costs when co-products are fully captured and sold as value-adding items

xiii

instead of simply being discharged into a nearby stream. In the US a turkey plant with waste of 210t/day is converting it into 70t/day of oil, 7.5t/day of fuel gas and 34t/day of liquid fertiliser (Section 3.4).

Tables ES1, ES2 and ES3 contain the estimated resource costs for the different meats, dairy products and fibres. Fine wool has been added as a comparative enterprise for silk. Tables ES4, ES5 and ES6 show the costs for each activity along the supply chains for the different meats, dairy products and fibres. Table ES1: Supply chains’ costs, by resources used in competing meat producing industries ($/kg carcass weight)

Resource Emu ($/litre oil) Rabbit Turkey Pigs Materials 5.92 2.76 1.25 1.77 Labour 8.24 2.70 1.17 1.18 Expenses 38.59 9.32 6.26 7.04 Machinery & equipment 2.66 1.69 0.41 0.12 Investment 1.90 0.17 0.11 0.07 SG&A 1.02 0.18 0.10 0.04 Commissions 0.63 0.18 0.10 0.11 Profits 3.14 0.57 0.31 0.35 Income tax 0.79 0.12 0.06 0.07 Total costs 62.89 17.69 9.68 10.75 Co-product revenue credit 2.00 1.00 0.50 1.57 Tot. costs after co-products 60.89 16.51 9.18 9.18 Profit % of sales 5.00 2.60 2.60 2.60

Table ES2: Supply chains’ costs, by resources used in competing dairy industries ($/kg CFCW)

Resource Cow’s milk Goat’s milk

($/litre) Sheep’s milk Materials 0.16 0.22 0.58 Labour 0.29 0.97 1.70 Expenses 0.73 1.63 2.69 Machinery & equipment 0.07 0.37 0.68 Investment 0.06 0.18 0.15 Profits 0.06 0.50 0.81 Income tax 0.01 0.10 0.16 Total costs 1.39 3.97 6.47 Co-product revenue credit n.a. n.a. n.a. Tot. costs after co-products 1.39 3.97 6.47 Profit % of sales 3.50 10 10

Table ES3: Supply chains’ costs, by resources used in competing fibre, textile and garment industries ($/kg of end product weight)

Resource Silk scarf Fine wool woven

scarf Materials 53 16 Labour 174 47 Other expenses, incl. profits, M&E

548 256

Retail price 775 319

xiv

Table ES4: Supply-chains’ costs, by activities of competing meat producing industries ($/kg CFCW)

Resource Emu Rabbit Turkey Pigs Elite breeders 0.27 0.09 0.09 0.04 Grandparent breeders 2.69 0.10 0.27 0.09 Parent breeders 7.80 6.48 1.62 2.05 Grower progeny Included above Included above Included above Included above 1st process — abattoir 12.21 1.82 1.03 1.11 2nd process — cutting etc. 15.90 2.85 0.66 1.69 Co-products 0.25 0.30 0.93 0.05 Dist. & mktg 7.87 0.41 0.86 0.64

• Supermarket & other retailing

10.26 4.55 3.94 3.94

• Restaurant Not included Not included Not included Not included • Other 5.64 1.09 0.28 1.14 • Total 62.89 17.69 9.68 10.75

Table ES5: Supply chains’ costs, by activities of competing dairy industries ($/kgCFCW)

Resource Cow’s milk Goat’s milk Sheep’s milk Elite 0.08 0.12 0.28 Grandparents 0.13 0.19 0.40 Parents 0.11 0.46 0.49 Growers Included above Included above Included above 1st process 0.39 1.20 1.79 2nd process Co-products Dist., packaging & mktg 0.29 0.63 0.52

• Supermarket 0.31 0.79 0.79 • Restaurant n.a. n.a. • Other 0.08 0.58 2.20 • Total 1.39 3.97 6.47

Table ES6: Supply-chains’ costs, by activities of competing fibre, textile and garment industries ($/kg of end-product weight)

Resource Silk scarf Fine wool woven scarf Raw material fibre (cocoons for silk and clean wool) 44.12 12.97 Spinning 20.00 9.79 Weaving 70.00 19.44 Garment make-up, incl. design and colour 139.00 105.22

Wholesale margin 79.00 14.15 Retail margin 431.00 160

xv

Implications There are a number of important messages from the analysis: • Five factors are set to shake the foundations of supply-chain competitiveness: the growing demand

for nutritious, low-fat food; increased feed-grain prices; regulations in support of traceability systems; and the growing cost of labour. Operators may get away with ignoring one or two of these factors, but those that ignore all five are unlikely to survive the next five years.

• Close collaboration along the supply chain is likely to become a central part of effective supply chains with partners paying more attention to meeting end-consumer expectations than grabbing a quick one-off dollar from a nearby supplier or buyer.

• For some NAP industries existing production is dominated by developing country suppliers that have labour costs of less than 10% of those in Australia. Labour-saving and productivity-improving technologies offer a way forward for these industries and they should also think strategically about collaboration with low-cost countries to have labour-intensive tasks undertaken in them.

• Some NAP industries have significant potential to take market share away from traditional meat industries due to their superior feed-to-saleable-meat conversion ratios and high health ratings for the end food products, the most prominent of which is turkey.

• The food service sector is accounting for a growing share of all the main food products. Its requirements are different to that of end consumers in terms of quality and type of cuts. In addition, end consumers’ preferences are shifting towards ready-made meals and portions suitable for immediate use.

• While the competitiveness of NAP supply chains is constrained by their typically small size, which leads to high delivery costs and limited ability to reliably supply service retailers who need continuous supplies of high-quality products, there are a number of ways of overcoming or diluting the impact of this. Better collaboration along the supply chain or vertical integration and development of differentiated products for niche markets can offset the cost disadvantage. In addition, the capture of revenue from co-products has not been fully exploited by many, if any, NAP industries. More research could be undertaken into identifying bioactive compounds from NAP animals – particularly those with an existing market.

• As found with Part 1 of this report (Adding Value to New Animal Product Supply Chains: Part 1of December 2004), small things can have a big impact on supply chains. The two most prominent examples are genetic improvement, through an elite-grandparent stock selection system, and a livestock identification and traceability system. Improved genetics can deliver growth in productivity and livestock identification, and traceability systems can be introduced with a small direct impact on overall supply-chain costs, but a major impact on productivity and end-market product values and security. In a similar vein improved reproductive performance can reduce production costs.

• Identifying, designing and preparing the best supply-chain business model for each of the NAP industries is a key factor in supply-chain competitiveness. Supply-chain leaders should be encouraged to set up efficient structures and develop distinctive brands.

• Feed conversion ratios have become an increasingly important driver of competitiveness. Improved feed rations, better feeding practices and selling animals at the right time can all contribute to improved feed conversion ratios. And use of low-cost feed, including forage, can improve the impact on profits even when feed conversion ratios are unsatisfactory.

• While supermarket and restaurant returns account for a relatively high, though often variable, share (30–50%, sometimes more) of the value-chain costs, these returns may not be excessive in the context of gaining market access, and reaching and meeting consumer needs in a low-cost way. Furthermore, direct sale to gourmet delicatessens and restaurants offers an alternative outlet when supermarket costs are too high.

xvi

Recommendations 1. Further research could be undertaken into identifying skills, systems and practices to enhance collaboration between NAP supply-chain partners. The cluster concept for industry development could be examined in detail.

2. Further research could be undertaken into measures to resolve the labour shortage and cost problems, including identification of labour-saving technologies, and improved work practices and measures to improve access to immigrant and itinerant labour.

3. Research shows many processors could reduce their consumption of water and power without compromising on quality management and food safety. Further research could examine utility management and procurement practices and identify case studies in this area for NAP industries.

4. NAP industries could be encouraged to adopt effective identification and traceability systems to enhance market access and to meet consumer expectations in this area. Further research could be undertaken to monitor changes in traceability regulations in key international markets. Further research could also be undertaken into examining consumer willingness to pay price premiums for products that come from supply chains with traceability systems.

5. Due to the scarcity of research on the subject it would be useful to undertake research into measuring the price elasticity of demand for a range of NAP industry products. This data is important for making strategic decisions about product and market development.

6. Further research could be undertaken into identifying bioactive compounds in NAP co-products, the markets for these products and the yields and product conversion ratios from co-products. In addition, there is a need to also examine commodity co-product possibilities including conversion of waste into energy.

7. Co-product processing cost and marketing possibilities need further investigation. In some cases there are potential high returns, but sometimes there are very high costs associated with the specialised extraction, storage and processing routines. Another aspect of marketing is that there are significant cultural differences in preferences for some co-products. With pigs, for example, Asians have a high preference and willingness to pay for lard, lungs and kidneys, which could sell for $2.00/kg, but they may have less interest in the traditional cuts like spare ribs and roast which western consumers are more interested in. It would be useful to identify and examine the cultural preferences for different NAP co-products and how this could be integrated with demand for traditional cuts.

8. Further research could be undertaken into practices that improve feed conversion efficiency. There is evidence of a positive correlation between turkey meat consumption and carcass size, but at the same time research shows that feed conversion ratios decline with carcass size. More research could examine these relationships in detail to enhance understanding of consumer requirements and the cost trade-offs.

9. Feeding systems based on forage materials instead of concentrates could enable lower feed costs, so long as energy and protein requirement for the animal is not compromised. The forage feeding systems could be examined in more detail with a multi-disciplinary approach considering biological, technological and economic conditions for each animal species.

10. Retail margins are subject to significant variation, even during periods of seemingly stable prices for the underlying meat and dairy products. It would be useful to understand the reasons for this variation as it may enable suppliers to better meet the needs of retailers and end consumers.

11. The underlying nutritional value and low fat content of many NAP industry products has not been fully exploited and further research could be undertaken into identifying advertising and promotional methods to improve awareness at the consumer, wholesale and retail levels.

xvii

12. Technical efficiency ratios like feed-consumption-to-liveweight-or-product gain (e.g. silk or milk) need to be interpreted with caution as stand-alone indicators because they do not include costs and prices or the moving marginal productivity of inputs. More research could be undertaken to explain the role of technical efficiency ratios in whole-farm planning and profit maximisation.

13. Nanotechnology is likely to influence all agricultural supply chains over the next decade through technological breakthroughs in the method and cost of making ingredients and in packaging. A scoping study could be commissioned to explore the impact of nanotechnology on NAP industries and identify priorities for research in this area.

1

1. Introduction

1.1 Background to the research A number of important messages emerged from Part 1 of this study (Adding Value to New Animal Product Supply Chains: Part 1 – RIRDC Publication 04/166): • The competitiveness of NAP supply chains is constrained by small enterprise size (at both

production and processing levels), which leads to high delivery costs and limited ability to reliably supply service-oriented retailers who need continuous supplies of high-quality products. Cooperation by operators along the supply chain or vertical integration and development of differentiated products for niche markets has potential to offset the cost disadvantage.

• Small things can have a big impact on supply chains. The two most prominent examples are genetic improvement, and better feed and nutrition management.

• Identifying, designing and preparing the best supply-chain business model is a key factor in supply-chain competitiveness. Supply-chain leaders would typically be associated with efficient structures, distinctive brands, and superior supply-chain management. The duck supply chain was identified as having many attributes of the ideal business model for an NAP supply chain, with a high level of vertical integration, effective brand development and sufficient economies of scale to be cost-competitive in an international market.

• An efficient NAP value chain has to focus on and meet precisely the requirements of end consumers, which often require segmentation to accommodate different needs and which can be met by carefully designed products and services.

• The animal-growing activities, and feed procurement in particular, account for a significant share of the costs in the more intensively operated1 NAP supply chains. Measures that improve animal growth rates, feed conversion and the yield of high-priced meats, skins and leather can add value to the NAP industries.

NAP industries continue to face significant challenges in producing, processing and delivering products for either food or industrial markets. Frequently the firms involved are start-up companies with severe capital shortages and undeveloped distribution channels. At the retail end, NAP enterprises often compete against supply chains of traditional industries, which feature highly developed and technologically advanced information systems and large-sized firms, often with multi-national structures. To overcome the high cost problem, there is often a search for niche markets that might be able to generate price premiums to cover higher costs. But the product proliferation that this involves can lead to further fragmentation of supply.

If supply-chain participants improved their knowledge of what is happening upstream and downstream from them, they could improve their competitiveness.

Both food and industrial supply chains are becoming more integrated, with improved quality management and cost control being the drivers of this trend. In the food supply chain the major Australian retailer, Woolworths, has more and more of its products delivered through formal supply-chain management systems. This makes cost control and improved food-quality management easier through better compliance with standards like Hazard Analysis at Critical Control Points (HACCP). Another major Australian retailer, Coles, insists that suppliers of private label (non-proprietary brand) food products must comply with the Good Manufacturing Practice (GMP) and food safety requirements detailed in the Coles Myer Food Standards. Producer-members of this type of supply chain have a better understanding of market requirements, and marketing risks are, therefore, generally reduced.

1 Intensively managed systems rely mainly on supplementary feed (e.g. grain) to maintain animal nutrition, compared to extensive systems which rely mainly on natural feed (e.g. grass and clover).

2

Supply-chain case studies suggest that improvements in supply-chain management can typically generate cost savings equivalent to 5% of revenue or 7% of costs. Industry turnover of the NAP industries covered by this study is estimated to be more than $30m/year. This suggests potential gross revenue benefits of $1.5m/year for the portfolio as a whole if superior supply-chain management practices are implemented.

1.2 Study objectives This study had four main objectives:

1. Increased knowledge by industry stakeholders of how value is added through collaboration, and various levels and combinations of labour and capital along the supply chains.

2. Improved awareness of relative strengths and weaknesses along the supply chains as well as for the overall supply chain.

3. Improved information for negotiating agreements between participants along the supply chain.

4. Improved information for quality management systems.

Outcomes from the study include improved information and awareness about the relative cost competitiveness of different supply chains, and identification of opportunities for improving competitiveness. A common grievance about food supply chains is that farm gate prices are often too low in relation to retail prices, and that this is due to inefficiencies and excessive market power in distribution and retailing. This may be a valid observation for some situations, but fundamental factors such as market demand for value-adding services, economies of scale, new technology, quality management and work practices often provide better explanations. This study is expected to provide more objective evidence of the drivers of supply-chain efficiency.

1.3 Research strategy and methods There are five basic components that need to be addressed in developing effective Supply Chain Management (SCM) systems (Koch 2002): • Plan, starting with a strategy for managing the resources needed to meet customer requirements. • Source (production of animals or materials for processing and delivery of services that consumers

are prepared to pay for), involving selecting the suppliers that can meet customer requirements. • Processing, involving scheduling of all those activities necessary for production, product

transformation, quality control, testing, packaging and preparing for delivery. • Delivery and storage, an often critical step for high-value products and perishable products. • Return of defective goods and management of customer relationships.

This study is essentially about the planning step and uses an Activity-based Costing (ABC) model, the conceptual layout of which is shown in Chart 1.1.

3

Chart 1.1: Adding value to new animal products

0

100

200

300

400

500

600

700

$/kg (finished wt)

Animal product 1 Animal product 2 Animal product 3

Sourcing Processing Inward delivery Outward delivery Reject/returns Capital cost

This research involved the collection of data and construction of supply-chain structures for eight industries, all of which needed the following: • work breakdown structure, requiring identification of the supply-chain activities that are required

to take a product from feed and on-farm breeding, through processing to an end user • cost breakdown structure, which involved sequential identification of costs associated with each

activity, from the bottom up, starting from production of raw materials on farms, though distribution and processing to retail

• price breakdown structure, which involved calculation of prices that enable recovery of costs at each activity stage.

The supply-chain model used for this study is based essentially on one product being produced for the supply chain from activities that extend from feeding to breeding, farm production of growers, first-stage slaughter, second-stage boning and separation, retail and restaurant activities. With this approach co-products are typically treated as negative costs when they generate additional income.

Each activity is defined in terms of materials, labour, expenses, capital investment and equipment used.

At the product definition level we specify a product name (e.g. whole carcass or a breast meat cut) and volume produced for one year. For each activity, a unit of output from that activity is defined as the take-off per unit of end product. For example, the final output may be 10,000 kg of emu meat to be produced each year. Then, in the farm-production activity, the take-off (the amount of resource used to produce each unit of end product) may be 500 grower birds/10,000 kg of emu meat2. In turn, this farm production activity may use 300 kg of grain/grower at a grain price of say $0.25/kg. This process is extended through the supply chain to arrive at a supply-chain cost of production, expressed in terms of the finished product delivered to the end user. The model allows profits and cost of capital to be built into the supply-chain costs.

There are a number of financial variables used in estimating the supply-chain costs, including taxes, mark-ups and commissions: • income tax: we assume a constant tax rate of 30% • GST of 10% is applied to all inputs other than labour • overhead burden rates of 2% are applied to all inputs • sales commission of 1% is mostly applied to the end sales value, though this may vary from

industry to industry and product to product • net profit of 1% of sales revenue is included as a cost.

2 This is simply a hypothetical example. In January 2007 there were 41 Australian producers with an estimated annual production of 90,000 kg, equivalent to 2,195 kg per producer.

4

The distribution of this net profit to the different supply-chain members is not determined. After the adjustments listed above, an aggregate supply-chain cost is estimated and from this amount revenue from sales of co-products would be deducted, enabling a final cost to be determined and compared to what can be achieved in the market.

Data for the study was obtained from a combination of field visits, literature searches and in-house data from previous studies. Data from co-products was obtained from a number of studies. This is an area for further research because co-product revenue can contribute significantly to offsetting processing costs and improving competitiveness, especially at the abattoir level for meat products and spinning level for textiles.

It is intended that the results of this project will stimulate further inquiry by specific supply-chain participants, who would be better able to identify and capture the potential value-adding benefits that come from improved supply-chain integration and collaboration.

1.4 Scope of this study The NAP industries selected for the study are dairy goats, emus, rabbits, turkeys, sheep’s milk and silkworm, with dairy cattle and pigs included as comparative supply-chain data from traditional industries. With a potential revenue benefit of 5% from improved SCM strategies, the potential gain from the study is between $1.0m and $1.5m /year. Because most of these industries are growing at 10%/year or more, the present value benefits are potentially large.

1.5 Report outline The report describes each animal industry with a similar, though not identical, structure, starting with some background and history to the industry and a brief overview of the global market. FAO (Food and Agriculture Organization of the United Nations) statistics are used as the prime source of production and trade data. Supply-chain maps are prepared for each NAP industry and the two traditional industries. These show the sequence of activities and the conversion ratios at each step in the supply chain.

The next chapter describes further details about the supply-chain approach. Chapter 3 deals with turkeys and is followed by the other species in the following order: emu, rabbit, silkworm, dairy goat, dairy sheep, dairy cattle and pig. Chapter 11 provides an analysis and discussion of the research and draws out the main common issues. Chapter 12 is the concluding chapter and contains recommendations for further research.

5

2. New animal product supply-chain parameters In estimating the costs of the different animal product supply chains there are complex demands on mapping the tasks and their costs when they absorb resources such as materials, labour, expenses, machinery and investment in stock. Furthermore, there is a need for common standards in measurement to enable the inevitable comparison of performance indicators across animal types. For example, feed conversion ratios (i.e. the ratio between feed consumed to liveweight gained) can be difficult to interpret when feeds of different quality and value are used. For example, as shown in Part 1 of this study, crocodiles have relatively high feed conversion ratios, but this disadvantage is offset by the low-value waste that makes up most of their diet. In this study, the silk cocoon has a relatively high ratio of mulberry leaf consumed to silk cocoon produced, but mulberry leaf is a relatively low-value feed (at least compared to grain).

Other distortions arise when different quality and different-aged animals are compared. With turkeys, for example, the feed conversion ratio of a fully vertically integrated enterprise is logically higher than for an enterprise where the grower3 is purchased from an outside supplier at an age when it is ready to experience rapid growth. Some research into the conversion ratios for turkey shows it declining over the life of the grower so their could be an optimal time to sell when the extra revenue just exceeds the extra cost, but this is not necessarily the time of best feed conversion. More appropriately it is the time when it best meets consumer expectations and when profits are maximised. With some enterprises, such as the squab (Part 1 of the report), the grower is fed mainly by the parent. In these circumstances the integrated feed conversion ratio is again much higher than for the grower in isolation. With extensive enterprises there is little supplementary feeding and low feed conversion ratios are shown, but this is offset by the consumption of grazing land.

The process flow of materials and resource use is required before we can construct a basic supply-chain cost estimate from breeding through production, processing and retailing. In some activities, especially the recovery of co-products, data is often limited. In these situations we have applied co-product yield ratios (e.g. offal-to-dressed-weight yield) from other animal industries to arrive at broad estimates of co-product quantities from each supply chain.

The basic supply-chain model for each animal product is a vertically integrated structure, with a self-replacing animal breeding enterprise. That is, all animals for growing are generated from breeders within the enterprise. The only purchases are for a small number of key sires in the elite breeding herd/flock. There is typically one primary product for the vertically integrated enterprise, and secondary and co-product revenues are treated as negative costs4. This primary product would be labelled a “stock keeping unit” in accounting terminology. The full supply chain starts with an elite breeding activity5 that supplies superior stock to a grandparent herd/flock activity, which supplies improved stock to a parent herd/flock activity, which is the main source of growers (the grower activity). A small percentage of growers are also sourced from the culls of the elite and grandparent

3 In this report, the term “grower” refers to the animal that is being grown. 4 The treatment of co-product, joint product and waste product revenues as negative cost items avoids the problem of allocating direct costs to these products. It can, however, become a problem when the co-product revenue accounts for a large share of the final revenue. 5 “:Elite breeding” here means the activity of breeding superior stock or stock with particular characteristics sought by end consumers of the value chain. “Grandparent flock/herd” means the stock directly derived from the “elites”, with the elites supplying all the replacement sires and breeders required to sustain the grandparents for the value chain. “Parent flock” means the stock directly derived from the grandparents, with the grandparents supplying all the replacements required to sustain the parent group for the value chain. The “grower facility” is the stock derived from the parents, as well as culls from elites and grandparents. It is the growers that supply the requirements for the first-stage processing activity.

6

herds/flocks. Finished livestock are transferred to an early-stage processing activity (slaughter and hide/feathers/skin co-product recovery), from where carcasses may be sent direct to a supermarket or to a boning room for further processing. Another choice at the end of the chain is to send the carcass direct to a restaurant.

While the silk supply chain also involves an animal, a different approach is adopted for it to provide a perspective over the whole fibre–textile–garment–retail activities. Silk, like most fibres, tends to lose its identity at the spinning stage.

When defining products in the model, there is an allocated product name for the primary product and volume produced is defined for a period of one year. That is, we define all the activities to be undertaken and resources used for making a set volume over a one-year period. Selecting the target volume is a key decision in supply-chain management as it is governed by market demand and economies of scale, and has major implications for the costs associated with different-scaled enterprises and management coordination tasks. Task take-off factors are used as the basis for defining resource use and costs. An example of task take-off is the number of turkeys needed to produce, say, 2m kg of meat. After the take-offs for the activities are defined, the next step is to define the resource take-offs within each activity so that activity costs can be worked out.

7

3. The turkey value chain

3.1 Background Turkeys (stock numbering 277 million) account for just 1.5% of the world’s poultry flock, in which chickens have the dominant share (more than 90%), followed by ducks (5.7%) and geese (1.6%) (FAO 2006) (Table 3.1). Unlike other poultry species, turkeys take on more importance in developed countries (75% of global livestock numbers and over 90% of turkey meat production) than developing countries. The turkey is the only poultry species that is produced mostly in developed countries. Nevertheless, developing country production is growing faster (300% over the past 20 years, compared to 200% for developed countries) than that of developed countries. Australian production has risen 245% over the same period.

Table 3.1: World Poultry Livestock Numbers, 2005

Chickens Ducks Geese Turkey All poultry birds Australia 85,000,000 620,000 1,600,000 87,220,000 Developed countries

4,548,428,000 75,432,000 17,650,000 209,480,000 4,850,991,000

Developing countries

12,147,449,000 969,304,000 284,256,000 67,341,000 13,468,350,000

World 16,695,877,000 1,044,736,000 301,906,000 276,821,000 18,319,341,000

Source: FAO Statistics 2006

The estimated world production of turkey meat was 5.1m tonnes in 2005 (from 687,710,000 slaughtered birds with an average liveweight of 7.5 kg) (Table 3.2). The US is the largest producer, accounting for almost 50% of world production. Turkey meat accounts for about 6% of world poultry meat production, but in Australia it accounts for less than 4% of Australian poultry meat production. By way of contrast turkey meat accounts for over 12% of US poultry production and 17% of EU production.

Table 3.2: World Poultry Meat Production (tonnes), 2005

Chickens Ducks Geese Turkey All poultry birds Australia 735,625 9,600 28,700 773,925 Developed countries

31,599,018 489,842 88,508 4,699,471 36,877,839

Developing countries

38,875,484 2,957,722 2,238,175 468,089 44,558,429

EU (25) 8,763,917 414,610 74,983 1,920,491 11,175,320 US 16,104,200 51,300 2,463,960 18,619,460 World 70,474,502 3,447,564 2,326,683 5,167,560 81,436,268

Source: FAO Statistics 2006

Australia produced an estimated 28,700 tonnes of turkey meat in 2005 (with an average carcass weight of 3.5 kg/bird) and it ranks second after chicken in terms of national production. Compared to other countries Australian turkey carcass yields of 3.5 kg/bird are relatively low, less than half the world average and less than 40% of US yields (Chart 3.1).

8

Chart 3.1: Turkey carcass weights: Australia and selected countries: 2005

ChinaDeveloping Countries

U.S.

World

0

2

4

6

8

10

12

kg carcass weight

Australia China DevelopedCountries

DevelopingCountries

E.U. U.S. World

Source: FAO Statistics 2006 data

The wide inter-country variation in turkey carcass weights reflects, in part, cultural preferences and possibly the growth in use by the food service sector. Large turkey toms (male) are sometimes kept to 20 weeks of age (compared to 12–15 weeks for average stock sales) when they could weigh 18 kg live (13–14 kg carcass). These birds would be used more for further processing into turkey ham, deli products and select cuts like breast meat roasts. In the US there is heavy consumption of turkey at Thanksgiving and Christmas and this also tends to be associated with preference for larger birds that can deal with a crowd and last the event. Another factor is the feed conversion ratio which is under 2 up until an age of around 10–12 weeks. This may induce producers facing high feed costs or cash constraints (e.g. developing country producers) to turn the growers off at a relatively early age. Over the past decade the world carcass weights of turkeys have steadily increased from 6.2 to 7.5 kg/bird (Chart 3.2). In the US the growth has been even stronger, from 7.3 to 9.6 kg/bird, which is achieved at an age of about 14 weeks. In Australia, however, there seems to have been little change, on average, though some producers are generating carcass weights of 5.0 kg/bird or more.

Chart 3.2: Carcass weight trends: by country

0

2

4

6

8

10

kg/bird carcass weight

Australia EU US World

1986 1996 2005

Source: FAO Statistics 2006 data

There were about 64 million live turkeys (valued at $US163m) traded globally in 2004 (23% of total stock) with the US and Canada accounting for 28% of supplies. The US and Canada themselves are also major importers. In 2004, 916,000 tonnes of turkey meat was exported globally, 85% of which originated from developed countries (Table 3.3) with the EU accounting for 61% of the total. France alone accounts for 25% of global exports and the US 20%. The EU is also a major importer (43% of global imports). Mexico, Russia, Taiwan, Canada and Hong Kong are the top five export markets for US turkey. Major importing countries include Germany (83,000 tonnes) and the UK (28,000 tonnes).

9

Australia is not registering any imports in live turkeys or turkey meat, though there is a small quantity of low valued (probably dark meat6) exports.

Table 3.3: World turkey meat trade, 2004 (tonnes)

Imports Exports

Total quantity (tonnes)

Total value ($US’000)

Average value

($US/kg) Total

quantity Total value ($US’000)

Average value $US)

Australia 0 0 0 3,636 2,599 0.71 Developed countries

554,921 1,114,742 2.01 766,190 1,429,825 1.87

Developing countries

253,185 321,921 1.27 149,928 236,717 1.58

World 808,106 1,436,663 1.78 916,118 1,666,542 1.82

Note: FAO exports and imports are not reconciled at a global level. Source: FAO Statistics

World exports of turkey meat have increased significantly over the past 20 years, from 67,000 to 916,000 tonnes (Chart 3.3). The share of turkey meat in global poultry trade has increased by about 300% over the past 20 years.

Chart 3.3: World exports: turkey, chicken and duck meat: 1984 to 2004

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

tonnes

1984 1988 1992 1996 2000 2004

Turkey Chicken Duck

Source: FAO Statistics 2006

The institutional structure of the value chain of turkey production and processing in Australia is somewhat similar to the other poultry value chains like ducks (refer to RIRDC Publication No. 04/166) where a couple of large processors (Inghams and Barters-Steggles, in the case of Australia) dominate processing (accounting for 77% of production) and are supplied by their own production

6 Dark meat in the turkey is understood to be due to the presence of blood vessels containing myoglobin (muscle haemoglobin). The more myoglobin in the muscle the darker is the muscle. Active muscles like the legs and thighs contain more blood vessels than the breast and therefore more myoglobin which gives it the dark appearance. Turkey meat has about 70% white meat and 30% dark meat. White turkey meat has a relatively low level of saturated fat compared to dark meat (http://www.nutritiondata.com/facts-C00001-01c20DI.html), but both are rated highly as a source of protein and selenium and both types of meat are rated poorly for their levels of cholesterol (30% of daily allowances in a serving of 132g of dark turkey meat and 30% in a serving of 150g of white turkey meat). Nevertheless, turkey meat has relatively low levels of cholesterol and saturated fats compared to chicken meat and red meats.

10

activities and a few external producers under contract. In the US there is similar concentration of processing. The vertically integrated Jennie-O Turkey Store (544,000 tonnes), the world’s largest turkey processor, accounts for over 20% of production in the US and is followed by Cargill and Smithfield7.

In Australia an estimated 50% of turkey is sold through retailers direct to the public, 10% direct to consumers including through farmers markets, 15% to the food service sector, 12.5% to export markets, and 12.5% to commodity markets for further value adding by other manufacturers. Per –capita consumption of turkey meat is very low in Australia at about 1.0 kg (Australian Poultry CRC 2006). By way of contrast in the US it is 7.4 kg, 4.4 kg in Canada, 3.9 kg in the EU, and 13 kg in Israel (USDA 2000) (Chart 3.4). These statistics suggest the domestic market in Australia has potential for significant growth in turkey consumption, though some of the consumption in other countries may be enhanced by subsidies. For example, the US Department of Agriculture’s Agricultural Marketing Service announced recently that it plans to purchase young whole turkeys, turkey roasts, and turkey hams for use in school lunch and other domestic food nutrition assistance programs.

There seems to be some positive correlation between per capita consumption of turkey and the carcass weight/bird. Countries with high per capita consumption of turkey tend to produce birds with relatively high carcass weights. The reasons for this require further investigation. The increased consumption could be due to extra demand for further processed meat like ground turkey, sliced breast meat etc. or due to lower processing costs and prices for consumers. Larger birds tend to have lower processing costs/kg.

Chart 3.4: Per capita consumption of turkey meat: selected countries

0

2

4

6

8

10

12

14

kg/capita

Australia Canada Israel EU US

Source: USDA Foreign Agricultural Service 2006; Poultry CRC

In the international market, turkey is traded in a range of product forms, from whole birds with skin to whole birds without skin (illustrations 3.1 and 3.2), bone-in to bone-out, turkey breasts, roasts and hams. The United Nations Economic Commission (2005) for Europe has recently drafted a turkey meat carcass and parts standard which contains about 100 turkey products, including offal and meat.

7 At the time of writing this report Smithfield is in the process of taking over ConAgra’s Butterball turkey plants in the US and if this is completed it would become the largest turkey processor in the US.

11

Illustration 3.1: Whole bird with skin

Whole turkeys may be sold as frozen, fresh or chilled. Fresh turkeys tend to be more expensive than frozen turkeys because of their special temperature, and handling and storage requirements.

Illustration 3.2: Skinless whole bird

Source: United Nations Economic Commission for Europe 2005

A summary of comparable properties of turkey and other meats at a carcass level, including meat, fat and skin, in the raw state, is shown in Table 3.4. High saturated fats and cholesterol affect, adversely, the health ratings of all main meats except rabbit, though turkey meat is rated relatively high compared to other poultry and other meat. It has a lower saturated fat content and higher protein.

12

Table 3.4: Turkey meat compared to beef, turkey, rabbit and chicken

Beef — raw fresh

carcass

Chicken — broiler, back,

meat and skin, raw

Duck, meat &

skin, raw

Pig — raw

fresh carcass

Rabbit — raw, domestic,

composite of cuts

Turkey — composite,

raw Average total fat (% of content)

22.0 28.8 39.4 35.0 5.5 13.0

Saturated fat (% of content)

9.2 8.5 13.2 12.0 1.8 3.6

Chol. (mg per 100g) 74.0 79.7 76.0 74.0 56.8 74.0 Sodium (mg per 100 grams)

59.0 64.4 63.1 42.0 41.0 65.9

Protein (%) 17.0 13.6 11.5 13.9 20.0 18.0 Iron (% of daily values with 2000 calorie diet & 454g meal)

47.0 5.1 13.2 47.0 8.8 9.1

Negatives Saturated fat

Saturated fat High saturated

fats

High sat. fats

High chol. High chol.

Positives Protein, vitamin B12

& low sodium

Protein, low sodium

Low sodium

Protein, thiamin & Se.

Niacin, vit B6, B12, P, Se,

protein, low Na

Protein, Se and low Na

Opt. health star rating 2 stars 1.75 stars 1.75 stars 1.5 stars 2.25 stars 2 stars

Source: http://www.nutritiondata.com/facts-C00001-01c20DM.html.

When fat is trimmed all meats show significant improvements in terms of lower fat content and cholesterol and this improves their rating in the optimal health scale (Table 3.5). Turkey is rated highly as a source of protein and selenium and for its low sodium content. Table 3.5: Boneless turkey compared to boneless beef, pork, rabbit and chicken

Beef — raw, bottom sirloin, trimmed to zero fat.

Chicken breast meat, raw

Duck — raw, domestic,meat only

Boneless pork loin — fresh

Rabbit —raw, domest.

Turkey — raw, meat only

Average total fat (%) 7.1 9.2 5.8 7.1 5.5 2.8 Saturated fat (%) 3.6 2.3 2.2 2.7 1.8

1.1 Cholesterol (mg per 100 grams)

64 64.4 76.6 49.1 56.8 65

Sodium (mg per 100 grams)

53.6 63.2 73.7 358 41 70.1

Protein (%) 21.4 20.7 18.2 18.75 20 21.7 Iron (% of daily values with 2000 calorie diet & 454g meal)

7.1 4.6 13.1 4 8.8 8.2

Negatives High cholesterol

High chol.& trans. fats

High chol. High chol. & sodium

High chol. High chol.

Positives Protein, vitamin B12, B6, P, Zn, Se & low sodium

Protein, niacin vitamin B6, Se & low sodium

Thiam, ribofl, niacin, vit B6, pant acid, P, Se, protein

Protein Niacin, vit B6, B12, P, Se, protein, low Na

Niacin, vit B6, P, Se, Zn, protein

Optimum health star rating

2.1 stars 2 stars 3 stars 1 star 2.25 stars 2.25 stars

Source: http://www.nutritiondata.com/facts-C00001-01c20DM.html

13

In the book Superfoods Rx, Dr Steven Pratt concludes:

“Turkey — A perfect example of a twenty-first century ‘health’ protein source. It’s extremely low in fat, and provides multiple nutrients which help build a strong immune system.” (http://www.superfoodsrx.com/).

Turkey is the only meat in the list of 14 foods which Pratt claims will make people look better and live longer. He says that “21st century research shifts emphasis from fats, carbs and protein to phytonutrients, vitamins and minerals yielding dramatic health benefits”.

3.2 Drivers of competitiveness Poultry raising is generally undertaken through what are termed extensive or intensive production systems. In developing countries, where little turkey production takes place, the extensive or back-yard system prevails. With high economic growth, however, there is likely to be significant change towards more commercial and intensive systems in developing countries to meet growing demand in both domestic and export markets.

In developed economies such as Australia, North America and Western Europe, more than 95% of commercial turkey production takes place through intensive production systems. There is, however, a growing market for free-range turkeys (Bender 2005). While there are a few small-scale producers operating in developed countries, the large-scale specialist dominates the market, and economies of scale result in highly concentrated domestic markets. The Australian market, for example, is dominated by just two processors, who rely to a large extent on vertically integrated intensive production systems. A few turkeys in developed countries are run on free-range paddocks, but this exposes the birds to outside predators and uncontrolled disease, all of which add to the cost of production. Free-range turkeys sell at higher prices than those grown in sheds. Bender (2005) found farmers are receiving prices that are 2–5 times higher than supermarket prices for range-fed turkeys in the US and that even at these prices they cannot satisfy demand. That’s well above the price premium we found in Australia where organic range-fed turkeys (in whole-bird form weighing 3.5 – 3.8 kg) are selling for $14/kg compared to standard turkeys at $8.50/kg.

The following factors appear regularly in discussions of turkey enterprise competitiveness: • Economies of scale exist in both production and processing. Ollinger, MacDonald and Madison

(2000) examined structural change in the US chicken and turkey industries and found that substantial economies of scale exist in turkey processing (and chicken processing) and that the economies of scale were not fully exploited by the industry. Turkey processing plant sizes increased 600% from 1967 to 1992 in the US, though existing plants were still only 80% as large as the average chicken processing plant. The average plant processing size at Jennie-O Turkey is 64,000 tonnes of turkey carcass meat/year, compared to Australia’s total turkey production of 28,700 tonnes. Using Ollinger et al. data (Chart 3.5) the processing cost advantage of Jennie-O Turkey over Australian turkey processors would be at least 20%. The following scale formula provides an approximate predictor of costs for a given capacity for a turkey enterprise (at least over the capacity range of 10,000–100,000t/year):

C = 1.2 (CAP) 0.9

Where C = total annual processing costs; CAP = annual processing capacity (kg of turkey carcass); and 1.2 and 0.9 are estimated constant and scale coefficients, respectively, and estimated from the Ollinger et al. data.8

As processing plant size increases so does the optimal size of production enterprises. In Minnesota (the largest turkey-producing state in the US) the average producer raises three flocks per year, each containing 15,000 birds for an annual total of 45,000 (Data derived from Ollinger et al.).

8 Section 9.4 has more detail on the scale formula applied to dairy processing.

14

Chart 3.5: Impact of turkey processing plant size on average costs

1.05 1 0.89 0.83

0

0.2

0.4

0.6

0.8

1

1.2

Cost Index

9,936 19,828 39,655 79,310

carcass '000 kg/year

Average cost index

• Utilisation of capacity9. As it is with other industries, utilisation of capacity is a critical requirement for competitiveness. Utilisation of capacity for turkey processing has been complicated by the traditional seasonal demand for turkey consumption which has been based around Christmas, Thanksgiving and other special occasions, resulting in long periods of unutilised capacity. The trend, however, at least in higher-consuming countries, is for turkey becoming a more mainstream meat available at all times of the year. This trend is expected to maintain the structural adjustment pressure towards larger plant sizes.

• Concentrated industry structure. The presence of economies of scale in turkey processing would be expected to lead to increasing industry concentration and possible concerns about the level of competition and buying behaviour. In Australia two firms account for over 75% of processed turkey output. This is a very concentrated industry structure. There does not seem to be quite the same concentration in the US turkey industry, though it’s still rated as highly concentrated.

• Integration processes. The combined importance of economies of scale and high utilisation of capacity creates a major incentive for careful management of the integration process between production and processing, and retailing. Jennie-O Turkey10, the largest turkey processor in the US (accounting for 20% of country capacity) and the world, also owns and operates 140 growing and breeder farms, eight feed mills and four hatcheries. Vertical integration is becoming an important strategy for controlling risk between supply-chain processes and also for fully exploiting the growing demand for different products at the consumer level.

• Management of nutrition and feed, as the major production cost (about 60% or more of farm costs), is a key item in competitiveness. The cost of feed relative to the price received for the turkey is a key benchmark indicator, as is the feed conversion ratio. The USDA (United States Department of Agriculture) tracks the cost of feed relative to the price received for turkey in that country. Over the past decade ratio of the average price of turkey meat to the cost of feed has been 7.04 and it has only been below four for a short period from February to May in 2004 (Chart 3.6). Chart 3.6: Turkey— the ratio of liveweight price received to feed price paid: US: 1996 to 2006

zSource: Data from USDA “Feed Grains Database 2006”. Note: The methodology uses major raw feed component prices from Agricultural Prices, published by USDA’s National Agricultural Statistics Service. The

9 The proportion of manufacturing plant and equipment that is being used in production, relative to peak capacity. 10 Jennie-O Turkey is a subsidiary of Hormel Foods (www.hormel.com) which is one of the top five US food manufacturers.

15

major feed components of corn and soybeans account for 83–91% of the total ingredients in the turkey feed ration. The interval between peaks is about five years, at least for this series of observations. It is of some interest to note that in Australia at present the turkey-meat:feed-grain ratio would be well below four, and around five over the long-term. This reflects the acute shortage of grain due to the drought and associated high prices being paid for all of the main feed grains.

The feed conversion ratio (FCR) for turkeys rises with the liveweight of birds (Chart 3.7). There is an optimal weight to sell at and it’s based on that point where the marginal revenue just exceeds the marginal cost of generating the extra weight and revenue. As turkeys become more of a year-round food there is a trend towards smaller “one-meal” birds, but there is also demand for select cuts like breast meat slices and ground meat which can be delivered more efficiently from larger birds.

Chart 3.7: Feed conversion ratios — turkey toms, by age in weeks

0

0.5

1

1.5

2

2.5

3

3.5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22Age (weeks)

FCR

Source: Derived from data provided by Pennsylvania State University, College of Agricultural Science 2004 • Fertility and survival management. Careful management of breeders, artificial insemination

practices, hatching, poultry survival and grower growth rates are essential for high performance. Neglect of any one activity can lead to excess losses and undermine performance of the whole production activity.

• Growing demand for free-range turkeys. While free-range production typically involves challenges in the form of protection from disease, easy access to predators and higher costs, there is a growing group of consumers prepared to pay the price premiums of at least 50% over standard environmentally controlled operations.

• Verifiable standards. There is a growing demand for birds from enterprises that have high and verifiable standards of animal welfare, which typically means best-management practices and effective traceability systems.

3.3 The flow of products and yield from the turkey supply chain The flows of livestock and associated products and yield of meat and co-products from the turkey supply chain are shown in Charts 3.8 and 3.9. The data used is derived from various research publications and should be viewed as indicative only. The product parts are derived from the USDA’s State Processing Program Handbook (1999). Chart 3.8 shows a basic value chain from a task perspective. Value can be created in almost every activity along the supply chain. In production,

16

value-creating options exist in achieving best practice in feeding, breeding and general management. During processing, options exist to create value through economies of scale, best practice for all activities, undertaking specific activities like boning and slicing, and in creation of saleable co-products. The capture of co-product revenue is often neglected, as is the scope to reduce water and electricity consumption in processing. Co-products can be captured and sold as original products where markets exist or consolidated and even transformed into oil, gas and fertiliser commodities. The Norbest turkey cooperative in the US supplies turkey feathers for making Indian garments and arrows, and turkey skins for making leather for footwear. Turkey down is used for pillows. Elsewhere, Changing World Technologies (www.changingworldtech.com) established a thermal de-polymerisation, energy recovery plant in the US alongside a ConAgra Turkey processing plant. From 210 tonnes/day of waste from the turkey plant they are able to convert 70 t/day of oil, 7.5 t/day of fuel gas, 7 t/day of carbon black and 34 t/day of liquid fertiliser.

The Danish Meat Research Institute (2000) found significant variation in water, electricity and heat consumption between poultry slaughtering plants in Denmark. For example, average water consumption was 15 litres/bird, but the range extended from 7 to 23 litres/bird. The Institute found low consumption of water could be achieved without compromising on health and safety or product quality. Old refrigeration plants are often inefficient users of electricity and replacement with modern refrigeration facilities can add value.

Effective integration of quality managed activities along the value chain has emerged as an important requirement for competitiveness in the turkey industry and it is the main reason for processors integrating backwards into production and supply of breeding stock and even feed. Efficient integration can reduce the risk of low utilisation of capacity, especially at the processor level, and improve the reliability of supply for retailers and communication of market information from consumers to operators throughout the value chain. It can also enable quality management in each and every activity.

The value chain of intensive turkey production and processing is complicated by the choices available to operators in terms of breed selection, how growers and materials are sourced, which markets are to be targeted, and how much processing and value-adding takes place at the slaughter and boning stages. There are several distinct, but highly integrated, stages in taking a turkey from breeding though growing, early-stage processing and meat preparation to retailing, where it might be available as a 200-gram vacuum-packed breast or a whole 3.4 kg turkey for a supermarket or gourmet delicatessen, where it could be in a fresh, frozen or chilled form.

17

Chart 3.8: Turkey value chain activities

Elite breedingflock

Grandparentflock Parent flock Hatchery Growing farm or

shed

2. Distribution

Freight, cartage &handling

3. Early stage processing

Arrival &hanging

Stun/kill/de-feather Evisceration

Offal & co-products

Gizzards, liver, heart,neck, blood, feathers

Chill Wrap &vacuum pack

Weigh

Specialtymarkets, incl.

industrial

4. Second stage processing

Cutting,separation &

boning

Boneless turkey, boneless leg, wingjoints, breast, inner breast fillet, dicedbreast, thigh, drumstick, bone meal

Adding ingredients ... stuffing, flavouringsWrap & pack

5. Distribution

Transport Warehouse Wholesale

6a. Retail - supermarket/gourmet deli

Storage Preparation Location & display Promote & sell

6b Food Services - Restaurant, hotels, caterers

Storage Meal design One-to-onecustomer service

Promote & sale

Location & ambience

End consumer

1. Production

IncubatorEggs Poult

Brooder shed -male & female

separated

Effluent:compost, fertiliser

Feed

Re-insert neckand giblets

ID Code

Freeze Chill

Inspectors

W hole bird

Shipping/Air

6c Export

18

Chart 3.9: Turkey value chain: yields of livestock and products

a.) Production

Female turkey hen(20-25)

Male (tom) turkey(1)

200 eggs/female

Non-fertile eggs(7.5%)

Fertile eggs(92.5%)

170 poults (wt.65g)

153 growers(liveweight: toms: 7 kg; hens:

5.6 kg; average: 6.3 kg)

b.) 1st stage processing c.) 2nd stage processing

Bone-in carcass(79% yield) (5kg)

Thigh(13%)(650g)

Drumsticks(9.5%) (475g)

Wing (5%)(250g)

Bones (19%)(950g) andSkin (11%)(550g)

Boned-out meat,excluding skin (3.5kg)

Co-products (1.05kg+ 1.5kg transferred in

from boning andskinning)

Disappearances -moisture loss etc.

(360g)

Offal (300g)

Hide, skins,feathers (700g)

Fat (180g)

Bone, meat, otheretc. (950g)

Blood (60g)

Offal products:neck/feet (100g)liver (60g)heart (20g)gizzards (60g)other (60g)

feathers (150g),skin (550g)

Renderedproducts:

tallow (180g)bloodmeal (10g)

meatmeal (185g)

Effluent (15,460g)

100g

Other 100g

ArtificialInsemination

185 fertile eggs

92% hatch

10% losses

Incubator: 28 days

Brooder shed6 weeks

Grower shed6 weeks

Breast meat(27%)(1350g)

Comminuted meat(15.5%)(775g)

Water used (15litres/bird)

+

Fertiliser (5.0g N;0.55g P))

Convert all waste tooil, gas and fertilizeror capture specificco-products?

0.85g oil; 0.1g fuel gas; 0.41gfertilizer; and 0.1g carbo black

d.) Effluent treatment and co-product recovery

19

Specialist preparers add further value through boning and stuffing, and adding components such as smoking and sachets of sauces and marinades. Restaurant chefs add further value through meal design, material blends and cooking techniques. In some areas the chef is much more important than either the food brand or the restaurant name. A turkey, which could start off at a value or cost of about $2.00 as a day-old chick, could end up at $30.00 or more as a whole bird weighing 3.4 kg. If the organic path is followed the same turkey could be selling for $13.00/kg instead of $8.50/kg, a retail price premium of over 50%.

In an efficient market the different market prices for different products reflect merely differences in the costs of production. For this reason caution is needed in the interpretation of price premiums as they may or may not add value to an enterprise. It all depends on the cost of creating the price premium as to whether value is actually added.

Chart 3.10 shows the differences in value for a selection of whole turkey carcass and meat cuts. About 29% of the male turkey carcass comprises high-priced breast meat, 13% low-priced thighs, 18% bones, and 10% skin.

Chart 3.10: Turkey meat product prices: $/kg

8.53

13 18

19.9817.96

02468

101214161820

$A/kg

Whole turkey-standard

Whole turkey-Organic

Shaved turkeybreast

Smoked turkeyroast

Turkey breastw hole

Source: Various supermarkets and delicatessen, NSW October 2006

3.4 Size and structure in the turkey value chain The breeding structure and numbers within each activity along the turkey supply chain are based on the requirements for a minimum-efficient-sized early-stage processing plant, which is judged in this study to have capacity to process 2.5 million turkeys/year and 1000 birds/hour, or more when operating at full capacity11. This size of processing operation in Australia is relatively large as total annual slaughterings are only 8.2 million so it would account for over 20% of supply. By US standards, however, it is relatively small. For example, the average-sized processing plant in Minnesota is slaughtering just under 6 million birds/year. Fanatico (2003) describes a year-round poultry processor as one that would be slaughtering 25,000 birds/day (at least 7.5m/year). The design of an efficient supply chain requires an initial assessment about the target market size and its requirements and the efficient size for each of the activities along it. From this point, a supply-chain leader can set about sourcing products and services in the most efficient way possible from efficient-

11 Processing investment costs and technology were obtained from JM Poultry Technology BV in the Netherlands, and Meyn Food Processing Technology, also in the Netherlands. Fanatico (2003) has more information about processing costs for small-scaled poultry operations.

20

sized suppliers. The production starting point in the turkey supply chain described here is one with each producer having an elite breeding flock of 14 hens and one tom. This elite flock in each production enterprise (of which there are 67) can supply all the breeding material for a turkey supply chain that provides 2.6 million growers and eventually produces 9,542 tonnes of turkey carcass meat/year.

The small elite flock supplies replacements for a grandparent flock of 42 females and three males which, in turn, supplies the replacements for 252 females and 18 males in a parent flock, which then supplies the 42,500 growers for fattening. In this model, turkey growing is undertaken by 67 producers that each deliver 38,250 growers/year at an average liveweight of 5.16 kg12. As with the processing activity this is a relatively small production enterprise. For example, in Minnesota the average production enterprise size turns out 79,000 growers/year. Furthermore, it is unlikely that each producer enterprise would be involved in a breeding activity. More likely, there would be specialist breeder enterprises, perhaps just one supplying all eggs for hatching under a specialist roof and then poults for growing out.

3.5 Cost of production at the farm level Let us say that a producer enterprise has 308 turkey hens. Table 3.6 shows the basic assumptions used for this flock. Four key assumptions are the feed conversion ratio (2.04, which is relatively high, but which deteriorates with age (refer to Chart 3.7 above), the liveweight-to-feed-price ratio (4.33), the survival number of poults/hen and the average weight of finished turkeys, the impact of which flows through to financial returns and value added throughout the supply chain. The feed conversion rate of 2.04 is achievable at an age of 74 days (Pennsylvania State University 2004), but it would be very important to assess market preferences for different sized birds and demand for further processed meats. The higher the target carcass weight, the higher is the feed conversion ratio and cost of feed. Table 3.7 shows the costs and returns, given the assumptions of Table 3.6.

12 Note: the 5.16 kg liveweight is less than the 6.3 kg in Chart 3.9. The liveweight of 5.16 is closer to the Australian average.

21

Table 3.6: Turkey production enterprise: main enterprise assumptions

Number of hens per producer 308 Structure: closed herd — 14 elite hens, 42 grandparent, 252 parents, 22 toms, AI. Three groups/year. Toms (% of hen numbers) 5 Death rates:

• hens 5 • poults: to 4 weeks 6 • growers: 74 days 6

Average growers delivered/hen 125 Growers delivered per producer enterprise 38,250 Total finished growers delivered to abattoir by 67 enterprises 2,562,750 Average price received ($/kg live) $1.30 Average liveweight (kg) (5.79 kg for toms and 4.53 kg for hens) 5.16 Average carcass yield (%) 73.5 Carcass weight (HSCW) 3.8 Average value of progeny sold or transferred $6.71 Enterprise revenue per producer $256,581 Number of producers in supply chain 67 Days to sale weight 74 Feed conversion ratio13 2.04 Liveweight-to-feed-price ratio 4.33 Labour (hours/1000 birds/day) 1.5 Total hours of labour (hrs) 3,000 Labour rate ($A/hour) 20.00

13 Feed conversion ratio (FCR) of 2.04 is derived from the average for the fully integrated operation, including feed for hens, toms, poults and growers.

22

Table 3.7: Cost of producing turkey growers, from hen to sale (or transfer) 2006

Projected income Value ($A) Progeny sold at 74 days (38,250 at 5.16 kg and $1.30/kg) 256,581 Culled for age (300 at 13.5 kg at $0.80/kg) 3,240 Sub-total $259,821 Direct expenses Flock costs Artificial Insemination ($5/hen) 1,600 Flock recording and testing (5.50/hen) 1,760 Animal health ($20/hen) 6,400 Sub-total 9,760 Shed costs Power and heating ($16/hen) 5,120 Sanitary supplies (detergents, gloves etc.) 4,500 Sub-total 9,620 Feed costs Hens: (65 kg/hen at $0.30/kg ) 6,240 Toms-breeders (65 kg/tom at $0.30/kg) 312 Poults (41,761) (1.15 kg/poult at $0.35/kg) 16,809 Growers (39,308) (8.68 kg/feeder at $0.325/kg) 110,888 Water 3,500 Sub-total 137,749 Fuel and oil ($15.50/ hen) 4,960 Repairs and maintenance ($10/hen) 3,200 Licensing and registration (5/hen) 1,600 Sub-total 9,760 Overhead cash costs Paid operating labour 40,800 Administration (1 hours/hen) 6,400 Sub-total 47,200 Overhead imputed costs Family labour (2 hours/hen) 12,800 Depreciation on buildings & equipment: ($0.35/bird) 14,350 Stock holdings cost of capital: ($12/grower) 3,500 Sub-total 30,650

Total 244,739 Costs/kg carcass weight 1.66 Costs/kg liveweight 1.22 Operating profit $15,082 Profit/kg at farm gate (l$/kg live-weight) $0.075

The total cost of production is estimated to be $1.22/kg liveweight. Feed is the major cost item in all turkey production enterprises, accounting for over 56% of total expenditure. The older or heavier the bird the higher the relative cost of feed. In response, feed formulators have developed high nutrient feed supplements to enhance the productivity from feed and improve feed conversion ratios. DuPont Specialty grains have developed OPTIMUM High Oil Corn as an ingredient with high levels of metabolisable energy (ME), amino acids (12% more lysine than standard corn) and vitamin E. Gormone and Balnave (1995) found in chickens that supplements of lysine and methionine in starter and finisher diets resulted in significant improvements in breast meat yields. Lehmann, Pack and

23

Jeroch (1996) found the same results when turkeys were supplemented with lysine.

The next major cash outlay is for labour (25% of total expenditure), with an estimated 1.5 hours/1000 birds/day, equivalent to 67 kg liveweight/hour. Labour in the above budget generates revenue of $87/hour which is still relatively high for agriculture, but low compared to pork ($131/hour). Any move to decrease the quantity of labour input would need to consider carefully the impact on quality and the value of output. The liveweight-to-feed-price ratio in the budget is relatively low (4.33:1) and at the lower point of that experienced in the US over the past decade. If a price ratio of 5 was achieved the price received would increase to over $1.50/kg and profits would rise threefold to over $55,000. Whether or not this can be achieved is somewhat problematical with international competition in turkey meat products sourced from countries with access to low-cost feed grains. The increasingly unstable climate and drought in Australia poses a serious challenge to development of animal industries based on intensive grain supplements, unless consumers are going to be willing to pay premiums during shortages.

3.6 Processing As with milk, and other meat-processing plants, the costs of turkey processing are closely related to plant size and utilisation of capacity. Costs increase with capacity, but not in the same proportion, providing capacity is utilised at a relatively high level of 85% or more. The processing activity described here is a plant with slaughtering capacity of 2.6 million birds/year, which is fully utilised in a single shift. This is still a relatively small plant compared to some of the plants in the US (refer to Section 3.2 above). Figure 3.1 later in this chapter shows a poultry processing physical layout, provided by JM Poultry.

The revenue generated by this supply chain at the retail level is estimated to be $9.68/kg on average for the edible main meats and potentially $1.00/kg or more for the co-products. The total volume of edible meat produced by the supply chain is just over 9.8m kg (HSCW) and of co-products it would be around 2m kg, depending on the recovery processes employed. The total value of output at the retail level is estimated to be $96m/year, of which co-products account for just 2%14. This output is generated by 67 producers each delivering 38,250 growers weighing on average 5.16 kg (liveweight) and 3.8 kg HSCW, along with 300 culled for age hens and toms weighing 13.5 kg each.

The processing costs for the plant are shown in Table 3.8. Apart from the cost of the live bird, labour is the major processing cost (35–40% of total) followed by packing and processing materials. Fixed costs (depreciation, fixed labour etc.) are estimated to be about $2.8m/year. If two shifts were worked at full capacity for the full year it is estimated the processing costs would be $0.29/kg lower.

The cost of labour in meat processing plants is emerging as a critical constraint. In this study we have assumed labour costs on average to be $20/hour (for both production and processing) and even at this rate there would be little assurance of people wanting to work in an abattoir. The problem is not unique to Australia. Meat processing enterprises in the EU, US and all developed countries are facing the same problem in procuring labour. Immigrant workers and itinerant workers are becoming an important part of the solution.

14 The co-product value is relatively lower than that estimated for other animal species. For example, Liu (2005), estimated co-product revenue to be 7.5% of gross income for a pig enterprise. In the duck supply chain (RIRDC Publication No. 04/166) we estimated the co-product revenue could be around $0.35 – 0.5/kg, equivalent to about 10% of gross income at the duck production enterprise level.

24

Table 3.8: Turkey processing costs, 2.6 million birds/year

Annual costs ($A)

Year 2006 Costs Average % of

total costs

Land & buildings (depreciation 2.5%) $882,953 10

Labour: variable 3,090,335 35

Labour: fixed 441,476 5

Plant and equipment 1,478,946 16.75

Packing and processing materials 1,765,906 20

Electricity (0.58 kWh/bird) 220,738 2.5

Fuel & oil 220,738 2.5

Repairs and maintenance 176,591 2.0

Transport 176,591 2

Water (15 litres/bird and $0.75/ kL) 44,148 0.5 Effluent disposal (37g of BOD/bird); 4.0g of N and 0.55g of P. Disposed for land use & irrigation ($0.30/kL) 22,074 0.25

Product loss 132,443 1.5

Operating capital 176,591 2.0

Total $8,829,528 100

Processing cost $0.90/kg

3.7 The overall value chain for the turkey supply chain The total average costs (including profits) for the turkey supply chain are estimated to be $9.68/kg (including profits and sales commissions of 1%) at the retail level over the 9.8m kg of turkey meat sold. These costs include the on-farm production; first- and second-stage processing (including evisceration; carcass splitting into untrimmed cuts; second-stage processing into wholesale cuts (trimmed and boneless); third-stage processing into sliced products; and distribution, storage and retailing (Chart 3.11). The single largest cost activity in this supply chain is the retail activity ($3.94/kg, equivalent to 41% of total supply-chain costs), followed by production ($1.98/kg of which feed is $1.05) and then slaughtering ($1.03/kg), followed by first- and second-stage processing (slicing, grinding etc.) ($0.44/kg). Chart 3.12 shows the estimated price spreads and shares of retail revenue for supply-chain activities.

25

Chart 3.11: Turkey supply chain activities: by cost ($A/kg HSCW)

0

0.5

1

1.5

2

2.5

3

3.5

4

$/kg

Feed Production total Process (1) Process (2-3) Retailing

Activity

The percentage shares of activities along the supply chain are shown in Chart 3.12.

Chart 3.12: Value chain shares: by percentage of retail value

0

10

20

30

40

50

%

Production Processing Retail Other service

The largest cost items in the turkey value chain are general operating expenses ($6.26/kg, which covers meat slicing, grinding and additional processing, co-product processing, water and effluent, advertising and promotion ($0.843/kg), rent, electricity, and storage and other items (Chart 3.13). Labour accounts for 12% of total supply-chain costs and materials (including feed) for 13%.

The profit incorporated in the supply-chain budgets here is 3.25% on sales. We have also incorporated a $0.045/kg product reject rate at the retail level to accommodate “past-expiry-date” events for products and a further reject cost of $0.015/kg at the processing level.

26

Chart 3.13: Resource use: turkey value chain: farm to retail

LabourSet-up design

Investment

0

1

2

3

4

5

6

7

$/litre

Materials Generalexpenditure

M & E

3.8 Main messages from the turkey value chain The main messages from the review of the turkey-meat value chain are as follows: • The turkey-meat production and processing supply chain is dominated in the US by large and

efficient producers and processors. Australia has a highly concentrated turkey-processing industry but the operations are very small by US standards. Small-sized producers and processors face cost disadvantages that are accentuated if they do not fully utilise capacity and adopt best management practices. The heavily concentrated ownership of the turkey industry in Australia and by firms with similar influence in chicken-meat processing may be compromising growth of the turkey industry in Australia. Further research could examine this structure to identify ways of improving it.

• The full potential of turkey as a food is unexploited in Australia. It has high health rating, a competitive feed-to-meat conversion ratio but relatively low per capita consumption. It has potential to capture significant market share from both the chicken-meat industry and other meats with less favourable health ratings. If Australian per capita consumption was increased to that of the EU there would be an extra $300m added to the industry at the farm gate, making it the biggest industry in the NAP portfolio.

• The prospects for turkey also seem promising in the international market where global exports have risen consistently over the past 20 years from less than $100m to nearly $1b.

• Even though turkey production has one of the best feed-to-saleable-meat conversion performances there is still significant potential to improve the feed conversion ratio through improved genetics and improved feed products.

• As with other animal product supply chains, there is always the risk of not fully using capacity, and this risk points towards solutions with vertically integrated structures, though it’s important to recognise that resources and skills in product development, brand management and marketing generally take on added importance in a vertically integrated enterprise.

• The traditional competitive challenges facing all producers of animal products also apply to turkey meat enterprises. This means ongoing attention to the growth in productivity of feed, yields of saleable meat or animals, and ongoing genetic improvement. The returns to good technical and financial management are likely to be just as high as they are with competing meat enterprises.

• For the future, turkey-meat producers face growing competition from imports, especially from

27

countries with access to reliable supplies of low-cost feed and large efficient processing operations.

• Animal industries based on concentrates, grain and other purchased inputs face growing risks of supply shortages in Australia, with drought conditions leading to growing domestic feed prices. Product prices for imported meat products will not necessarily track the price of feed costs, especially where the source country has a reliable supply of low-cost feed grains. It is vital for producers to have access to imported grain for feed when local supplies run short and costs rise.

• Processors play a leading role in the turkey-meat supply chain, mainly because of their potential to exploit economise of scale and the ongoing risk of unutilised capacity for those who lack access to reliable supplies of livestock.

• Turkey meat consumption appears to be correlated, positively, with carcass weights. More research could enhance understanding about this and improve understanding of consumer requirements.

• The costs of labour in processing are presenting growing problems for the meat industry. Further research could examine measures to improve access to labour.

28

Figure 3.1: Poultry processing layout

29

4. The emu value chain 4.1 Background Like other ratite-raising systems (including ostrich), emu-raising presents the choice between extensive or intensive production systems or some mixture thereof. Again, in developed economies, such as Australia and the US, most commercial emu production takes place through what would be described as semi-intensive production systems in which supplementary feed is the dominant source of animal nutrition. Nicholls (1998) explored the technical feasibility of using forage-based grazing systems for emus in place of feed concentrate supplements and concluded they could reach, at a lower cost, a slaughter weight of 45 kg, similar to the intensively supplemented bird, though more land was needed and more time to achieve the results. The economic viability of this type of system would depend, among other things, on the cost of land, quality of products (oil and meat) and the interest rate (time cost of holding the stock).

The emu industry has experienced significant volatility in stock and slaughter numbers. Emu farming commenced in Western Australia in the early 1970s and experienced problems in domesticating the bird, in transport, in processing, and in making the transition from speculative expansion of livestock numbers for re-sale to production of meat, leather and oil for consumers. The products of oil, leather and meat were new and the markets unfamiliar with them, meaning advertising and promotion resource requirements had to be significant if market penetration was to be achieved. The first slaughterings occurred in 1990 (O’Malley 1998) and by 1995 over 110,000 chicks were produced in Australia. More recently, over the four year period 2000–2004 the average slaughter numbers in Australia have been 5,200, ranging from 3,700 to 7,000 (Foster, Jahan & Smith 2005), from a flock of 500–700 breeders (our estimate). In 2006 the estimated slaughter number in Australia was 4,275 birds, with 1,700 in Victoria, 1,575 in South Australia and 1,000 in Queensland (pers. comm. Dr P.McInnes).

Small numbers of emus are also produced in Canada, Chile, China, India, New Zealand and the US. The world emu breeding flock in 2006 could be around 1,000 birds. The US is understood to have imported live emus from Australia over the period 1930–1959. Again, production, slaughtering numbers and marketing in the US and Canada has been volatile. In Canada it was estimated that 5,500 were emus slaughtered in 1997 (Agriculture and Agri-Food Canada 1999), but production seems to have almost disappeared in that country over the past five years. In the US there is the same volatility and a major contraction over recent years, though some operators (www.cmonbackacres.com 2006) continue to report significant, but unbelievable sale numbers (e.g. 100,000 hides/year!).

There are some vertically integrated production systems — from the selection of elite breeding stock through to grandparent, parent, hatchery, growing and processing, and final delivery to wholesalers, re-packers and retailers, but mostly the emu suppliers use outside processing facilities where slaughtering can be undertaken on either a contract basis or straight sale. The value chain of intensive emu production and processing is more clearly focused (or should be) than that of ostrich production because emu oil is the main source of revenue (at least 50%) and seems to have more unique properties than substitutes. While meat is important, it and emu leather look likely to be secondary products, though emu meat is rated high for its unsaturated fat content.

An emu, which could start off at a value or cost of $50 as a 1–5-day-old chick, could end up at over $350 as a whole bird at the farm gate weighing 35–45 kg, yielding 18–24 kg of cold dressed weight carcass (including fat), 0.6 – 0.8 square metres of leather, and 15 kg of co-products. If the fat is taken forward further to be formed into fully refined oil, and the skins taken through to a footwear product it could add as much as $1,000 to the bird.15 At the time of writing this report (31 October 2006) an

15 Talyala Emu Farm sells pure emu oil in Australia for $135/litre, retail, in 1-litre containers. Emu Products and Management in the US sells pure emu oil for over $US100/litre and speciality boots made from emu skins at $US300/pair. One pair of boots or more can be made from a good quality emu skin valued at $75 as leather.

30

organic emu tenderloin steak was selling for $39/kg at speciality butcher shops16.

The opportunities to add value to an emu are again many and varied. The first opportunity is the choice of enterprise structure and scale. There are likely to be moderate economies of scale in production (minimum of 50 females needed) and, again, stronger economies of scale in processing. Again, it is equally important to make full use of available assets, otherwise the gains from operating in large-scale are quickly dissipated. Operators in other new animal industries have gained greater control of their capacity utilisation by vertically integrating backwards into breeding and production, and forward to direct selling to end consumers or to specialist product developers. As a general observation, emu supply chains feature smaller-sized processing operations than most other animal product chains like ostrich and duck enterprises. This reflects, in part, the widely dispersed location of production enterprises which adds to procurement costs and reduces cost competitiveness. The second major opportunity for adding value is in achieving operational efficiency for a given scale of operation, which means efficient selection and use of key inputs especially feed, breeding stock, transport practices, labour and feed. Finally, there is the value of the end product, and opportunities exist to achieve relatively high unit prices by delivering to quality-sensitive markets.

Emu meat is delivered to a highly competitive market which looks for consistent high quality at competitive prices. At present emu meat is priced at the upper end of the price range for competing meats (Chart 4.1).

Chart 4.1: Selected organic emu and other organic meat cuts: $/kg retail level: October 2006

38.99 39.99

23.99

28.99

0

5

10

15

20

25

30

35

40

$A/kg

Emu tenderloin Ostrich fillet Turkey breast Duck breast

Source: Fyshwick Market Poultry, Game and Organic Butcher, ACT (http://www.organicbutcher.com.au/products.html)

The price of emu oil seems to be similar to that of rhea and much higher than ostrich oil (about double), but price comparisons are difficult. Emu oil is high in the relatively highly valued mono-unsaturated oleic acid, while ostrich oil is relatively high in saturated palmitic fatty acid, with rhea oil somewhere in between. The cosmetic and therapeutic properties of emu oil have been rated highly, in part because of the presence of monounsaturated fatty acids which are thought to facilitate skin penetration/permeability (Zemtsove, Gaddis and Montalvo-Lugo 1994).

As a food, emu meat rates highly as a source of protein with low fat and saturated fats in particular. It also scores high for iron, and for optimum health overall (Table 4.1). These attributes offer significant product differentiation possibilities against other meats and potential for price premiums, though the cholesterol level of the meat is more than some promoters claim and more than that of rabbit meat.

16 Organic Butcher, http://www.organicbutcher.com.au/bird.html.

31

Table 4.1: Emu fan fillet compared to boneless beef, pork, rabbit and turkey and duck.

Beef —raw, bottom sirloin,

trimmed to zero sub. fat.

Emu fan fillet

Duck —raw,

domestic,meat only

Boneless pork loin —

fresh

Rabbit— raw, domest.

Turkey —raw, meat

only Average total fat (%) 7.1 0.8 5.8 7.1 5.5 2.8 Saturated fat (%) 3.6 0.1 2.2 2.7 1.8 1.1 Cholesterol (mg per 100 grams)

64.0 71.0 76.6 49.1 56.8 65.0

Sodium (mg per 100 grams) 53.6 120.0 73.7 358.0 41.0 70.1 Protein (%) 21.4 22.4 18.2 18.75 20.0 21.7 Iron (% of daily values with 2000 calorie diet & 454 gram meal)

7.1 113.0 13.1 4.0 8.8 8.2

Negatives High cholesterol

High chol High chol. High chol. & sodium.

High chol.

High chol.

Positives Protein, vitamin B12, B6, P, Zn, Se & low sodium

Low sat fats, high protein, niacin vitamin B6, B12,P,Fe

thiam, ribofl, niacin, vit B6, pant Acid, P, Se, protein

Protein Niacin, vit B6, B12, P, Se, protein, low Na

Niacin, vit B6, P, Se, Zn, protein

Optimum health star rating 2.1 stars 3 stars 3 stars 1 star 2.25 stars

2.25 stars

Source: http://www.nutritiondata.com/facts-C00001-01c20DM.html. Note: data apply to tests of final consumer products. These test results can vary significantly according to rations and grazing conditions.

4.2 The flow of products and yields in the emu value chain The emu value-chain map is shown in Chart 4.2. At each sub-activity there are, again, various levels and combinations of capital, labour, outsourced services and materials to be procured and managed in the most efficient way possible. In this chain it is assumed or at least there is the option of breaking the emu flock into a performance-based herd comprising elite, grandparent and parent breeders selected according to estimated breeding values (EBVs). EBVs estimate the value of the animal for the measured traits of interest which could, for example, be kilograms of fat at a certain age, say 275 days (more about the application and principles of EBVs can be found at: http://abri.une.edu.au/online/pages/understanding_ebvs_mg.htm). Benson and Holle (2003) outlined the production possibilities for an ostrich enterprise when producers adopt high genetic performance selection techniques, improved feed management practices and better overall management of an ostrich flock. They found that increased inputs, accompanied by best management practices would generate an extra $169.30/ostrich compared to current average performance in the industry. Fertility could increase from 55% to over 95%, hatchability increased from less than 50 to over 90%, survival increased from 50% to over 90%, liveweight increased from 95 kgs to over 120 kg, feed-to-liveweight conversion ratio improved from 12:1 to 4:1, and the percentage of first-grade hides increased from 25% to over 70%. There is no reason similar improvements cannot be achieved with an emu enterprise. Obviously the characteristics of interest will not be the same because of different attributes like the yield of oil from the emu, but the potential to add value by just achieving best practice in one or more attrributes is likely to be significant.

In the supply chain the bird is the sent to slaughter for recovery of oil, meat, skin and other co-products. Further processing possibilities exist at this point or by distribution to other specialised renderers and refineries and meat value-adding enterprises through, for example, activities for de-boning and addition of flavourings, special packaging etc.

32

The livestock, meat, skin-leather and co-product yields from the emus are shown in Chart 4.3. These metrics are sourced, in part, from a study of emu carcasses undertaken by Blake and Hess (2004) at Auburn University and, in part, from a 1992 study by Texas A&M University into ostrich carcass composition. Oil yields are from Whitehouse and Turner (1997). Hatchling size is from Dzialowski and Sotherland (2004). It is assumed some of the co-product yields (offal etc.) of the ostrich would be applicable to emus (after adjustment for liveweight differences). The yields of co-products may vary depending on animal breeds, animal gender, feeding, age at processing, and processing conditions. For example, Blake and Hess found that emus fed a diet of 18% protein achieved improved feed conversion ratios (10.92 compared to 12.08), but this diet also seemed to reduce the level of fat (3.84 kg compared to 4.79 kg). Female emus of the same age as the males achieved higher carcass weights and fat yields. Transport conditions can also affect both the recovery of saleable meat and the quality of the skin. The yield of saleable meat from an emu carcass (less than 50%) is relatively low compared to other animals (e.g. 70% for a turkey) because of the high bone content in the rib cage (Agricultural Utilization Research Institute 2002).

First-stage processors have the potential to recover co-products in the form of bone, blood and offal for further processing. These could add up to 16 kg, valued at between $0.20 and $2.00/kg. Emu fat is likely to be sent to refiners for further processing into one or more of crude oil priced at about $33/litre (for soap and animal feed), “once-refined oil” priced at about $60/litre (for industrial use), or fully refined oil priced at about $86/litre (for pharmaceuticals, cosmetic and dietary supplements) (Dino Meat Company 2006).

33

Chart 4.2: The emu production, processing and service value chain

Elite breedingflock

Grandparentflock Parent flock Hatchery Growing farm or

shed

2. Distribution

Freight, cartage &handling

3. Early stage processing

Arrival &hanging

Stun/kill/de-feather Evisceration

Offal & co-products

Gizzards, liver, heart, neck,blood, feathers, eggs, skin & fat

Chill Wrap &vacuum pack

Weigh

Specialty markets,incl. industrial forfurther oil refining

4. Second stage processing

Cutting,separation &

boning

Boneless emu fillets, boneless leg -inside, outside, thigh, round, oyster

fillet, fan, tenderloin

Adding ingredients ... stuffing, flavouringsWrap & pack

5. Distribution

Transport Warehouse Wholesale

6a. Retail - supermarket/gourmet deli

Storage Preparation Location & display Promote & sell

6b Food Services - restaurant, hotels, caterers

Storage Meal design One-to-onecustomer service

Promote & sale

Location & ambience

End consumer

1. Production

IncubatorEggs Chicks

Brooder shed -male & female

separated

Eff luent: compost,fertilizer

Feed

Fat ... crudeoil

ID Code

Freeze Chill

Inspectors

Whole bird?..rare

Shipping/air

6c Export

Fat rendering,bleaching, vacuum

deodorization, test &pack.

34

Chart 4.3: Emu value chain: the flow of animals, products and yield

Elite breedingflock

Grandparentflock Parent flock Hatchery Growing farm or

shed

2. Distribution

Freight, cartage &handling

3. Early stage processing

Arrival &hanging

Stun/kill/de-feather Evisceration

Offal & co-products

Gizzards, liver, heart, neck,blood, feathers, eggs, skin & fat

Chill Wrap &vacuum pack

Weigh

Specialty markets,incl. industrial forfurther oil refining

4. Second stage processing

Cutting,separation &

boning

Boneless emu fillets, boneless leg -inside, outside, thigh, round, oyster

fillet, fan, tenderloin

Adding ingredients ... stuffing, flavouringsWrap & pack

5. Distribution

Transport Warehouse Wholesale

6a. Retail - supermarket/gourmet deli

Storage Preparation Location & display Promote & sell

6b Food Services - restaurant, hotels, caterers

Storage Meal design One-to-onecustomer service

Promote & sale

Location & ambience

End consumer

1. Production

IncubatorEggs Chicks

Brooder shed -male & female

separated

Eff luent: compost,fertilizer

Feed

Fat ... crudeoil

ID Code

Freeze Chill

Inspectors

Whole bird?..rare

Shipping/air

6c Export

Fat rendering,bleaching, vacuum

deodorization, test &pack.

35

4.3 Size and structure in the emu value chain The breeding structure and numbers within each activity along the emu supply chain are based on the requirements for a minimum-efficient-sized early-stage processing plant, which is judged to have the capacity to process at least 35,000 birds/year.17 The design of an efficient supply chain requires an initial assessment about the efficient size for each of the activities along it. From this point, a supply-chain leader can set about sourcing products and services in the most efficient way possible from efficient-sized suppliers. For the emu industry, in Australia at least, the transport cost can be a significant factor in competitiveness, involving both direct and indirect costs (damage through bruising and hide damage increases with distance travelled).

The production starting point in the emu supply chain is an elite breeding flock of one female and one male. This elite flock can supply all the breeding material for a self replacing, performance-driven emu supply chain that provides 5,216 growers per producer enterprise. With six producers the total grower supply number is 36,515, which produce 823,000 kg of carcass weight meat, 292,000 kg of fat for oil, 36,515 skins for leather, 358,000 kg of offal, 29,212 kg of feathers, and 51,121 kg of blood. The elite flock supplies replacements for a grandparent flock of 18 females and 18 males, which in turn, supplies the replacements for 324 females and 324 males in a parent flock, which then supplies 5,796 growers for fattening. In this model, ostrich growing could be undertaken most efficiently by, say, six producer sub-enterprises turning out 5216 growers/year. A production enterprise of this size is estimated to achieve most of the economies of scale in production.

4.4 Cost of production at the farm level The supply chain designed here is built around a producer enterprise of 343 emu hens. Table 4.1 showed the basic assumptions used for this flock. Key assumptions are the feed conversion ratio (6.74), growers delivered/hen (15), the contract slaughter fee ($65/bird) and the yields and prices received for the three key products (oil, meat and skins), the impact of which flows through to financial returns and value added through the supply chain. The feed conversion rate of 6.74 is achievable at an age of 380 days, but it would be very important to monitor growth rates and yields of fat. The higher the target carcass weight the higher is the feed conversion ratio and cost of feed.

Transport costs and the contract processing fee are major items, and a key question is: “who pays for them?” If the grower keeps ownership, they will be paying, otherwise it’s probably the processor.

Table 4.3 shows the costs and returns, given the assumptions of Table 4.2. The costs items are largely self-explanatory. At the bottom of the table are estimated costs of producing each of the three products. Costs have been allocated simply on the basis of the proportional contributions to revenue. That is, oil contributes 62% to revenue and therefore shares 62% of costs of production. Meat contributes 22% and skins 16%. The production enterprise viability is sensitive to yields and prices received, especially for oil. In this budget the oil yield is 8 litres at a price of $30/litre. The yield is slightly more than Chart 4.3 indicates, but is achievable and possibly could be exceeded with appropriate attention to nutrition and protein content.

17 The 35,000+ unit is derived from previous benchmarking studies undertaken by Wondu that found this size of operation is needed for an ostrich processing facility to achieve competitive costs. It could be achieved with a multi-species plant. It’s understood that processors in Australia are charging about $70/bird for slaughtering, which translates to $1.52/kg carcass weight. This is relatively high compared to a turkey plant ($0.90/kg, see below), though the turkey plant is producing 10,000t of meat/year (over 10 times the emu processing plant) and hide recovery is less important than with emus.

36

Table 4.2: Emu production enterprise: main enterprise assumptions

Number of hens per producer 343 Structure: Closed flock — 1 elite hen, 18 grandparents, 324 parent, and 343 males. Male (% of hen numbers) 100 Death rates:

• hens 5 • chicks: to 4 weeks 10 • growers: up to 380 days (54 weeks) 10

Average growers delivered/hen 15 Growers delivered per producer enterprise 5,216 Total finished growers delivered to abattoir by 6 producer enterprises 31,296 Eggs/hen 22 Egg fertility (%) 80 Average price received meat ($/kg carcass) $6.50 Average price received crude oil ($/litre) $30.00 Average price received skins ($/skin) $60.00 Average liveweight (kg) (48 kg for hens and 44 kg for males) 46.00 Average carcass yield (%) 50.00 Carcass weight (HSCW) 23.00 Average value of progeny sold or transferred $384.50 Enterprise revenue per producer $2,005,552 Number of producers in supply chain 6 Days to sale weight 380 Feed conversion ratio18 6.74 Labour (hours/emu hen/year) 20.8 Total hours of labour (hrs) 7,134 Labour rate ($A/hour) $20.00

18 Feed Conversion Ratio (FCR) of 6.1 is derived from the average for the fully integrated operation, including feed for hens (250 kg/year), males (250 kg/year), chicks (54 kg) and growers (209 kg).

37

Table 4.3: Cost of producing emu growers: from hen to sale (or transfer) 2006 (spreads over two pages)

Projected income Value ($A) Progeny sold at 273 days and slaughtered contract:

• oil (5,216 birds yield 8 litres at $30/l) 1,251,840 • meat (5216 birds yield 13 kg at $6.50/kg) 440,752 • skins (5,216 birds yield 1skin/bird at $60 ea) 312,960

Sub-total $2,005,552 Direct expenses Flock costs Artificial Insemination ($X/hen) 0 Flock recording and testing ($50/hen) 17,150 Animal health ($40/hen) 6,400 Incubation and husbandry ($98/hen) 33,614 Sub-total 64,484 Shed costs Power and heating ($48/hen) 16,464 Sanitary supplies (detergents, gloves etc.) 13,720 Sub-total 30,184 Feed costs Hens: (250 kg/hen at $0.30/kg ) 25,725 Males (250 kg/male at $0.30/kg) 25,725 Growers (5,216) (263 kg/bird at $0.3/kg) 434,439 Other fodder ($120/hen) 41,160 Lease 15,000 Water ($20/hen) 6,860 Fertiliser (45 ha at 250 kg and $400/t) 4,500 Weed and pest control 15,435 Sub-total 629,212 Energy and maintenance Fuel and oil ($50/ hen) 17,150 Repairs and maintenance ($75/hen) 25,725 Sub-total 42,875 Overhead cash costs Paid operating labour 81,000 Administration (1 hours/hen) 35,500 Licensing and registration (5/hen) 1,715 Sub-total 118,215 Overhead imputed costs Family Labour (4 hours/hen) 27,440 Depreciation on buildings & equipment: ($10/bird produced) 52,160 Stock holdings cost of capital: ($12/grower) 62,592 Sub-total 152,624 Contract slaughter fees ($65/bird) 339,040 Transport to abattoir ($55/bird) 286,880 Total 1,612,750 Meat costs/kg carcass weight 5.23 Meat costs/kg liveweight 2.62 Oil Cost/litre 23.96 Skin cost 49.47

38

Operating profit $392,802 Meat profit/kg at farm gate ($/kg carcass-weight) $1.27 Oil profit/litre at farm gate ($/litre) $6.04 Skin profit ($/skin) $10.53

Note: Specific product costs are calculated by apportioning total costs according to the proportion of revenue they generate; oil accounts for 62% of revenue, meat 22% and skins 16%. Then the total costs apportioned are divided by the respective quantities produced. There is not really any other basis for apportioning costs with a joint-product animal.

The total cost of production for the enterprise is estimated to be $1.326m (including the contract processing fee, but excluding the transport fee). Feed is the major cost item in all emu production enterprises, accounting for almost 50% of total expenditure. In this budget we may have underestimated feed costs (due to the moving impact of the current drought) which are based on a standard cost of $0.30/kg. A 30% increase in unit feed and water costs would decrease profits by 28%. The older or heavier the bird the higher the relative cost of feed because the feed conversion ratio declines with age (refer to Blake and Hess (2004) feed trial results). In response to this important relationship, which is not unique to emus, feed formulators in the poultry industry have developed high-nutrient feed supplements to enhance the productivity of feed and improve feed conversion ratios. Blake and Hess found a diet of 16% protein generated high carcass weights and fat yield. DuPont Specialty grains have developed OPTIMUM High Oil Corn as an ingredient for poultry rations with high levels of metabolisable energy (ME), amino acids (12% more lysine than standard corn) and vitamin E. Gormone and Balnave (1995) found in chickens that supplements of lysine and methionine in starter and finisher diets resulted in significant improvements in breast meat yields. Lehmann, Pack and Jeroch (1996) found the same results when turkeys were supplemented with lysine. For the emu industry it would be useful to identify rations that improved fat yield, noting the significant role of emu oil in enterprise profits.

The second highest cost is the contract slaughter fee ($65/bird), which amounts to 26% of total costs. As discussed elsewhere the level of this fee will vary with the size of the processing plant.

Transport costs ($55/bird) are the third highest and potentially most variable cost. They could be reduced to a very low level for a producer located near to a processing plant or could be a multiple of the $55 allowance for an enterprise located interstate. Creating a vertically integrated production and processing business, all on the one site, has significant cost advantages (one of which is transport) providing all the other management and marketing skills and resources are in place.

The next major outlay ($143,940) is for labour (11% of total expenditure), with an estimated 1.1 hours/bird. Labour in the above budget generates revenue of over $250/hour which is relatively high for agriculture (e.g. pork is $131/hour and turkeys less than $100/hour). Any move to decrease the quantity of labour input would need to consider carefully the impact on quality, productivity and the value of output.

As noted elsewhere, the increasingly unstable climatic conditions and drought in Australia pose a serious constraint to development of animal industries based on intensive grain supplements, especially when they have to compete against international competition with reliable access to low-cost grain.

4.5 Emu processing As with turkey and other meat processing plants the costs of turkey processing are closely related to plant size and utilisation of capacity. Costs increase with capacity, but not in the same proportion, providing capacity is utilised at a relatively high level of 85% or more. The processing activity described here is a plant with slaughtering capacity of 35,000 birds/year (1.6m kg liveweight), which is fully utilised in a single shift (that is, it could increase capacity by almost 100% by working another shift). This is still a relatively small plant compared to, for example, the turkey processing plant

39

(13m kg/year liveweight and which is also a small plant by international turkey standards).

The processing costs and revenue for the plant are shown in Table 4.4. The main revenue for this synthetic plant is $65/bird slaughtered, which generates total revenue of $2.275m/year. Important additional revenue is derived from the sale of co-products, which are priced (perhaps modestly) at $0.45/kg for a 12 kg/bird. It is revenue from the sale of co-products that takes the abattoir into a state of viability. It is also important to note that co-product revenue could be increased significantly by full capture of offal, blood and bone, and feather product revenue. For example, we estimate there is about 1 litre of blood that could be recovered from an emu, the value of which for bioactive compounds seems to have been unexplored. It is part of a range of co-products from emu that have yet to be fully examined for their commercial potential. Meat and Livestock Australia (MLA) (2006) estimated the processor could receive $12/kg for co-products recovered from cattle processing, materials that were suitable for further manufacturing into nutraceuticals (Figure 4.1).

Labour is the major processing cost (38% of total) followed by packing and processing materials which may actually be a recoverable expense from a commission slaughtering operation. Fixed costs (depreciation, fixed labour etc.) are estimated to be about $0.962m/year. If two shifts were worked at full capacity for the full year it is estimated the processing costs could be reduced by $12.50/bird to about $52.50/bird. This, in turn, would have a significant impact on producer costs.

Table 4.4: Emu processing costs, 35,000 birds/year

Annual costs ($A) Year 2006 Costs Ave. % of total costs

Land & buildings (depreciation 2.5%) $400,000 17

Labour: variable 796,250 33

Labour: fixed 113,750 5

Plant and equipment 381,000 16

Packing and processing materials 455,000 19

Electricity (0.58 kWh/bird) 56,875 2

Fuel & oil 35,000 1

Repairs and maintenance 30,000 1

Transport 35,000 1

Water (15 litres/bird and $0.75/ kL) 11,375 0.5 Effluent disposal (37g of biochemical oxygen demand (BOD)/bird); 4.0g of N and 0.55g of P. Disposed for land use & irrigation ($0.30/kL) 7,500 0.5

Product loss 34,125 1.0

Operating capital 45,500 2.0

Total $2,401,375 100

Processing cost $68.61/bd

Revenue Ave. % of total rev.

Contract slaughter fees ($65/bird) 2,275,000 92

Sale of co-products (12 kg at $0.45/kg) 189,000 8

Total revenue for slaughter 2,464,000 100

Slaughter profit 126,375

Slaughter profit % of sale 5%

40

Figure 4.1: Co-products recovered from cattle processing

Source: MLA 2006. Note: SG&A means selling, general and administration expenses; PAT means profit after tax; COGS means cost of goods sold.

The value chain for nutraceuticals illustrates graphically the value-adding possibilities for the emu, but also the specialisation requirements. There are significant downstream processing costs and specialist skills required to pursue any of the product streams beyond the commodity level. Moreover, product owners have to make a judgement about just how successful they will be in further processing and marketing that product. Sometimes further processing can take the supplier into fierce competition with what may be a friendly buyer at the commodity level.

Further processing of the emu oil requires additional investment in filtration equipment to remove proteins and other impurities, centrifuge equipment, drying tanks and refinery facilities. Again, it all depends on how far the supplier wants to take the fat, to crude oil or part-refined or fully refined oil.

4.6 Product analysis As it is with the ostrich, a complication with allocating costs of production to an emu enterprise is the presence of joint or even multiple products and the allocation of costs to these different sub-enterprises. The complexity increases with differences in the level of processing applied to each product. For example, is the oil to be fully refined or partly refined or left as fat or crude oil? Is the

41

skin to be tanned or left fresh? Is the meat to be classified as organic? Will the meat be delivered to a supermarket (at wholesale prices) or food service enterprise, or taken to the farmers market for sale at near retail prices? These questions can only be dealt with case-by-case. The more processing is undertaken the more skills and resources, and marketing resources and skills in particular, will be required.

Here we have created a supply chain that produces six products, each involving different levels of processing and distribution (Table 4.5).

Table 4.5: Emu supply-chain products

Product End point in this supply chain Price re’cd at end

point Quantity distributed Crude emu oil Wholesale in bulk $34.65/litre 83,456 litres Partly refined emu oil Wholesale in bulk $50/litre 83,456 litres Fully refined emu oil Wholesale in bulk $65/litre 83,456 litres Boned meat Retail supermarket/deli/farmers m’kt $17.50/kg 406,848 kg Skins Wholesale $66 31,296 Co-products Wholesale $0.45/kg 375,552 kg

As noted above, costs have been allocated at the production level on the basis of the proportional contributions to revenue and this approach continues until the costs can be clearly allocated to a particular product. The first-stage processing costs in Table 4.4 are also allocated according to revenue at completion of this stage. That is, oil contributes 62% to revenue and therefore shares 62% of costs of production. Meat contributes 22% and skins 16% at this level. Beyond the abattoir stage costs can be allocated more directly to the product. For example, because meat is the only product taken through to retail, all retailing costs accrue to meat. The further-processed oils share the underlying costs of fat in proportion to their respective amounts used, which is one-third to each based on the 83,456 litres allocated to each product. Co-products are allocated nominal amounts to cover the costs of recovery.Table 4.6 sets out the supply-chain costs and revenue for the six products.

Table 4.6: Emu product supply-chain costs and revenue ($)

Item Crude oil (wh’sale)

Partly refined oil (wh’sale)

Fully refined oil (wh’sale)

Boned meat

(taken to retail)

Skins (wh’sale)

Co-products (wh’sale)

Total

Revenue 2,891,750 4,172,800 5,424,640 7,119,840 2,065,536 168,998 21,843,564

Costs

Materials 294,607 294,607 294,607 324,067 265,145 1,473,033

Labour 198,230 248,547 331,396 1,257,913 125,951 75,000 2,237,037

SG&A 720,615 2,246,689 3,684,640 1,825,456 1,137,487 44,125 9,659,012

Tooling 11,765 16,880 22,505 18,150 13,200 82,500

M&Equip 69,716 100,028 133,371 107,557 78,223 10,000 498,895

Investm’t 70,636 99,173 130,564 101,260 73,644 5,000 480,277

Other mk’tg

1,156,700 553,850 542,464 2,847,936 206,554 10,000 5,317,504

Total costs

2,522,269 3,559,774 5,139,547 6,482,339 1,900,204 144,125 19,748,258

Profit 369,481 613,026 285,093 637,501 165,332 24,873 2,095,306

Profit % of sales 12.78% 14.69% 5.26% 8.95% 8.00% 14.72% 9.59%

42

4.7 Main messages from the emu value chain There are several important findings from the emu supply-chain study: • An efficient emu value chain is one that meets the specific requirements of end markets, which are

highly sensitive to quality variation. It would be useful for a supply-chain leader to prepare a detailed requirements definition for each activity in the supply chain. To do this effectively they would need an in-depth understanding of consumer requirements for different oils, meat and leather and to then match this up with best practice production and processing.

• Product development, marketing and sales management are critical for success. Marketing expenses in the overall supply chain designed here average over 24% for all products and over 40% for some. It may be appropriate to allocate over 50% to marketing, especially for firms with extended integration into several products. Unless the resources and skills are available for marketing it’s preferable to focus on production and leave marketing to specialists.

• Fragmented ownership of products in the emu supply chain can create a distinct disadvantage when compared to closely integrated supply chains that exist with turkey, ducks and other poultry. Fragmentation increases risks and costs when capacity is not fully used. Integration, however, can also increase risks if insufficient resources are allocated to product development and marketing.

• While emu meat remains an important revenue earner for the enterprise, emu oil, in its various forms, is the major source of revenue and is where the focus of feeding and breeding for higher fat-yielding birds and product development is best placed or at least should not be compromised. The emu oil products have unique properties, and there are probably some that are still to be discovered. They offer the strongest possibilities for competitive advantage through product differentiation strategies. Emu meat and emu skins do not have the same differentiation possibilities as the oil due to the presence of closer substitutes.

• The emu-growing activity accounts for a significant share of the value-chain costs and value creation. Measures that improve bird growth rates, feed conversion and the yield of oil can improve efficiency and profitability in the emu supply chain. There are also potentially strong links between growing performance, feeding and breeding, and research into this area has potential for high returns. The use of forage-based feeding systems deserves more examination as a measure to allay some of the worst effects of high grain prices.

• The emu abattoir slaughter cost of $65/bird is relatively high compared to other animals, but there are important differences in that several valuable joint products have to be recovered from the emu and the processing plant is relatively small. If two shifts were worked at full capacity for the full year it is estimated the processing costs could be reduced by $12.50/bird to about $52.50/bird. This, in turn, would have a significant impact on producer costs. It could be achieved, however, only with a significant increase in throughput, from 31,296 birds to over 60,000 birds/year.

• The problems of economies of scale and fully utilising available capacity when it is built may be resolved with the development of industry clusters with producers locating closely around the processing facility. This would reduce transport costs, but it has to have efficient organisation.

• Co-products can also create value and help reduce processing costs even further. This is an area for further research, especially into the bioactive materials of co-products.

• Supermarket returns account for a relatively high share of the emu meat value-chain costs, but this activity has potential for reaching and meeting consumer needs in the most efficient way and in simply gaining market access.

• It is important for product developers to target the food service industry (restaurants, takeaway stores, caterers) and gain exposure across all of the main markets, including exports.

• Restaurant services are potentially an important part of the value chain and it is important to understand precisely their requirements, especially in terms of quality and types of meat cuts preferred for particular meals and consumer groups. The turkey industry in the US has allocated considerable resources to designing meals and flavours, and drinks to blend with their meats. Emu meat suppliers need to allocate the same resources and skills to achieve the same results.

43

5. The rabbit value chain

5.1 Background Rabbits are farmed for a variety of purposes: meat (for humans and animal pet food), angora fibre, skins, live animals and biotechnology. The estimated world value of farm rabbit production at the farm level is about $US5.66b in 2005, 94% of which is contributed by meat (for food), 3% by angora fibre (for textiles), 2.5% by skins (for leather) and 0.5% by offal (for pet food and biotechnology). For simplification, this chapter concentrates largely on rabbits for meat for human consumption, with some information on biotechnology products derived from rabbit organs.

Farmed rabbits (numbering 535 million) are located mainly in developed countries, though China, which now farms nearly 200 million, accounts for nearly 40% of the world total. There are no official estimates of Australian-farmed rabbit numbers, but Foster, Jahan and Smith (2005) estimated the sales number for processing was 171,000 in 2003–2004. Based on FAO statistics this implies the number of stock on hand could have been around 104,000 in that year.19 With growth of 5%/year the 2005 farmed rabbit stock number in Australia is estimated to have been around 109,000 of which 67,000 are does. This is less than 0.05% of the world numbers. Globally, farmed rabbit numbers have gown substantially over the past 25 years (Table 5.1)

Table 5.1: World rabbit livestock numbers, 1985 to 2005

1985 1990 1995 2000 2005 Australia n.a. n.a. n.a. n.a. 109,000 China 69,077,000 155,172,000 149,469,000 185,043,000 198,035,000 Developed countries 131,654,000 215,610,000 310,242,000 269,092,000 299,494,000 Developing countries 81,596,000 171,444,000 165,904,000 214,270,000 235,994,000 World 213,250,000 387,054,000 476,146,000 483,362,000 535,488,620

Source: FAO Statistics 2006 and our estimates for Australia. Some reports indicate Australian numbers have risen substantially in the past two years to perhaps 300,000.

The estimated world production of rabbit meat was 1.2m tonnes in 2005 (from 882.6 million rabbits with an average carcass weight of 1.32 kg) (Table 5.2). Italy is the largest producer, accounting for almost 20% of world production and over 43% of EU production. The trend in rabbit meat production growth is clearly with developing countries.

Table 5.2: World rabbit meat production (tonnes), 2005

1985 1990 1995 2000 2005 Australia n.a. n.a. n.a. n.a. 265 Developed countries

621,662 591,954 549,947 542,592 548,530

Developing countries

133,865 186,402 371,140 481,962 613,643

EU (25) 471,112 412,669 506,341 510,877 514,910 World 755,527 778,356 921,087 1,024,554 1,162,173

Source: FAO Statistics 2006. Australian production data based on Foster et al. (2005) estimates for 2003–2004, adjusted to 2005 on the basis of 5% growth.

19 FAO statistics (2006) estimated there are about 1.65 rabbits slaughtered for every rabbit held as stock (stock would include breeding does and followers). This ratio varies across countries. For the EU it is 3.3, and for China it is 1.7.

44

The average carcass yield at a world level is 1.32 kg, which is slightly above that in Australia (Table 5.3), but in developed countries as a whole, yields are 20% higher than in developing countries. There is little evidence of growth in carcass weights over the past 20 years, though there are significant differences between carcass weights achieved by some countries. Moldova, for example, has a carcass weight which is over 60% higher than that achieved in Australia and the world average. China also achieves high carcass weights.

Table 5.3: World rabbit carcass weights: 1985 to 2005 (kg/carcass) 1985 1990 1995 2000 2005 Australia n.a. n.a. n.a. n.a. 1.28 China 1.4973 1.500 1.3820 1.4298 1.4577 Developed countries

1.4689 1.4940 1.4613 1.4549 1.4648

Developing countries

1.3236 1.3335 1.3238 1.2259 1.2077

EU (25) 1.4316 1.4527 1.4487 1.4447 1.446 Moldova n.a. n.a. 2.3965 2.2222 2.1429 World 1.441 1.4522 1.4026 1.3374 1.3168

Source: FAO Statistics 2006; Foster (2005).

There were about five million live rabbits (valued at $US21.7m) traded globally in 2004 (FAO Statistics), most of which were from developed countries and traded within and around the EU. In 2004 there were 38,515 tonnes of rabbit meat exported globally, over 70% of which originated from developed countries. Italy accounts for over 10% of global exports. Australia has not registered any imports of rabbit meat over the past five years, but there was a small amount of export (1,000 kg) in 2000, possibly wild rabbit meat. The average value of exports in 2004 was $US4.60/kg (Table 5.4), with developed country exports selling at a premium of 13%. The value of world exports has almost doubled over the past 20 years with an average compound growth rate of around 3.5%/year, but export quantities have fallen by 30% over the past five years mostly due to the sharp decline in exports from China. This is understood to be due in part to consignments of contaminated frozen rabbit meat that lead to an EU ban on imports from China. This interruption underlines the importance of meeting HACCP (http://www.haccp.com.au/) standards and having generally high-quality health management practices in place for rabbit production and processing.

Most of the growth in the value of international rabbit meat trade has been from developed countries where export values have grown 240% over 20 years.

Table 5.4: World rabbit meat trade, 2004 (tonnes)

Imports Exports Total

quantity (tonnes)

Total value ($US ‘000)

Average value

($us/kg) Total

quantity Total value ($US’000)

Average value

($US/kg) Developed countries

29,182 131,678 4.51 27,030 141,134 5.22

Developing countries

436 806 1.85 11,485 36,076 3.14

World 29,618 132,484 4.47 38,515 177,210 4.60

Source: FAO Statistics. Note: FAO exports and imports are not reconciled at a global level.

World per capita consumption of rabbit meat is about 0.2 kg, but in some countries like France (3.0 kg/capita) and Italy (5.7 kg/capita) it is a major part of their meat protein diet (Chart 5.1). Countries surrounding the Mediterranean seem to have a particularly high preference for rabbit meat. This is an important feature of rabbit meat consumption that could be examined in further research to improve understanding about what features actually drive this consumption. It could be a mixture of cultural, dietary and specialised cuisine, as described, for example, by Guy Savoy at the World Wide Gourmet website. It is equally important to understand why countries like the US and Australia have

45

such a low level of rabbit meat consumption and whether there are cultural, regional, district or even climatic differences within these countries.

Chart 5.1: Per capita consumption of rabbit meat: selected countries

World

Malta

Cyprus

0123456789

kg/capita

Australia World France Malta Italy Cyprus USA

Source: Various study data.

In Italy an estimated 46% of the rabbit carcass is now cut up for further value-added products or cooked for ready-to-eat consumption (Cavani & Petracci 2005). The trend towards further processing and towards the food service sector is expected to continue as it is with other meats. For rabbit meat this trend is of perhaps greater importance than it is with other meats because it enables processors to prepare meat for customers unfamiliar with the techniques and skills required to make full use of the rabbit meat and its flavours. The food service sector also has even more stringent health standards than the traditional household sector due to the demands of high-quality restaurants and hotels. The EU also now has a requirement for full traceability throughout the rabbit supply chain (and other animal products) and exporters will need to comply fully with these regulations (EU Regulation 178/2002 EC) if they wish to enter the EU market.

The institutional structure of the value chain of rabbit production and processing in Australia is very different to the poultry chains (especially chicken and turkey) which are dominated by one or two processors with vertically integrated structures. Instead, with rabbits, in Australia, there are no large processors with dominant market positions, though it might be just a matter of time before poultry processors enter the rabbit industry. In the US there is a similar dispersion of processing with 60 processors that are not vertically integrated, and who rely on a large number of suppliers to remain viable (http://www.hoppingstart.net). Pel-Freez, Arkansas, claims to be the largest producer of rabbits in that country, much of the co-products from which are used primarily for biotechnology products including serums, plasma, tissues, antibodies and powders. In Europe, however, where the industry is larger, the industry starts to resemble the concentrated poultry industry. Groupe Doux (http://en.doux.fr/), one of the largest poultry producers and exporters in the world, is also the major rabbit processor in France. Woldsway Foods is the largest rabbit processor in Scotland and has a dominant share of that market.

Rabbit meat is rated highly as a source of protein and for its low sodium content and flavours. It is also a good source of vitamin B6 and phosphorus (P). A summary of comparable properties of rabbit and other meats at a carcass level, including meat, fat and skin, in the raw state, is shown in Table 5.5. High saturated fats and cholesterol adversely affect the health ratings of all main meats except rabbit.

46

Table 5.5: Rabbit meat compared to beef, poultry and pork

Beef — raw

fresh carcass

Chicken — broiler, back,

meat and skin, raw

Duck — meat & skin

raw.

Pig — raw fresh carcass

Rabbit — raw,

domestic, composite of

cuts

Turkey — composite,

raw Average total fat (% of content)

22 28.8 39.4 35 5.5 13

Saturated fat (% of content)

9.2 8.5 13.2 12 1.8 3.6

Cholesterol (mg per 100 grams)

74 79.7 76 74 56.8 74

Sodium (mg per 100 grams)

59 64.4 63.1 42 41 65.9

Protein (%) 17 13.6 11.5 13.9 20 18 Iron (% of daily values with 2000 calorie diet & 454 gram meal)

47 5.1 13.2 47 8.8 9.1

Negatives Saturated fat Saturated fat High saturated fats

High saturated fats

High chol. High chol.

Positives Protein, vitamin B12 & low sodium

Protein, low sodium

Low sodium

Protein, thiamin and selenium

Niacin, vit B6, B12, P, Se, protein, low Na

Protein, Se and low Na

Optimum health star rating

2 stars 1.75 stars 1.75 stars 1.5 stars 2.25 stars 2 stars

Source: Nutrition Data: http://www.nutritiondata.com/facts-C00001-01c21Cw.html

When fat is trimmed all meats show significant improvements in terms of lower fat content and cholesterol and this improves their rating in the optimal health scale, though rabbit meat continues to rate highly compared to other trimmed meat.

5.2 Drivers of competitiveness In Australia and most developed countries, rabbit raising is generally undertaken through intensive production systems with animals maintained in wire cages and fed throughout. In Australia free-range rabbit farming has severe restrictions, with rabbit-proof enclosure fencing and environmental impact statements required for control of security, odours and effluent. In developing countries some of the systems are more back-yard. With high economic growth, however, there is likely to be a continuing shift towards more commercial and intensive systems in developing countries (especially China) to meet growing demand in both domestic and export markets.

The following factors appear regularly in discussions of rabbit enterprise competitiveness: • Economies of scale exist in both production and processing. At the production level an enterprise

with at least 300 does seems to achieve most of the economies of scale for an owner-operator system. Expansion beyond this level needs to consider the use and division of outside labour, with an extra full-time labour unit taking the next economic size to 500–600 does or more. The optimal rabbit processing size is potentially large and perhaps would be in line with poultry processing plants (e.g. at least 2.5 million animals/year — refer to Section 4.6 above for turkeys). With Australian rabbit numbers at less than 250,000 it’s not possible to achieve the same economies of scale in the poultry industry without exporting, and processing costs will, therefore, be relatively high and remain a weakness until the industry achieves sufficient size. Extending the scope of an abattoir to other animal species can overcome the sourcing problem to some extent, but the

47

resulting diversity of animal shapes and sizes means some activities have to be undertaken manually and this requires more labour and higher costs.

• Capacity. As discussed in other sections, utilisation of capacity is a critical requirement for competitiveness. Utilisation of rabbit processing capacity has been constrained by the absence of the large vertically integrated structures that feature in poultry processing and which facilitate reliability of supply for retailers (especially supermarkets) and reduced risk.

• Entry of large poultry processors into the rabbit industry. The presence of economies of scale in rabbit processing would be expected to lead to increasing industry concentration and possible entry of large poultry processors into the rabbit industry as has happened in France. This may then raise concerns about the level of competition and buying behaviour. In Australia two firms account for over 75% of poultry processing output. This is a very concentrated industry structure, but it may be an unavoidable outcome if the rabbit industry is to exploit the growth opportunities available and compete on cost with poultry and other meat enterprises.

• The integration process. The combined importance of economies of scale and high utilisation of capacity creates a major incentive for careful management of the integration process between production and processing and retailing. Vertical integration is becoming an important strategy for controlling risk between supply-chain processes and also for fully exploiting the growing demand for different products at the consumer level.

• Management of nutrition and feed, as the major production cost (typically 50% or more of farm costs), is a key item in competitiveness. The cost of feed relative to the price received for the rabbit meat is a key benchmark indicator, as is the feed conversion ratio.

• Fertility and survival management. Careful management of breeders, disease, kitten survival and growers is essential for high performance. Neglect of any one activity can lead to excessive losses and undermine performance of the whole production activity. Eady (2005) estimates the gross margin/doe can be increased by 80% (from $143/doe to $255) just by increasing the kitten and grower survival percentage by 31% (from 65% to 85%).

• Growing demand for free-range animals. While free-range production typically involves challenges in protection from disease and predators and higher costs there is a growing group of consumers prepared to pay the price premiums of at least 50% over standard operations.

• Verifiable standards. There is a growing demand for animals from enterprises that have high and verifiable standards of animal welfare.

• Low-fat foods. There is a growing demand for foods, and meats in particular, that have a low level of unsaturated fat and can easily satisfy daily protein requirements. This is probably the main strength of the rabbit industry and offers potential to maintain a price premium over competing meats.

5.3 The flow of products and yield from the rabbit supply chain The flow of livestock and products, and yield of meat and co-products from the rabbit supply chain are shown in Charts 5.2 and 5.3. The data used is derived from a limited number of research publications and should be viewed as indicative only. Further research could be undertaken in this area to improve understanding about rabbit meat yields and why they vary. The product and co-product yields here are based on an average of yields identified by Oteku and Igene (2006) who noted that reported carcass yields of rabbits vary significantly from 56% (reported by Pla, Hernandez and Blasco 1996), to 50.7 – 58.5% (reported by Memeith, Radnei and Sipos (2004)) and around 55% by others. Oteku and Igene found yields were significantly affected by slaughter age with 10-week-old rabbits having a carcass yield of 46.74% compared to 50.04% for 13-week-old rabbits.

Chart 5.2 shows a basic value chain from a task perspective and Chart 5.3 the associated yields or conversion ratios. Value can be created in almost every activity in the supply chain by doing it more efficiently and reducing costs or improving quality with a view to achieving price premiums or simply being able to access an attractive market like the EU. In the production enterprise, value-creating options generally exist in achieving best practice in feeding, breeding, reduced mortality and general

48

management. During processing, options exist to create value through economies of scale, best practice for all slaughtering, cutting and grinding activities, sourcing rabbits with high carcass yield, undertaking specific value-adding activities like boning and slicing, packaging, and in creation of higher-value saleable co-products. The capture of co-product revenue is often neglected, as is the scope to reduce water and electricity consumption in processing. For rabbits the skin can be a major item, providing it meets processor requirements. Co-products can be captured and sold as original products where markets exist or consolidated and even transformed into oil, gas and fertiliser commodities. Table 5.6 shows a list of key technical issue to be addressed in supply-chain management for each activity.

High-value co-product opportunities exist in the biotechnology field for rabbits. Pelfreez Biologicals (http://www.pelfreez-bio.com/Home.asp) in the US has a range of products made from rabbit organs, glands, tissue and blood with prices ranging from about $US25.00 for a single rabbit testicle through to $US10,000/kg for rabbit brain acetone powder. Table 5.7 shows a sample of rabbit co-products and their associated retail prices. Pelfreez biological’s rabbit co-products are derived from NZ White rabbits. While the retail prices seem high there is considerable specialised processing, risk and storage involved. As shown in Figure 4.2, producers or processors could potentially derive perhaps $2.00/kg in supplying the raw material for these products.

Effective integration of quality managed activities along the value chain has emerged as an important requirement for competitiveness in all meat supply chains, including rabbits, and it is the main reason for processors integrating backwards into production and supply of growers and breeding stock and sometimes feed. Efficient integration can reduce the risk of low utilisation of capacity, especially at the processor level, and improve the reliability of supply for retailers and communication of market information from consumers to operators throughout the value chain. It can also enable quality management in each and every activity.

The value chain of intensive rabbit production and processing is complicated by the choices available to operators in terms of breed selection, how growers and materials are sourced, which markets are to be targeted, and how much processing and value-adding takes place at the slaughter and boning stages. There are several distinct, but highly integrated, stages in taking a rabbit from breeding though growing, early-stage processing and meat preparation to retailing, where it might be available as a 200-gram vacuum-packed loin cut or a whole 1.4 kg rabbit for a supermarket or gourmet delicatessen, where it could be in a fresh, frozen or chilled form. Specialist preparers can add further value through boning and stuffing, and adding components such as smoking, and sachets of sauces and marinades. Restaurant chefs add further value through meal design, material blends and cooking techniques. A doe, which could be valued at $20 may return a profit of over $72/year to the producer in Australia or nearly $100 by simply reducing mortality rates (Eady 2003).

49

Chart 5.2: Rabbit value chain activities

Elite breedingflock

Grandparentflock Parent flock Breeder shed Growing farm or

shed

2. Distribution

Freight, cartage &handling

3. Early stage processing

Arrival &stunning

Hang, kill, bleedand skin Evisceration

Offal & co-products

Gizzards, liver, heart,neck, blood, skins

Chill Wrap &vacuum pack

Weigh

Specialty markets,incl. industrialbiotechnology

4. Second stage processing

Cutting,separation &

boning

Boneless loin, boneless leg,fore-leg, hind-leg, hind parts

Adding ingredients ... stuffing, flavouringsWrap & pack

5. Distribution

Transport Warehouse Wholesale

6a. Retail - supermarket/gourmet deli

Storage Preparation Location & display Promote & sell

6b Food services - restaurant, hotels, caterers

Storage Meal design One-to-onecustomer service

Promote & sale

Location & ambience

End consumer

1. ProductionFertility and

survivalEggs Kittens Weaners

Effluent:compost, fertilizer

Feed

ID Code

Freeze Chill

Inspectors

Whole carcass

Shipping/air

6c Export

Fasting: 8-12hrsCrating

Holding

Angora ormeat rabbit?

Textiles

50

Chart 5.3: Rabbit value chain: yields of livestock and products

a.) Production

Female rabbit doe(7)

Male (Buck) rabbit(1)

Litter size: 8.1

Mortali ty:birth-weaning (20%)

Mortality: w eaningto slaughter (8%)

b.) 1st stage processingc.) 2nd stage processing

Bone-in carcass(52% yield) (1.4kg)

Loin (26%)(364g)

Rump (5%) (70g)

Arms (18%)(252g)

Bones (27%)(108gm,included above)

Boned-out meat,excluding skin (1.292kg)

Co-products Total:1.743kg (1.3 kg + 0.108 kg

transferred in from boningand 0.335 kg from skinning)

Disappearances -moisture loss etc.

(286g)

Offal (955g)

Skin (335g)

Fat (10g)

Bone. (108g)

Blood (49g)

Offal products:head (232g)liver (116g)heart & lung (35g)kidney (43g)tail & feet (89g)alimentary canal (440g)

skin (335g)

Renderedproducts orbiotech products:

Effluent (10,386g)

100g

Artificialinsemination

50 marketablegrowers/doe

weighing 2.8kg live

Litters/year/doe: 8.1

Rib meat(22%)(308g)

Legs (29%)(406g)

Water used (10litres/carcass)

+

Fertiliser (N; P))

d.) Effluent treatment and co-product recovery

Mortality: adults(20%)

Fasting weight loss: 0.1kg, net weight 2.7 kg

51

Table 5.6: Selected rabbit supply-chain issues at each activity

Activity Issues Feed sourcing Identify optimal rations for all groups.

Identify feed supply sources. Accurate records of feed supplies and inventory.

Production Identify target market (direct retail, food service etc.) and its requirements. Traceability system in place. Identification of processing enterprise to buy or accept stock. Design an efficient production system that meets 2.5- and 10-year plans. Identify breeding objectives and KPIs for livestock. Target survival and growers/doe. Manage feed requirements for all stock classes. Sheds and cages for optimal output. Implement plans with precision.

Preparation for sale Identify carrier and time of despatch Feed withdrawal 8–12 hours before despatch Catching, crating, holding, transport. Control losses and animal welfare.

First-stage processing Control losses and animal welfare. Traceability continued. Unloading, holding and hanging. Stunning method, slaughter and bleeding. Control carcass damage, automation of processes.

Skinning and evisceration Skin and hide preparation. Removal of forefeet. Removal of viscera and genital tracts. AQIS and veterinary inspection if exported. Offal and blood recovery, storage and processing. Minimise carcass damage.

Chilling and storage Sanitation and general compliance with HACCP. Chill to required temperatures.

Further processing Carcass separation; required cuts, grinding etc. Packaging, labelling, branding.

Retailing Positioning, discounts, promotion etc.

52

Table 5.7: Selected Pel-Freez Biologicals from rabbit co-products

Bio product category Product Price ($US)

Measure-ment unit

Whole blood Rabbit whole blood non-sterile sodium citrate young

72 500 ml

Acetone powder Rabbit brain acetone powder, fresh brains 100 10grams Antibodies Rabbit/tyrosine hydroxylase 225 150 UL Complement Rabbit complement H2 frozen 100 50 ml Hemostasis research products

Rabbit plasmin 550 1 mg

Organs, glands and tissue • Rabbit aorta young

90 2 items

• Rabbit whole eye young 50 2 items • Rabbit whole eye mature 70 2 items • Rabbit lung 55 1 item • Rabbit testicle trimmed 55 2 items Plasma Rabbit plasma non-sterile ACD 70 500 ml Serum Rabbit serum non-hemolyzed sterile delipidised 96 500 ml Specialty products Recombinant rabbit tissue factor 1,000 mg

Source: Pel-Freez Biologicals, November 2006

A grower that could be selling for $7.50/kg (carcass weight) at the farm level could be eventually a small part (30%) of a 350 gram meal of “rabbit cannelloni” priced at $28.00.

Chart 5.4 shows the differences in value for a selection of rabbit carcass and meat cuts. Prices vary according to the yield of boneless meat, the quality of the meat cut, the extra costs involved in preparing value-added portions, the extent of packaging and the supply-chain channel involved.

Chart 5.4: Rabbit meat product prices: $/kg

7.5

19.5

15.99

24.99

0

5

10

15

20

25

$A/kg

Farm gate price Whole carcass retail (1) Whole carcass retail (2) Boneless loin retail

Source: Various gourmet stores, on-line stores and delicatessens, NSW, Australia, November 2006.

Note: Whole carcass retail (1) was a branded product available on-line, whereas Whole carcass retail (2) was available at a specialty retail store as a house brand.

53

5.4 Size and structure in the rabbit value chain Establishment of an efficient-sized rabbit processing plant involves many challenges in balancing market demand with output from a minimum-efficient-sized plant. The prime driver is, or should be, the market and obtaining a good understanding of what quantity of product can be sold and what form and quality is required. The pressure to meet the demand for an efficient size has induced many overseas and local plants to undertake multi-species processing, typically poultry and rabbits. For this study we make the assumption that market demand could absorb around 400,000 kg, which would be supplied by 20 rabbit producers. This is still a very small plant compared to other meats (for example, poultry processing) and it may, in the absence of exports, need poultry as an added species to facilitate utilisation of capacity because it would actually amount to double the current output from Australia. The design of an efficient supply chain requires an initial assessment about the target market size and its requirements, and the efficient size for each of the activities along it. From this point, a supply-chain leader can set about sourcing products and services in the most efficient way possible from efficient-sized suppliers. The production starting point in the rabbit supply chain described here is one with each of the 20 producers having an elite breeding flock of seven does and one buck. This elite flock in each production enterprise can supply all the breeding material for a rabbit supply chain that provides 14,320 growers/producer (after losses and replacements) and eventually produces 289,400 growers and 420,418 kg of carcass meat/year for the supply chain.

The small elite flock supplies replacements for a grandparent flock of 14 does and two bucks which, in turn, supplies the replacements for 279 does and 40 bucks in a parent flock, which then supplies the 14,320 growers for fattening. In this model, rabbit growing is undertaken by 20 producers that each deliver 14,320 growers/year at an average liveweight of 2.8 kg and dressed weight of 1.456 kg.

5.5 Cost of production at the farm level Table 5.8 shows the basic assumptions used for the production enterprise. Following Eady (2005), the four key assumptions in production profitability are the litter size at birth (we use 8.1), mortality rate from birth to weaning (20%), feed conversion ratio (3.5) and post-weaning growth rate (45g/day). The average number of growers/doe delivered for processing is 48 in this model which is actually twice the Australian average, but it is achievable. In addition, the liveweight/feed-price ratio (9.5) has a major impact on profit. The feed conversion ratio of 3.5 is achievable at an age of 84 days, but it would be very important to assess market preferences for different sized carcasses and demand for further processed rabbit meats, all of which can affect the optimal marketing age, weight and feed conversion ratio. Table 5.9 shows the costs and returns, given the assumptions of Table 5.8.

54

Table 5.8: Rabbit production enterprise: main enterprise assumptions

Number of does per producer 300 Structure: closed group-7 elite does, 14 grand-parent, 279 parent, 43 bucks, AI (?). Bucks (% of doe numbers) 14.3 Death rates:

• breeders 5 • kittens 20 • growers: 84 days 8

Litter size on average 8.1 Litters/year 8.1 Average growers delivered/doe/year 48 Growers delivered per producer enterprise 14,320 Total finished growers delivered to abattoir by 20 enterprises 286,400 Average price received ($/kg live) $3.85 Average liveweight (kg) (2.8 kg) 2.8 Average carcass yield (%) 52 Average carcass price ($/kg) 7.40 Carcass weight (HSCW) 1.456 Average value of progeny sold or transferred 10.77 Enterprise revenue from growers per producer 154,289 Number of producers in supply chain 20 Days to sale weight 84 Feed conversion ratio20 3.5 Liveweight-to-feed price ratio 9.5 Labour (hours/doe/day) 7.8 Total hours of labour per enterprise (hrs) 2,342 Labour rate ($A/hour) 20.00

20 Feed conversion ratio (FCR) of 3.5 is derived from the average for the fully integrated operation, including feed for all animals: does, bucks, kittens and growers.

55

Table 5.9: Cost of producing rabbit growers, from doe to sale (or transfer) 2006

Projected income Value ($A) Progeny sold at 84 days (14,320 at 1.456 kg and $7.40/kg) 154,289 Culled for age (150 at 4 kg live and $2.00/kg) 1,200 Skin sale proceeds (14,470 at $0.60/skin) (not included) (8,682) Sub-total $155,489 Direct expenses Herd costs Artificial insemination ($3.32/doe) 1,030 Herd recording and testing (9.63/doe) 2,986 Animal health ($13.28/doe) 4,118 Sub-total 8,134 Shed costs Power and heating ($10.63/doe) 3,295 Sanitary supplies (detergents, gloves etc.) 2,896 Sub-total 6,190 Feed and water costs (160.25t feed) 64,901 Sub-total 64,901 Fuel and oil 6,500 Repairs and maintenance 5,500 Licensing and registration ($1/doe) 300 Sub-total 18,300 Overhead cash costs Paid operating labour 34,491 Administration 4,118 Sub-total 38,609 Overhead imputed costs Family Labour 8,237 Depreciation on buildings & Equipment: 13,628 Stock holdings cost of capital 0 Sub-total 21,865

Total 146,761 Costs/kg carcass weight 6.84 Costs/kg liveweight 3.56 Operating profit $8,728 Profit/kg at farm gate (l$/kg carcass-weight) $0.41

The total cost of production is estimated to be $3.56/kg liveweight. Again, feed is the major cost item in all rabbit production enterprises, accounting for 45% of total expenditure. The feed expenditure is based on an average cost/kg of $0.405, which may not be achievable in today’s drought-affected conditions where grain prices have risen substantially. It would be very important to make full use of feed formulator’s feed supplements and best feeding practices to enhance the productivity of feed and improve feed conversion ratios. The next major outlay is for labour (32% of total expenditure), with an estimated 2,342 hours of family and hired labour which are both based on a rate of $20/hour. Labour in the above budget generates revenue of $66.40/hour which is relatively low compared to a turkey enterprise ($87/hour) and pork enterprise ($131/hour), but probably acceptable to most owner-operators. Any move to decrease the quantity of labour input would need to consider carefully the impact on quality and the value of output. The liveweight-to-feed price ratio in the budget is relatively high (9.5:1) and therefore the potential to improve profitability through an improvement in the rabbit meat terms of trade seems to be limited.

56

The revenue from the production enterprise could be enhanced if the producer received the proceeds of skin sales. At $0.60/skin this would add $8,682 to producer revenue and all of it would be profit. Without skins included the net profit return to invested capital would be less than 5%, assuming capital employed of around $200,000. Further negotiating options exist with ownership of other co-products such as blood and offal.

5.6 Processing As discussed above, the costs of rabbit processing are closely related to plant size and utilisation of capacity. Costs increase with capacity, but not in the same proportion, providing capacity is utilised at a relatively high level of 85% or more. The processing activity described here is a plant with slaughtering capacity of 289,400 rabbits/year (420 tonnes carcass meat), which is fully utilised in a single shift. This is still a relatively small plant compared to some of the large multi-species plants in France. But it’s a large plant compared to Australian processing sizes, the largest of which is processing 50,000 rabbits/year. The cost of processing just 50,000 rabbits is likely to relatively high with fixed costs like land and buildings, plant and equipment and fixed labour accounting for over 30% of total costs. If the 50,000 unit plant had the same costs for these items as the 289,400 unit plant then its total processing costs would increase by over $2.00/kg. International markets would not absorb these higher costs. The challenge facing local processors is in making the transition to a large internationally competitive plant size without an assured supply of livestock. This has prompted operators in overseas countries to become vertically integrated in the same way the poultry processors are.

The revenue generated by this supply chain at the retail level is estimated to be $17.70/kg on average for a whole carcass weighing 1.456 kg, with potential to add $1.00/kg or more for ,say, 1.0 kg of co-products/rabbit. The total volume of edible meat produced by the supply chain is 420,418 kg and of co-products it would be around 289,400 kg, depending on the recovery processes employed. The total value of output at the retail level is estimated to be $7.5m/year, excluding co-products.

The processing costs for the plant are shown in Table 5.10. Apart from the cost of the live rabbit (not included in Table 6.10), labour is the major processing cost (35–40% of total) followed by packing and processing materials. Fixed costs (depreciation, fixed labour etc.) are estimated to be about $150,000/year. If two shifts were worked at full capacity for the full year it is estimated the processing costs would be $0.17–20/kg lower.

57

Table 5.10: Rabbit processing costs, 289,400 carcasses/year

Annual costs ($A)

Year 2006 Costs Average % of

total costs

Land & buildings (depreciation 2.5%) $64,350 10

Labour: variable 225,224 35

Labour: fixed 32,175 5

Plant and equipment 107,786 16.75

Packing and processing materials 128,699 20

Electricity 16,087 2.5

Fuel & oil 16,087 2.5

Repairs and maintenance 12,870 2.0

Transport 12,870 2

Water 3217 0.5 Effluent disposal (37g of BOD/bird); 4.0g of N and 0.55g of P. Disposed for land use & irrigation ($0.30/kL) 1,609 0.25

Product loss 9,652 1.5

Operating capital 12,870 2.0

Total $643,497 100

Processing cost $1.50/kg

At the conclusion of processing, and prior to wholesale and retail and any further processing, the costs are approaching $9.00/kg for the whole rabbit carcass. Beyond this point there are various options for the separation and preparation of the carcass that could add another $2.00/kg before wholesale, storage, transport and retailing. The retailer would be seeking a margin of 35–40% on this type of product.

5.7 The overall value chain for the rabbit supply chain The total average costs (including profits) for the rabbit supply chain are estimated to be $17.70/kg (including sales commission of 1%), at the retail level over the 420,518 kg of rabbit meat. These costs include the on-farm production; first- and second-stage processing, including evisceration, carcass splitting into untrimmed cuts, and second-stage processing into wholesale cuts, trimmed and boneless); distribution; storage and retailing. Revenue from the sale of co-products, which may amount to $1.00/kg or more for 420,518 kg, is not included. If this revenue was included as a negative cost it would effectively decrease the retail price by about $1.00/kg to $16.70/kg.

The single largest cost activity in this supply chain is the production activity ($6.84/kg, equivalent to 39% of total supply-chain costs), followed by retailing ($4.55/kg) and then first-stage processing ($1.50/kg), followed by second-stage processing (slicing, grinding etc.) ($0.60/kg). Chart 5.5 shows the estimated price spreads and shares of retail revenue for the different supply-chain activities. The percentage shares of activities along the supply chain are shown in Chart 5.6.

58

Chart 5.5: Rabbit supply chain activities: by cost ($A/kg)

0

1

2

3

4

5

6

7

$/kg

Feed Process(1)

Dist. &storage

GST

Activity

Chart 5.6: Value chain shares: by percentage of retail value

05

10152025303540

%

Production Processing Retail Other service

The largest cost items in the value chain are general operating expenses ($9.42/kg, which covers meat slicing, grinding and additional processing, co-product processing, water and effluent, advertising and promotion ($0.843/kg), rent, electricity, storage and other items (Chart 5.7). Labour accounts for 15% of total supply-chain costs and materials (including feed) for 16%.

The operating profit incorporated in the supply-chain budgets here is $0.58/kg. We have also incorporated a $0.57/kg product reject rate at the retail level to accommodate “past-expiry-date” events for products and a further reject cost of $0.02/kg at the processing level.

59

Chart 5.7: Resource use: rabbit value chain: farm to retail

Labour Set-up design

Investment

0123456789

10

$/kg

Materials Generalexpenditure

M & E

5.8 Main messages from the rabbit value chain There are several important features of the rabbit value chain: • The rabbit-meat production and processing supply chain in Australia is characterised by relatively

small producers and processors. Small-sized producers and processors face cost disadvantages that are accentuated if they do not fully utilise capacity and adopt best management practices.

• The second way of securing a competitive advantage for the rabbit supply chain is through product and service differentiation that customers are prepared to pay premiums for. While some suppliers are endeavouring to elevate their rabbit products to a distinct position in the market the low level of consumption/capita suggests there is considerable scope for improved understanding of what consumers like and dislike about rabbit meat. Further research could also examine why rabbit meat consumption is relatively high around the Mediterranean countries and low in North America and Australia.

• The trend towards further processing for consumption by the food service sector is an important development in opening up new marketing channels. It presents significant opportunities for processors and brand owners to develop rabbit meat products and educate customers about rabbit meat and how it can be prepared for maximum benefit to them.

• As it is with several of the NAP industry products, the full potential of rabbit meat as a high-quality source of low-fat protein is unexploited. It has high health rating, a reasonable feed-to-meat conversion ratio and relatively low per capita consumption. Like turkey meat it has potential to capture significant market share from both the chicken-meat industry and other meats with less favourable health ratings. Unlike the turkey industry, however, the level of consumer acceptance for rabbit meat varies a lot. It seems to be strong in some Mediterranean countries, but less so in most others. This suggests more resources are needed for product development and promotion.

• The prospects for rabbit meat also seem promising in the international market where global exports from developed countries have risen consistently over the past decade to over 27,000 tonnes/year. The most recent export prices would seem to be achievable by the most efficient producers and processors. To meet the demands of the export market, however, suppliers will need to implement full traceability systems, from feed supply through to production and processing. Failure to meet these requirements will constrain growth prospects for enterprises and the industry as a whole.

60

• There is still significant potential to improve the feed conversion ratio for rabbit meat production,

through improved genetics and improved feed product efficiency. Rabbit meat production has a less favourable feed conversion ratio and lower yield of saleable meat compared to turkey meat production. This adds to the cost disadvantage and is one reason why turkey meat (also with high health rating) sells for half the cost of rabbit meat. Further research could be undertaken to improve understanding about the high variation in rabbit carcass yields.

• As with other animal product supply chains the relatively high risk of not fully using capacity points towards some form of vertically integrated structure as a solution, though it’s important to recognise that resources and skills in product development, brand management and marketing generally take on added importance in a vertically integrated enterprise.

• The traditional competitive challenges facing all producers of animal products also apply to rabbit meat enterprises. This means ongoing attention to the growth in productivity of feed utilisation, yields of saleable meat or animals, and ongoing genetic improvement. The returns to good technical and financial management are likely to be just as high as they are with competing meat enterprises.

• For the future, rabbit meat producers may face growing competition from imports (if the domestic market expands), especially from countries with access to reliable supplies of low-cost feed and large efficient processing operations.

• Animal industries based on concentrates, grain and other purchased inputs face growing risks of supply shortages in Australia, with drought conditions leading to growing domestic feed prices. Product prices for imported meat products will not necessarily track the price of feed costs, especially where the source country has a reliable supply of low-cost feed grains. It is vital for producers to have access to imported grain for feed when local supplies run short and costs rise.

61

6. The silkworm value chain

6.1 Background Silk is one of the five major natural textile fibres, the others being cotton, wool, flax and hemp. Silk, however, is unique because, not only is it the strongest fibre, but is the only natural fibre in the form of a continuous filament (with a fibre of extreme length of up to 1,500 metres). The strength is thought to be due to the protein composition and structure in the cocoons. And although there is imitation silk, no-one has yet discovered how to fully replicate the fundamental features of natural silk fibre. Although silk has a small market share (less than 0.3%) and encounters all the same competitive pressures from artificial fibres as the other fibres, it seems to have consolidated its position in the global fibre market and has now moved ahead of hemp to be ranked fourth in the natural fibre market on a quantity basis (Table 6.1). The global fibre market was estimated to be over 54m kg in 2003 and to have risen to 61.4m kg in 2005.

Table 6.1 World textile fibre production, 1980–2003

Rayon and

acetate*

Non- cellulosic

fibres† Cotton Wool

(clean) Silk Flax Hemp (soft)‡

Total fibres

Year million kgs million kgs 1980 3,242 10,476 14,255 1,693 56 630 258 30,609 1981 3,204 10,827 13,823 1,715 57 611 223 30,460 1982 2,945 10,146 14,512 1,708 55 652 208 30,226 1983 2,929 11,076 14,315 1,733 55 786 184 31,078 1984 2,996 11,804 19,301 1,755 56 686 201 36,799 1985 2,931 12,489 17,482 1,746 68 745 218 35,679 1986 2,859 12,927 15,368 1,803 63 728 220 32,607 1987 2,825 13,741 17,641 1,850 63 956 215 37,291 1988 2,896 14,417 18,377 1,906 64 925 211 38,796 1989 2,943 14,747 17,364 2,010 66 816 180 38,126 1990 2,757 14,895 18,964 1,977 66 712 165 39,537 1991 2,434 15,276 20,700 1,783 67 699 199 41,158 1992 2,327 16,161 17,985 1,716 67 673 196 39,125 1993 2,346 16,586 16,889 1,670 68 621 118 38,298 1994 2,307 17,939 18,701 1,551 69 572 95 41,236 1995 2,413 18,377 20,352 1,483 112 647 56 43,439 1996 2,259 19,765 19,599 1,481 88 657 62 43,911 1997 2,304 22,396 20,035 1,415 85 619 67 46,922 1998 2,227 23,254 18,713 1,382 102 424 55 46,156 1999 2,074 24,485 19,089 1,370 98 489 53 47,657 2000 2,215 26,219 19,439 1,350 107 506 51 49,887 2001 2,083 26,382 21,475 1,293 131 608 61 52,056 2002 2,121 28,008 19,299 1,254 132 703 77 51,639 2003 2,260 29,498 20,430 1,231 139 737 85 54,379

*Excluding filter tow. †Excluding olefin. ‡Hemp starts a new series in 1996. Source: International Wool Textile Organization; USDA

Although the volume share of silk in the world fibre market is small it continues to have a high profile in the luxury end of the apparel-fibre market where silk tops are selling at the retail level for over

62

$200/kg compared to $80/kg for wool (November 2006). The high costs essentially reflect the labour intensity of sericulture compared to competing textile fibres. Its location in low-labour-cost countries improves competitiveness to some extent, but the traditional manual harvesting in these countries remains a constraint to development. Mechanised harvesting of mulberry has had minimal impact on the comparative advantage of low-labour-cost countries in the production of silk cocoons. While Japan was once a significant producer of silk cocoons that’s no longer the case and it now imports most of its raw silk requirements, mainly because of high labour costs in production. In 2005 over 99.5% of silk cocoons were produced in developing countries, with China, India and Uzbekistan accounting for 93% of world production (Chart 6.1 and Table 6.2).

Chart 6.1: World silkworm cocoon production, reelable (tonnes)

0.00

50,000.00

100,000.00

150,000.00

200,000.00

250,000.00

300,000.00

2000 2001 2002 2003 2004 2005

ChinaIndiaUzbekistanOther countries

Source: FAO Statistics 2006

63

Table 6.2 World production of silkworm cocoons, reelable (tonnes)

Year

Country 2000 2001 2002 2003 2004 2005

Afghanistan 500 500 500 500 500 500

Azerbaijan 100 100 100 100 100 100

Brazil 8,254.00 9,760.00 10,070.00 10,500.00 11,000.00 11,000.00

Bulgaria 50 50 50 50 50 50

Cambodia 270 280 280 300 300 300

China 223,503 269,003 286,003 290,003 290,003 290,003

Egypt 115 115 117 117 117 117

Greece 13 15 20 20 20 20

India 77,000.00 77,000.00 77,000.00 77,000.00 77,000.00 77,000.00

Iran 5,450.00 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00

Italy 60 60 60 60 60 60

Japan 1,244.00 1,031.00 866 765 665 600

Korea, North 1,000.00 1,200.00 1,400.00 1,400.00 1,500.00 1,500.00

Korea, South 2 3 3 3 3 3

Kyrgyzstan 300 150 150 150 150 150

Lebanon 52 50 50 50 50 50

Madagascar 50 50 50 50 50 50

Romania 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00

Spain 120 120 120 120 120 120

Syria 32 18 14 14 14 14

Thailand 4,000.00 4,000.00 4,500.00 4,500.00 4,500.00 5,000.00

Turkey 60 47 100 169 169 169

Uzbekistan 16,479.00 17,700.00 19,932.00 16,686.00 16,799.00 17,000.00

Vietnam 2,800.00 3,000.00 2,800.00 3,000.00 3,000.00 3,000.00

Total 342,454.00 391,252.00 411,185.00 412,557.00 413,170.00 413,806.00

Source: FAO Statistics 2006

64

The unit value of exported silk cocoons has fluctuated significantly over the past 15 years, from a peak of $US62/kg in 1990 down to $US6.50/kg in 2002 for exports from China (Chart 6.2).

Chart 6.2: Export prices: Silk cocoons, reelable: China (US $/tonne)

0.00

10,000.00

20,000.00

30,000.00

40,000.00

50,000.00

60,000.00

70,000.00

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Source: FAO Statistics 2006

There also seems to be significant variation within countries, with the Central Silk Board of Trade in India reporting prices of $US2.80 – $US3.60/kg for mulberry reelable, multivoltine cocoons in different regional markets. Only a small percentage (less than 0.5%) of silk cocoons are traded internationally (Table 6.3). Mostly the silk cocoons are processed further (reeling or filature stage) in the country of origin to a raw silk form. A note of caution is due about the export statistics for silk cocoons which include re-exports for countries like Australia.

65

Table 6.3 World exports of silkworm cocoons, reelable (tonnes)

Year Country 2000 2001 2002 2003 2004 Australia 2,630* 187 732 142 100 Austria Azerbaijan 7 12 Bangladesh Belgium 21 Brunei Darussalam Canada China 648.55 439 254 145 114 Egypt Iceland India 2 3 4 5 5 Indonesia 0.31 8 29 10 7 Iran 8.14 4 Japan 76 60 9 1 1 Kenya 27 33 Korea, South Malaysia 115 29 1 8 Mexico Netherlands 10 15 1 Pakistan Papua New Guinea Russian Federation Slovakia 1 South Africa 0.84 Sri Lanka 0.75 Sweden 1 Thailand Togo Turkey 13.5 1 21 15 US 61.45 22 12 44 41 Uzbekistan 480 340 428 400 234 World 4,036.54 1,095.00 1,485.00 811.00 592.00

*Australian exports understood to be re-exports. Source: Derived from FAO Statistics

The availability of raw silk prices is limited. The National Commodities and Derivatives Exchange in India were quoting raw silk imported from China at $US27.50 – 28.00/kg in September 2006, an increase of 14.4% over September 2005 prices for the same quality product.

There is significant variation in the yield of raw silk from cocoons, depending on whether they are bivoltine or multivoltine. Yong-woo Lee (1999) estimated the yield from multivoltine cocoons to be 9%, compared to 17% from bivoltine cocoons. This has an obvious effect on the relative prices of the two fibres. Dingle et al. (2005) reported on Japanese bivoltine cocoons having a yield of about 16.5% (117 kg of raw silk from 712 kg of cocoons). Silk reelers in China seem to be achieving around 13.75%. Bao-tong et al. (1984) reported on a yield of 7% from cocoons in the Pearl River delta of China.

66

Over the four years ended 2003 the average annual world production of silk fibre for textiles was estimated to be 127,000 tonnes. Over the same period the average annual world production of silk cocoons was 389,000 tonnes, suggesting around 30% of cocoon mass finds its way into fibre. This would appear to be all reeled or thrown silk fibre and excludes spun silk and noils. In fact, however, very little of the spun silk, noil and discarded fibre is wasted, though it sells at a discounted price. Different silkworm varieties also attract discounts and price premiums. The yield of high-quality thrown silk fibre from the cocoon after reeling could be around 30%, half of which could be first-grade silk. Appropriate cocoon drying techniques and reeling operations are vital to the production of high-quality silk (Yong-wu Lee 1999). Some evidence of the existence of problems with silk waste is demonstrated in the case of countries like Uzbekistan with annual production of raw silk of 17,000 tonnes and which exported over 4,000 tonnes of silk waste in 2004 (Chart 6.3).

Chart 6.3: Exports of silk waste (including yarn waste, discarded cocoons and garnetted stock): 2000–2004

0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

tonnes

2000 2001 2002 2003 2004

China Kyrgyzstan Uzbekistan Other countries

6.2 The flow of products and yields in the silk value chain The silk value-chain map is shown in Chart 6.4 with more detail in Chart 6.4a. For simplicity this is a mulberry silk chain, which accounts for over 95% of the world’s silk production. The silk value chain contains a potentially complex series of activities from mulberry production, through management of genes for both the plant and silkworm, reeling, spinning, weaving and garment make-up. This is done for a fickle textile, garment and fashion industry that is extremely cost-sensitive and forever requiring the best-quality materials and products. In addition, there are significant opportunities to capture value from co-products (Chart 6.5), some of which are more appropriately labelled joint products including the second-grade fibre, discarded cocoons and yarn waste that can be spun into yarn through the traditional systems. There are also opportunities for blending with other fibres, dyeing and screen printing. At each sub-activity there are various levels and combinations of capital, labour, outsourced services and materials to be procured and managed in the most efficient way possible to produce particular products and co-products.

67

Chart 6.4: The silk production, processing and service value chain

Mulberry CultivationActivity

Mulberry SilkwormTechnology, Feeding &

Rearing Plan

Seed stock selection: hybrids or pure Hatchery Cocooning

2. Sorting silk cocoons

Freight, cartage &handling

3. Early stage processing

Reeling-scouring

Brushing, picking,adding cocoons Unwinding

Direct co-products

Re-reelingand drying Twisting -

throwing Raw silk

Residual silk and noilsused for combing or

carding ... andtraditional spinning.

4. Second stage processing

Weaving orKnitting

Garment making: cutting sewing

Dyeing

Labelling, branding,booking, wrap & pack

5. Distribution

Transport Warehouse Wholesale

6a. Retail - fashion clothing (suits, coats, trousers, jackets, shirts, ties, lingerie, hosiery etc.)

Storage Preparation Location & displayin fashion shop Promote & sell

6b Specialty households and other industrial products (curtains, tablecloths, handbags)

Storage Product design One-to-onecustomer service

Promote & sale

Housing, other industrial

End consumer

1. Production

IncubatorEggs Larvae Pupae -adult

Effluent: fertilizeror fish feed?

Feed

Organzine; crepe;Tram or Thrown

single yarns.

Inspection andtesting

Shipping/air

6c Export

Cocoon selection:Colour, compactness, weight,

denier, grain or wrinkle, silkbave, reelability, shell ratio,

shape.

Harvesting

Blending

Secondary Coproducts: mulberry leavesfor nuraceuticals, fodder. Trees for timber. Pupae

for oil in cosmetics

Spun silk

Storage: Controlled temperature andhumidity

68

Chart 6.4a: Technological process for silk reeling

Source: Kusnaman 2004

There are several critical technical performance indicators for the silk value chain: • yield of mulberry leaf (t/ha) and quality • fecundity (number) • larval period (days) • yield/10,000 larvae • pupation rate (%) • cocoon weight (grams) • cocoon shell ratio (%) • filament length (m) • raw silk renditta (% of raw silk from 1.0 kg of cocoons) • reelability (%).

Rao et al. (2006) developed an evaluation index value, containing these indicators (excluding mulberry leaf) for the selection of polyvoltine germplasm stock.21

The conversion ratios for silk production as it travels along the supply chain are shown in Chart 6.6. The conversion ratios are derived from various research papers and, as noted above, there seems to be significant variation in yields of raw silk and spun silk from cocoons, as well as mulberry leaf yields.

21 There are estimated to be 3,000 or more silkworm strains available in the world for breeding. The varieties include univoltines, bivoltines and polyvoltines. The polyvoltines are relatively inferior to the others in most traits, but have higher survival percentages and general hardiness. In addition, they perform better in the tropics.

69

The basic parameters of yield used here are: • 475 eggs/female moth, 85% of which survive • 10% of cocoons are discarded • the average cocoon weighs 1.65g • the cocoon comprises 18% shell, 33% high-quality thrown silk, and 49% spun silk • from the thrown and spun silk an estimated 5% is separated as noil.

Chart 6.5: The silk production process and co-product commercialisation opportunities

Source: Kusnaman 2004

70

Chart 6.6: Silk production and processing conversion ratios

a.) Production

Female moth (1)

Male moth (1)

475 eggs/female

Non-survivors(15%) 70

Survival rate(85%) 405 larvae

405 silkworms(wt. 1.65g/cocoon)

365 reelable(90%)

b.) 1st stage processing c.) 2nd stage processing

600 grams from 365reelable cocoons,

weighing 1.65g

Shell (18%)0.3g/cocoon. Total 108 grams

Raw silk (200 grams)

Co-products:91g fibre

108g shellwaste water

10% discarded

Mulberry leaves: (12.5 kgleaves/kg cocoons)

Water: 23 kg water/kg cocoon

Spinning

Weaving

Garment make up

Dyeing

Spun silk (292grams)

Throw n silk Noil (5%)25g

66g

108g

6.3 Structure and competition in the silk value chain The silk value chain is complicated by several features including the historical dominance of China in production and processing and which has tended to feature vertically integrated structures that may not have developed in a fully market-driven economy. This situation is, however, changing and more specialised production and processing enterprises are emerging. Silk is a specialty natural fibre with a very small share of the total textile fibre market. This means it will have more appeal to niche markets and brands operating at the high end of the market. In these circumstances cost may be less important than quality. Nevertheless, silk is still operating in a highly competitive textile fibre market where developers of artificial fibres continue to come up with new products (e.g. Tencel, Lycra, and Polartec) that can often provide the same, and sometimes even better functionality than natural fibres. Imitation silk, made from polyester, is but one example. Shingosen, a group of fabric products made from ultra-fine polyester fibres with fibre diameter of 7–12 microns or less, is another example of current competition. The wool industry has been caught short in competing with artificial fibres as well as cotton over the past decade or more. There is, however, a resurgence of interest in natural fibres and that can be expected to generate benefits for silk and, maybe, even wool.

71

To identify key factors in adding further value to the silk industry, the study investigated and reviewed the information on comparative supply-chain activities, work practices and quality and cost control for competing fibres, mainly cotton (which accounts for about 38% of world fibre production) polyester (over 50% of world fibre production) and wool (now just 2.2% of the world textile fibre market). The reason for examining comparative features of competing supply chains was to improve understanding of cost and price differences between fibres and how performance gaps flow along the chain to be reflected in cost and price differences.

Silk has something in common with wool in the form of a scouring or boiling task. Silk cocoons are boiled or treated in ovens to dissolve the shell and gum, or sericin, that holds filaments in place, and to kill insects. This process, as with wool scouring, adds unavoidably to early-stage fibre processing costs compared with, say, cotton, which has a minimal cleaning task, and artificial fibres which have a zero cleaning task. The addition of an extra processing stage doesn’t necessarily make the silk and wool supply chains inefficient as such. It is more important that the boiling or scouring operation is performed and priced (if necessary) in the most efficient way possible and according to best management practices. Chart 6.7 shows a simplified snapshot comparison of silk and other fibre prices and their respective activities up to the spinning stage. It is almost impossible to compare yarns and fibres of different materials because of their different characteristics. The cotton data in Chart 6.6 is ring-spun combed cotton (Yarn Type 38/1), the polyester is also ring-spun (Yarn Type 30/1), the acrylic is worsted count (Yarn Type 1/32), the wool is 18 micron worsted yarn, and the silk is filature silk

Chart 6.7: Comparative textile fibre supply-chain costs ($A/kg clean)

0

200

400

600

800

1000

1200

1400

Cotton Polyester Silk Wool

Raw Material Distribution Cleaning and combing Spinning

Notes: The wool price is for 18 micron, long-term average The silk cocoon price (raw material) is based simply on the international reelable cocoon price (Sep. 2006 at Central Silk Board of Trade, India) which was $A4.75/kg, adjusted for a clean yield of only 30% for thrown silk. This actually overstates the silk price relative to wool. Source: Schute, Badgery, Lumby, Bell 2006; AWI (2006)’Sheep’s Back to Mill 2003–2004; study data There are several factors that affect the relative costs of the different textile fibres (Australian Wool Industry Future Directions Task Force 1999):

1. Control of production system. Silk, cotton and wool are natural fibres, but wool is subject to more variation in production and prices because it is produced on animals (which adds a further activity to the supply chain) and largely through extensive, rangeland production systems with variable climatic and soil conditions. In contrast, cotton is a plant and most is produced through intensive, irrigated production systems which facilitate greater control of processes and quality, all of which impact on cost and functionality. Silk, which is derived from the mulberry tree leaf, has potential to be closer to cotton because the mulberry tree could be irrigated and the cocoon stage tends to be a relatively

72

intensive activity with scope for greater control of inputs and output. The Sericulture Manual prepared by the Directorate of Sericulture in Assam illustrates the potential measures for control of the silk cocoon. Artificial fibres are produced with total control of inputs. Each of silk, cotton and artificial fibres can also be produced with shorter lead times (three months for silk if the infrastructure is in place, three months for artificial fibres and 10 months for cotton) than wool, at least for the long stapled worsted processing system which typically requires 12 months and up to three years lead time if livestock numbers are to be expanded.

2. Physical properties of fibres. Silk fibres have some unique properties that distinguish them from other natural fibres. It is a continuous thread with lengths up to 1,500 metres (most other natural fibres are less than 100 mm in length). While single fibres of silk have great strength, their low fibre diameter (less than 12 micron, compared to wool which has mainly 16–18 micron at the finest) means they require several filaments to be bound or twisted together to enable further development of textile products. But more generally there is more uniformity in the silk thread than the short-fibred wool and cotton. Dingle et al. described a list of 15 characteristics that silk fibre possesses and which underpin the price premium paid for silk.

3. Processing functional tasks. The silk-processing chain is longer than that for most other fibres, except wool which also requires scouring. The more involved cleaning task has an effluent discharge task associated with it. The task does, however, give rise to co-product possibilities.

There are several factors that influence the institutional structure of the silk industry: • Geographical location in countries with relatively low labour costs. • Price discovery and influence of China on prices. China, the major supplier, plays a leading role

in price discovery, a task of much reduced importance in both cotton (at least in Australia where prices are based on relatively open US markets) and artificial fibres (where firms are often vertically integrated or operating under sub-contracts).

• Closeness of producer to the processor. Both cotton and artificial fibre raw material production facilities are located close to and in a direct line with their respective first-stage processors. Silk is somewhat similar with cocoon producers in China located near the processors. In contrast, in Australia at least, most wool is directed through an auction system that features dislocated testing, appraisal, dumping, storage and transport support systems.

• Principal versus commission operations. The silk industry, in China at least, tends to have processors involved as principals who take ownership and responsibility for marketing and product development. In contrast, the owners of early-stage wool processing facilities, scours in particular, have traditionally been passive business operators with a tendency to operate as commission-based enterprises. Around 50% of tops and more in the case of scoured wool is produced on a commission or fee-for-service basis. In contrast, cotton gins have tended to be principal traders and nearly all artificial fibre operators operate as principals.

• Producer intervention beyond the farm gate. Silk appears to have very little intervention beyond the farm gate in the form of commodity taxes for R&D and marketing. Both wool and cotton producers have various research, development, promotion and marketing structures that extend beyond the farm gate. The statutory wool research, development and promotion levies are higher for wool than cotton (2.0% for wool, compared to 0.5% for cotton producers in both Australia and the US).

• Larger number of weavers with looms for hand-made garments. This is a distinguishing feature of the silk industry, especially in India where a large number of weavers with their own looms make hand-made garments like scarves. In contrast, the wool and cotton industries are dominated by big brands (like Benetton and Hugo Boss) who offer globally oriented supply chains built around recognisable brands. Suppliers of materials and services to these brands gain market access provided they conform to the requirements for quality and reliability of delivery.

73

6.4 Organisation of production and marketing in the silk value chain Establishment of an efficient-sized silk reeling plant involves many challenges in balancing market demand with output from a minimum-efficient-sized plant. The prime driver is, or should be, the market and obtaining a good understanding of what quantity of product can be sold and what form and quality is required. The design of an efficient supply chain requires an initial assessment about the target market size and its requirements, and the efficient size for each of the activities along it. From this point, a supply-chain leader can set about sourcing products and services in the most efficient way possible from efficient-sized suppliers.

6.5 Cost of production at the farm level The production starting point in the silk cocoon supply chain described here is based on 50 hectares of mulberry trees for the production of bivoltine silk from 200,000 plants. An important item in development of the mulberry plantation is the investment cost in cuttings. Dingle (2000) estimated cuttings would cost $3.00 each, which amounts to $60,000/hectare. The annualised investment cost on this amount is around $6,000, which translates to $4.60/kg of cocoons for a product that could sell for no more than $7.50/kg. To resolve this constraint we have assumed that just 3,300 cuttings would be acquired annually and the producer would be able to build up to the required 200,000 plants from this stock. More generally, we found the creation of a viable silk-producing enterprise in Australia would be a challenging exercise given the prevailing prices received in places like India and China. The assumed price of $7.50/kg was required to make the enterprise profitable, but this is 20% or more above recent world prices. It still may be achievable with a high-quality crop. The second option is to examine the cost structure in more detail. Table 6.4 shows basic assumptions used for the production enterprise, Table 6.5 the enterprise budget. Table 6.4: Mulberry and silk production enterprise: main enterprise assumptions

Number of hectares of mulberry/producer 10 Land cost: $4,500/ha, with implied rent of 5% of value ($/ha) 225 Water and irrigation investment: $178,500 with annualized depreciation cost of $7,500 7,500 Cuttings investment: 3,300 at $2.00/cutting ($). 6,600 Silkworm rearing investment: $100,000, with annualised cost of 10% ($) 10,000 Initial cuttings acquired (number) 1,000 Plants/ha in full production (bulked up from 3,300/year purchased) 20,000 Total plants in full production 200,000 Leaf yield (t/ha) 20 Total leaf (t/year/enterprise) 200 Silk cocoons (t/year/ha) 1.3 Total cocoons from enterprise (t) 13 Silk cocoon price received ($/kg) 7.50 Revenue per producer enterprise 60,450 Number of producers in supply chain 40 Feed conversion ratio22 15.4 Labour (hours/ha for mulberry planting, production & harvesting) 50 Labour (hours/kg of silk cocoons) 0.1 Overall labour productivity (hours/kg) 0.14 Total hours of labour per enterprise (hrs) 1,800 Labour rate ($A/hour) 20.00

22 Feed conversion ratio (FCR) of 15.4 is derived from the quantity of leaf fed to the silkworm to produce 1.0 kg of silk cocoons. There is significant variation in the results reported for feed conversion of mulberry leaf into silk cocoon weights, which range from 12.5 reported by Bao-tung to 36 reported by Dingle et al. in 2005 and 14.9 by Dingle (2000). Some of the variation is due to the type of cocoon and some to the tree variety.

74

Table 6.5: Cost of production, from mulberry to silk cocoons (or transfer), 10 hectares 2006

Projected income Value ($A) Silk cocoons (13,000 kg at $7.50/kg) 97,500 Mulberry stems Sub-total $60,450 Direct expenses Mulberry rootstock costs 6,600 Silkworm breeding purchases 4,080 Fertiliser for mulberries 5,500 Herbicides 839 Insecticides 1,450 Fungicides 2,500 Contract planting & root cutting 2,500 Water costs 2,000 Electricity and fuel on farm 3,600 Cartage 1,000 Repairs and maintenance 5,500 Licensing and registration 1,000 Sub-total of mulberry ($0.18/kg of leaves) 36,569 Overhead cash costs Paid operating labour 36,000 Administration 2,500 Sub-total 38,500 Overhead imputed costs Land rent 2,250 Depreciation on buildings & Equipment: 10,000 Depreciation on irrigation & water 7,500 Stock holdings cost of capital Sub-total 19,750 Total 94,819 Costs/kg cocoon 7.29

Operating profit $2,681 Profit/kg at farm gate (l$/kg silk cocoons) $0.20

The total cost of production is estimated to be $7.29/kg silk cocoon and at this price the production enterprise would struggle to be viable with bivoltine cocoon prices in China at less than $6.00/kg. Labour is a major cost item, accounting for over 40% of costs. The unit cost of labour is a major constraint to development of production, compared to that of competing countries like China and India where unit labour costs are less that $1.00/hour, especially for the many unskilled tasks involved in silk production. The Ministry of Textiles in India (2006) estimated that every hectare under sericulture in India creates work for 30 people in the silk value chain. If unit labour costs were, unrealistically, only $1.00/hour in Australia the total costs of production would be reduced by $34,200, equivalent to $2.60/kg, assuming labour productivity was not changed. We assume, perhaps also unrealistically, a relatively high level of productivity of 0.14 hours/kg, which would involve mechanised harvesting (refer to Dingle et al. 2005) and automated irrigation and other labour-saving technologies. By way of contrast, productivity in developing countries could be around 4 hours/kg (Kusnaman 2004). As a further contrast, in the cotton industry in Australia it takes 2.0 minutes of labour to produce 1.0 kg of cotton and deliver it to the gin and about 0.18 hours/kg to deliver 1.0 kg of greasy wool (0.25 hours/kg clean) (derived from Boyce 2005).

As it is with many NAP industries, feed is also a major cost item in all cocoon silk production enterprises, accounting for 39% of total expenditure. The feed expenditure is based on an average cost

75

of $0.18/kg for the mulberry leaf. Full mechanisation may reduce this cost. It would be very important to make full use of best agronomic practices to enhance the productivity of mulberry leaves and improve feed conversion ratios which we estimate to be 15.4.

The revenue from the production enterprise could be enhanced if the producer captured all the co-products and recycling opportunities on the mulberry production farm, as suggested by Bao-tung and Hua-zhu (1984) in their system for the integration of mulberry, sericulture and fish farming.

6.6 Processing As with other NAP industries the costs of silk processing are closely related to plant size and utilisation of capacity, especially in the spinning phase. Costs increase with capacity, but not in the same proportion, providing capacity is utilised at a relatively high level of 85% or more. The processing activity described here is a plant with 60,000 kg of annual raw silk output, which is fully utilised in a single shift. This is based on Yong-woo Lee’s (1999) conceptual framework. Using bivoltine cocoons, with a yield of 17%, the cocoon requirement would be 352,941 kg.

The revenue generated by this supply chain at the raw silk yarn level is estimated to be $50.00/kg on average, along with $690,000 for the sale of co-products and waste23. The total value of output at the raw silk yarn level is $3.69m for the reeling enterprise (Table 6.6).

This supply chain is barely viable, especially as we have not allowed for marketing. The price of $50/kg for yarn could be achieved providing the highest quality raw silk is produced. There is a market in India for this type of product where the “reelers” are currently importing about 8,000 tonnes/year of bivoltine cocoons, mainly from China, though the Chinese seem to be landing the product in India for less than $40/kg, even with import tariffs and dumping duties.

23 In their submission to the Indian Ministry of Commerce’s mulberry raw silk (not thrown) anti-dumping investigation (2003), the Chinese exporters submitted a sale price equivalent to $US20.50/kg for raw silk. The reeling costs were equivalent to 30% of the sale price and the recovery of proceeds from the sale of waste actually met the costs of reeling. In the processing budget (Table 6.6) the sale of waste only meets about 70% of reeling costs. This suggests that more revenue could be generated from the co-products, but because the budget applies to Australia it was considered important to have a conservative estimate.

76

Table 6.6: Reeled fibre processing costs: 289,400 kg/year

Annual costs ($A)

Year 2006 Reeling stage Average % of

total costs Raw cocoons 2,647,059 72.26 Land & buildings $105,000 2.87 Labour: variable $367,500 10.03 Labour: fixed $52,500 1.43 Equipment $175,875 4.80 Repairs $21,000 0.57 Supplies $50,400 1.38 Electricity $26,250 0.72 Fuel & oil $26,250 0.72 Transport $21,000 0.57 Water $5,250 0.14 Effluent treatment $2,625 0.07 Product loss $15,750 0.43 Operating capital $21,000 0.57 Profit $126,000 3.44 Total $3,663,459 100 Raw silk production (kg) 60,000 Unit value of raw silk $50 Raw silk revenue $3,000,000.00 By-products & wastage 690,000 Total reeling revenue $3,690,000.00

It is possible some of the costs could be reduced and the first place to look at is the cost of the cocoon which is $7.50/kg and derived from Table 7.5. The cocoon cost is equivalent to over 70% of total costs and should be around 65%. With a yield of 17% (silk% from the cocoon) the cocoon cost is equivalent to $44/kg.

6.7 The overall value chain for silk To examine the structure of the whole silk supply chain, from mulberry to retail, it is useful to examine a product in detail. The silk scarf is a common product. The current price of a silk scarf could range from $65 to $125. For example the on-line store ETSY had a reeled silk scarf (Illustration 6.1) on sale for $US79, which was about $A102 at the time of writing this report. The scarf weighs 134 grams (0.134 kg). This translates to a price/kg for the silk of about $760. By way of comparison the same retailer had a pure merino woven wool scarf (Illustration 6.2) for sale at $US49, equivalent to $A64.50. The silk scarf weighed 0.134 grams and the wool scarf weighed 0.210 grams.

77

Illustration 6.1: Reeled silk scarf Illustration 6.2: Pure merino wool woven scarf

The cost per kg of fibre used in the two garments is $A776 for the silk scarf and $306 for the wool scarf, which is made from 18 micron wool. Using the cocoon production and reeling cost schedules described earlier, together with estimates of weaving and garment finishing activities and costs, a full comparative assessment of the supply-chain costs for each product was compiled (Table 6.7). The main features to note in the comparison include:

• Labour accounts for an increasing proportion of costs as the products are developed further, from fibre production through to the finished garment.

• For silk the cost of labour grows even faster than for wool as it travels through the supply chain because of the typical use, at least for this product, of less-automated machines.

• The cost gap between the two products continues to widen at each stage, from the raw fibre through to the retailer, mainly because of the difference in relative labour costs between the two products.

• The retailing and wholesale margins for the silk product are almost double that for wool. One reason for this is that it takes almost twice as many transactions (8) to sell 1.0 kg of silk in the form of a scarf as it does for wool (less than 5).

78

Table 6.7: Comparative supply-chain costs, silk and woollen scarf ($/kg)

Pure wool fibre scarf Silk scarf Raw material 12.97 44.12 Labour, general 0.48 0.53 Labour, contaminant pickers 0.17 0.18 Effluent treatment 0.06 0.07 Other direct costs 0.28 0.30 Dye costs 1.62 1.78 Administration 0.13 0.15 Capital costs:

• fixed 0.65 0.71 • working 0.38 0.42

Total for dyed wooltop/cocoon 16.74 48.26 Yarn Raw material — undyed 15.02 46.37 Labour 3.42 7.00 Other direct costs 1.13 2.54 Dye costs 3.37 3.71 Administration 0.62 0.69 Capital costs:

• fixed 1.09 4.68 • working 0.16 0.35

Total for dyed yarn 24.81 65.34 Cloth Raw material — undyed 21.10 60.93 Labour for weaving,mending & mngt 7.37 44.22 Labour for picking contaminants 0.12 0.13 Labour for finishing 1.27 15.26 Dye costs 3.52 3.87 Re-finishing 0.11 0.12 Other direct costs 3.23 3.56 Administration 1.39 1.53 Capital costs:

• fixed 2.16 1.08 • working 0.26 0.13

Total for dyed fabric 40.54 130.83 Garment Raw material — undyed 36.28 122.54 Labour 16.80 58.80 Dye cost 6.22 6.84 Other direct costs 14.40 28.80 Administration 45.00 33.75 Capital costs 22.80 11.40 Total for dyed garment 141.50 262.13 Packaging 4.00 4.00 Wholesale margin 14.15 78.64 Retail margin 159.65 430.96 Retail price 319.30 775.74

Source: Study data an Australian Wool Industry Taskforce 1999; and own study data

79

6.8 Main messages from the silk value chain There are several important findings from the silk value chain study: • Sericulture is dominated by developing countries, with China and India the dominant suppliers

and where labour costs are less than 10% of those in Australia. • Further development of an Australian silk industry would need to have a clear strategy for dealing

with the comparative disadvantage Australia has in labour-intensive industries and activities, especially where there are generally low-skilled tasks.

• One option would be to focus on the highest quality bivoltine silk cocoons and to develop strong collaborative networks along the supply chain. India has a significant market demand for high-quality bivoltine silk cocoons. Spinning and weaving of yarn in Australia tends to be labour-intensive and to have trouble competing with imports, especially since the dismantling of import tariffs.

• Every cost item along the supply chain needs to be examined in detail, especially labour-intensive activities, with a view to adopting labour-saving technology.

• The productivity of mulberry leafs in generating high yields of first-grade cocoons is a key performance indicator.

• While the retail activity accounts for a relatively high share of the silk value chain costs, this may also present an opportunity to help retailers reduce the high cost of dealing with silk product suppliers.

• Silk is a very interesting fibre. It may be that there is a role for Australia to do complex research on the silk fibre (we have skills in this area), many features of which are still not well understood.

80

7. The dairy goat value chain

7.1 Background There were an estimated 809 million head of goats (slightly less than the estimated 1.1 billion sheep) in the world in 2004–200524, with about 20% used for milking (FAO Statistics 2006). An estimated 96% of the world’s goat herd is located in developing countries and 4% in developed economies. Australia had an estimated 400,000 head of domestically farmed goats in 200525. Foster, Jahan and Smith estimated there were 10,730 goats milked in Australia in 2003–2004, suggesting about 2.7% of the total farmed goat herd in Australia is used for milking, the rest for meat and fibre.

The estimated world production of goat’s milk was 12.4m tonnes (whole fresh equivalent is about 12.4bn litres) in 2005, of which we estimate 5.5m tonnes (44%) was used for making goat’s cheese; with an estimated 6.9m tonnes (56%) for other dairy products including whole milk, yoghurts and more exotic products like soap26. Compared to other sources of milk production a relatively large proportion of goat’s milk is produced in developing countries (Table 7.1). This is due to several factors including the relative labour intensity of production which would favour developing countries. The leading goat’s milk producers are India (2.7m tonnes, equivalent to 22% of world output), Sudan (1.3m tonnes), France (587,000 tonnes), Greece (495,000 tonnes), Somalia (393,000 tonnes) and Iran (393,000 tonnes).

Table 7.1: World milk production, by species, 2005 (fresh milk) (tonnes)

Buffalo milk Dairy cattle Goats Sheep Camel Total Australia *(10,149,000) (4,800) (2,300) (10,156,100) Developed countries 174,105 348,805,285 2,704,750 3,245,705 354,927,545 Developing countries 76,909,346 180,857,274 9,735,088 5,366,544 1,310,722 274,178,975 World 77,083,451 529,662,559 12,439,838 8,612,249 1,310,722 629,108,820

Source: FAO Statistics 2006, Foster et al. and study estimates

Notes: *1. FAO Statistics do not include goats and sheep’s milk data for Australia and the estimate here is derived from Foster et al., adjusted with information from this study. 2. Australian data is included in Developed countries. 3. The Australian, Developed countries and World data are adjusted up from FAO data to include Australian data for sheep and goat’s milk.

While goat’s milk represents just less than 2% of the world’s total milk production, goat’s cheese represents about 2.4% of world cheese production (Table 7.2), suggesting a level of comparative advantage for goat’s cheese over other cheeses. It is also noticeable that although developed countries account for only 22% of fresh goat’s milk production when it comes to goat’s cheese production the share of developed countries’ output is almost 50%. From this it is deduced that over 95% of fresh

24 It’s not clear whether the FAO statistics include wild goats, probably not; so the world number of goats could be some multiple of this estimate. 25 When feral goats are included in the census the number of goats rises significantly in Australia. In 2003, according to the MLA, AQIS inspected 1.1 million goat carcasses and over the period 2001–2003 the average carcass inspections exceeded 1m/year. Over the same period exports of live goats averaged over 100,000/year. The total number of feral goats was estimated to be 2.6 million in 1996 and this number is assumed to have changed little over the past decade. 26 Working on a conversion ratio of 12 litres of fresh goat’s milk to make 1 kg of cheese the world’s estimated 438,012 tonnes of goat’s cheese would have required 5,256,144 tonnes of fresh goat’s milk.

81

goat’s milk is used to make cheese in developed countries, but in developing countries only 27% is used for cheese and the rest probably for whole milk (Chart 7.1). The 95% figure, derived from FAO statistics, is probably not correct and it may overstate the production of goat’s cheese, perhaps because of the inclusion of goat’s cheese blends as pure product.

Table 7.2: World cheese production, by species, 2005 (tonnes)

Buffalo

Dairy cattle (whole milk)

Dairy cattle

(skim milk) Goat Sheep Whey

cheese TOTAL Australia n.a. (380,000) (217) (182) (380,399) Developed countries 14,329 13,510,788 1,619,694 216,211 392,499 54,407 15,807,928 Developing countries 249,750 1,399,263 542,208 221,801 273,861 560 2,687,443 World 264,079 14,910,051 2,161,902 438,012 666,360 54,967 18,495,371

Source: FAO Statistics and Foster et al., and own estimates Notes: 1. FAO Statistics do not include goat’s and sheep’s cheese data for Australia and the estimate here is derived from Foster et al. and this study’s estimates. 2. Australian data is included in Developed countries. 3. The Australian, Developed countries and World data are adjusted up from FAO data to include Australian data for sheep’s and goat’s milk. 4. There are unofficial comments that Australian production of goats cheese could have been 500t in 2005, but there is no background survey data to that estimate.

Foster et al. (2005) estimated that about 54% of Australian goat’s milk production was used for cheese, 44% for whole milk, and 2% for yoghurts. Based on these estimates, compared to global goat’s milk allocations to cheese in developed countries, a relatively low proportion is used for making cheese in Australia (54% compared to over 95% in developed countries overall). The small industry in Australia could be another reason for the difference, but more likely it is due to blends.

World goat’s cheese output (438,012 t) is relatively small compared to that from dairy cows and accounts for about 2.3% of total world cheese production implying it is a specialised product for a niche market.

Chart 7.1: Milk and cheese: world: by country and product group: market shares: 2005

0.00

0.20

0.40

0.60

0.80

1.00

Proportion

Developed countries Developing countries

Whole goat's milk Goat's cheeseTotal world all milk Total world all cheese

82

World imports of goat’s cheese were estimated by the FAO to be 530 tonnes in 2004, valued at $US1.873m. The largest importer was the US with 195 tonnes, valued at an estimated $US708, 000, an average value of $US3.63/kg. Again, this product may include blends of goat’s and non-goat’s cheese.

The value chain of dairy goat production and processing in Australia is in sharp contrast to the traditional dairy cow value chain. The industry is small, reliant on niche markets, somewhat unregulated, at least from a marketing perspective, and features an environment that encourages innovation and entrepreneurship. But there are some signs of a more regulated environment emerging. For example, in July 2003, the NSW Food Production (Dairy Food Safety Scheme) Regulation 1999 was amended to include goat and sheep farms that supply goat’s milk, speciality cheese and yoghurts for human consumption. These businesses now require a license to operate. The Safe-Food NSW Authority has developed a code of practice for all milking animals and is conducting microbial testing on goat’s milk. The Authority is assisting the goat dairy industry in implementing food safety programs and has been auditing businesses since 2004. Grevillia Goats of Bega was the first goat’s milk producer voluntarily certified by Safe-Food NSW as having implemented a food safety program for hazard analysis at critical control points (HACCP). HACCP is basically a value-adding practice.

Compared to the dairy cow structure the dairy goat industry is much less organised into cooperatives and tends to be focused on individual enterprises and more vertically integrated. The Appellation d’origine contrôlée (AOC) (a set of government rules and regulations that cover how various products are originated and controlled) in France describes four main organisational categories for approved cheese production in France (Table 7.3). With goat’s cheese there are many Fermier and Artisanal structures (see Table 7.3) in most countries, though use of unpasteurised milk for cheese is prohibited in many countries including Australia27. In the Netherlands, however, three Dutch cheese processors (Heijkoop, De Jong and CBM) are reported to have formed a joint venture to process and market goat’s cheese with a view to improving efficiency and lowering costs (http://www.foodproductiondaily.com/news/ng.asp?id=30844-dutch-courage). This suggest a more cooperative or industrial structure, the first of its kind for goat’s milk and posing a new level of international competition for goat’s cheese.

Table 7.3: Organisational classification of cheese production in France

Organisational category Description Fermier Where an individual farmer manufactures the cheese on-site using traditional methods and

unpasteurised milk. All milk must come from animals raised on that farmer’s farm. Artisanal Where a single manufacturer purchases milk from another farm (or uses their own) to make

cheese. Cooperative Where a group of local dairy farmers pool their milk to make a cheese as part of a collective. Industrial Where an industrial process is used to make cheese on a large scale.

The typical small enterprise size28 in the goat industry means it has high unit costs of production29. Nevertheless, it is experiencing rapid growth in Australia, from a small base of around $1m of sales in 1996 to over $4m in 2005. Export data is limited, but it is probably a very small quantity because imports are needed to satisfy local demand and were estimated by Foster et al. to be 150 tonnes in 2003–2004. (Note: this estimate is not included in FAO Statistics estimates of total goat’s cheese imports).

27 While its illegal to use unpasteurised milk for making cheese in NSW and QLD it is legal to sell unpasteurised milk direct to the public (Evans 2004). 28 As an example of relative size, the average goat enterprise could be producing around 100,000 litres/year from 200 milkers (Stubbs & Abud 2002) compared to 1,300,000 litres/year from 240 cows (5,400 litres/cow), the average output of a Gippsland dairy cow farm in Victoria. 29 Production costs for goat’s milk are about 250%/litre higher than for cow’s milk in Australia (see below).

83

There are numerous types of cheeses that can be produced (at least 545 by our estimate, mostly within the 10 categories listed in Table 7.4), many of them in France, but also many in other countries, especially Greece and Italy. It is a reminder of this famous French quote:

“Comment voulez-vous gouverner un pays qui a deux cent quarante-six variétés de fromage?” (“How can you govern a country which has two hundred and forty-six varieties of cheese?”) (cited on “List of French cheeses” at http://en.wikipedia.org).

Table 7.4: Cheese product categories

Fresh curd soft Fresh curd textured Fresh curd matured Fresh curd marinated White mould Blue mould Washed rind Cheddar style Semi-hard cooked style Hard cooked style

Source: Australian Specialist Cheesemakers Association.

The typical composition of goat’s milk is shown in Chart 7.2. (Note: there is some variation in the estimated components of goat’s milk. For example, compare Chart 7.2 with Table 7.5). While goat’s milk has similar constituents to cow’s milk there are important differences in fat and protein types and structure (St-Gelais et al. 2003) and lactose content. Goat’s milk has smaller diameter fat globules than cow’s milk (at 3 micron, about half the size of cow’s milk). This is seen to impart a firmer structure in the goat’s cheese, compared to that of cow’s milk, and to make it more digestible. It also makes fat separation difficult in making butter and cream. Goat’s milk, however, does not contain carotenoid pigments and this leaves goat’s cream a relatively white colour compared to cow’s cream. Compared to cow’s milk, goat’s milk also contains more caproic, caprylic and capric acids and this probably adds to the flavour and odour of goat’s cheese. Furthermore, goat’s milk contains fewer types of casein than cow’s milk, but more serum proteins and more non-protein nitrogen. St-Gelais et al. also noted significant differences between the milk compositions of different goat breeds. The Nubian and LaMancha breeds stand out from the milk of other goat breeds. They are richer in fats, fatty acids, minerals, total proteins and caseins. In addition, the milk obtained from the Nubian breed has a casein profile that differs considerably from that obtained for the other breeds. These differences need to be recognised in processing and product development. In Australia, the Saanen, British Alpine and Toggenburg seem to be popular, judging by the listings for sale on the Dairy Goat Society of Australia’s member website (http://home.vicnet.net.au~goats/dgsavictoria/adverts.htm.

Goat’s milk has a following of people, especially children, affected by allergies to lactose and proteins in cow’s milk and other products. It has higher digestible protein and also has a relative high buffering capacity that has a medicinal impact in certain situations. High buffering means the lactic acid bacteria need to produce more acid from lactose in order to lower the pH of the milk. Two cheeses that have identical pH values, but sourced from milks with different buffering capacities, may have very different lactic acid concentrations. This property is seen as useful for people with stomach ulcers.

84

Chart 7.2: Goat’s milk: composition by main constituents

Raw goats milk

Fat (3.28%)

Milk solids(11.4%)

Milk solids-not fat (SNF)(8.13%)

Water (88.6%]

Minerals(0.64%)

Lactose(4.29%) Protein (3.2%)

Whey protein (0.7%)Casein (2.27%)

Vitamins (A, B1, B2, C, D)Potassium (0.21%)Calcium (0.11%)

Source: St-Gelais D., Baba Ali O. and Turcot S. 2003, 'Composition of Goat's Milk and Processing Suitability',Food Research and Development Centre, Saint-Hyacinthe, Quebec, Agriculture and Agri-Food Canada

Casein (0.23%)

Other minerals(P,Mg,Na)(0.13%)

The unique properties of goat’s milk means it can be a stand-alone milk or cheese or be used to impart some benefits as a blend with other milk and milk derivatives, especially cow’s milk. While the main distribution channel for dairy goat products has historically been through the smaller gourmet and speciality retail outlet, this is changing and the supermarkets are now starting to emerge as an important channel. This reflects, in part, the growing presence of gourmet sections in supermarkets, but it also reflects the growth in demand for dairy goat’s milk, cheese and yoghurts, as well as exotic products like goat soap.

While the dairy goat enterprise operates in a more specialised product area than the dairy cow enterprise it still faces the traditional pressure to achieve competitive levels of growth in productivity to survive against international competition in particular. Low-lactose dairy cow’s milk is now readily available in Australia at less than half the cost of goat’s milk and the dairy cow industry is very active in its research and development of new products with medicinal and health benefits. With costs rising faster than prices received there is the typical long-term downward trend in the “terms-of-trade” with cow’s milk, though it may be more moderate with dairy goat’s milk. In this environment, for producers to achieve income growth, growth in productivity is essential.

85

Table 7.5: Goat’s milk compared to cow’s milk and human milk

Goat Cow Human Fat % 3.8 3.6 4.0 Solids-not-fat % 8.9 9.0 8.9 Lactose % 4.1 4.7 6.9 Nitrogen x 6.38% 3.4 3.2 1.2 Protein % 3.0 3.0 1.1 Casein % 2.4 2.6 0.4 Calcium % CaO 0.19 0.18 0.04 Phosphorus P2O5 % .27 .23 .06 Chloride % .15 .10 .06 Iron (P/100,000) .07 .08 0.2 Vitamin A (iu/g fat) 39.0 21.0 32.0 Vitamin B (ug/100 m) 68.0 45.0 17.0 Riboflavin (ug/100ml) 210.0 159.0 26.0 Vitamin C (mg asc. a/100ml) 2.0 2.0 3.0 Vitamin D (iu/g fat) .07 0.7 0.3 Calories/100ml 70.0 69.0 68.0

Source: http://www.realfoodliving.com/goatmilk.htm

The five main drivers of dairy farm efficiency include: • Dairy shed technology to improve labour productivity and enhance quality control. • Proportion of land irrigated, which may be less important for dairy goats than it is for the typical

dairy cow enterprise, though this may be due more to neglect of this resource for dairy goat production.

• Feed concentrates used. While less significant than technology and irrigation, the high-performing dairy goat enterprise is likely to rely, like the dairy cow enterprise, on feed concentrates, especially during droughts and to smooth out normal seasonal fluctuations in pasture growth. Achieving the optimal combination of pasture, supplementary feed and use of irrigated pasture is one of the major challenges for dairy production from all species, with dairy cow production the clear leader of the field.

• Farm size. Large farms tended to be more efficient, though this has to be considered in the context of market demand and what amount and quality can be sold. McGregor (1998) recommended a herd size of 250 does to achieve a low-cost operation. Canadian producers are aiming for 300 milking does in a viable enterprise (www.ontariogoatmilk.org/Industry.htm), but these are all very small operations compared to typical dairy cow enterprises.

• Yield of milk per goat. Yields for dairy goats vary significantly across breeds and feeding conditions. An average yield in Australia could be 700 litres/lactation, ranging from 2–3 litres/milker/day over a typical 300-day lactation period. As it is with dairy cow enterprises, high-efficiency goat enterprises are likely to feature relatively high yields (probably 800 litres or more/milker) compared to 700 litres for the medium-efficiency groups and less than 600 litres for the low group.

• Australian dairy goat’s milk yields (Chart 7.3), while well above the world average of just 82 litres/milker, are still below those achieved in the Czech republic (1293 litres/milker) and Germany (777 litres). Some producers in Australia are understood to be obtaining average yields of four litres/day.

86

Chart 7.3: Dairy goat yields: Australia and selected countries: 2005

Australia France

Developing countries

Somalia

0

200

400

600

800

1,000

1,200

1,400

Litres/milked goat/year

World CzechRepublic

Developedcountries

India

Source: FAO Statistics 2006 and various Australian sources

Dairy goat farms face the same challenges as those faced by dairy cow farms and especially if the industry is to expand into export markets. This means coming to grips with larger enterprise size, higher female productivity and optimising stocking rate and feed supplements. Nevertheless, while intensification and feed supplements can often improve productivity and profitability, there are often higher risks, and sometimes the response to supplementary feeding may be relatively low, especially when goats are already grazing high-quality pastures. This underlines the importance of whole-farm management, the timing of feeding, best management practices and cost of inputs used.

7.2 The flow of products and yields in the dairy goat value chain The stages in the dairy goat value chain are shown in Chart 7.4. There are two basic product streams at the farm level: milk sales and livestock (comprising culled does, male kids and replacements sold for re-stockers). The cheese value chain is shown in more detail in Chart 7.5. The livestock, milk (and its derivatives), and by-product flows for dairy goats are shown in Chart 7.6. The technical ratios are derived from previous studies and searches of various publications and are assumed to be similar to dairy cow conversion ratios, with variations according to feed, environment and breeds.

7.3 Size and structure in the dairy goat chain The breeding structure and numbers within each activity along the goat supply chain are based on the requirements for a minimum-efficient-sized milk and cheese processing plant, which is judged to have the capacity to process at least 350,000 litres/year and 1,200 litres/day or more when operating at full capacity. The design of an efficient dairy goat supply chain requires an initial assessment of the efficient size for each of the activities along it, along with the risk of being able to fully utilise whatever capacity is settled on. It is the least cost size of operation for each activity that governs the procurement requirements that flow from it and is typically the processing activity where economies of scale are strongest. This results in a natural supply chain leadership position for processing.

87

Chart 7.4: Dairy goat value chain

1. Production

Elite breedingherd

Grandparentherd Parent herd

Does culled, male kids soldand replacements for

re-stockers ...export orlocal

2. Raw Milk Distribution

Raw milk storage,refrigeration, freight,cartage & handling

3. Processing

Pasteurisation

Water, waste,detergents,

sanitisers

Weigh

Specialty markets,incl. exports for kids

4. Effluent & emissions

Wrap & pack5. Product packaging, storage distribution

Transport Warehouse Wholesale

6a. Retail - supermarket/gourmet deli

Storage Preparation Location & display Promote & sell

6b Retail - Food service sector (restaurants, catering etc.)

Storage Meal design One-to-onecustomer service

Promote & sale

Location & ambience

End consumer

LandPastureIrrigation

Rainfall and Purchased WaterBuildings and equipment

Purchased and GrownFeed supplementsGenetics

Risk managementWhole farm management skills

Farm inputs

Milkextraction

Skim milk

Whole milk

Whey

CurdMatured Hard Cheese (cheddar,

mozzarella, provolone etc.)

Rennets, penicillen, milkfat, vinegar,enzymes

WMP

SMP

Separation &standardisation

CreamSkimmed milk

Whole milk

Homogenisation & deodorisation

Casein

UHF milk

Soft cheese (fetta, chevre (French goatcheese), cream cheese,cottage cheese)

Packagingtype

88

Chart 7.5: Goat’s cheese value chain map

Raw milk inflow Pre-treatment &standardization

Maturedcheese

Pasteurisation

CoagulationSlicing

Draining

PressingBrine sprickling

Maturation

Curd

FermentsRennet

CaKl2, KNO3

Conditioning

Early stage processing

Packaging

Raw materials

Cheese milk

Lactic, ripened or culture butterWhey path

Whey

Filtration

Filtered whey

Mixing &Pasteurisation

SugarFlavouringColouring

Whey drinks

Conditioning

Matured cheese path

89

Chart 7.6: Dairy goat value chain conversion ratios and product yields

a.) Production

Female does (300)

? Buck (8) or AI

2.2 egg/femaleNon-fertile eggs

(%)

Fertile eggs(94%)

600 kids(wt.3.5kg)

420 sold; 108 retained;72 losses

(wt.16 kg @ 56 days)

b.) Milk processing

Fresh goat's milk[354,269 litres]

Whole milk [50%]177,134 litres

Cheese [30%]106,281 litres

WMP [15%]53,140 litres

SMP [5%]17,713 litres

Whey powder ['x'kg]

460,550 litresWaste

Waste treatment

'x' kg w hey liquid

Waste water discharge[1.3 litres/litre of milk

input]

Multiple ovulation and embryotransfer

'x' eggs/female

Artificialinsemination?

354,269 litres/year/enterprise 1 enterprise354,269 litres for factory

176,249 litres of saleablepasteurised goat milk

12,754kg cheese

99.5%conversion

12% conversion ratio

5,314 kg WMP

1,913 kg SMP

10.8% conversion

10.8% conversion

9.8% conversion

w hey permeate streamcondensate

ionic w astedetergents

Irrigated farm land

Water consumption[1.9 litres w ater/litre of

milk input]. Total forplant = 673,111

litres/year

Biological Oxygen Demand (BOD) - 1,500 mg/l ... 691 kg/year

Chemical Oxygen Demand (COD) - 2000 mg/l ... 921kg/year

Fat - 150 mg/l ... 69 kg/yearTotal Nitrogen (N) - 100 mg/l ...46 kg/year

Total Phosphorus (P) - 30 mg/l ...13 kg/year

c.) Effluent and waste recovery and recycling

90

It is at this point that a supply-chain leader is likely to emerge. The supply-chain leader can set about sourcing products and services in the most efficient way possible from efficient-sized suppliers of raw milk. Sometimes the processor will find it efficient for suppliers to be organised into cooperatives which can help in facilitating regular supply of material and in negotiating acceptable prices for sustained supply of raw milk from producers.

For the dairy goat supply chain the basic structure described here is a relatively small vertically integrated farm of 300 breeders-milkers, with 50% of the milk made into fresh whole milk for distribution to retailers, 30% made into cheese (hard and soft), 15% made into whole-milk powder (WMP), and 5% into skim milk powder (SMP). This is a strictly hypothetical example. This model is a variation from most of the other enterprises assessed in this study, which are not vertically integrated and typically comprise a number of producers selling to a large-scale processor that exploits the available economies of scale. The problem with applying this business model to goats is that the goat producer has to be located near to a processor and that may be neither practical nor an economically rational action to take, especially with land values in traditional dairy cow areas being very high. The other reason, perhaps the main reason, for establishing a vertically integrated business is to enhance control of marketing and brand development and reduce risk30. As a relatively small business operating in a niche market there are stronger reasons for developing a vertically integrated business than would be the case with dairy cow production where large and efficient-sized processors exist. It is relevant to note again that it is the relative responsiveness of suppliers and end-market consumers to price changes that influences the respective prices and shares of the activities undertaken in the dairy goat value chain. The more inelastic their supply, the more will be the gains captured by the producers (Freebairn, Davis & Edwards 1982) when they introduce a new technology, such as an improved high-milk-yielding dairy goat breed. A vertically integrated goat’s milk breeding, production, processing and distribution system, operating under a focused branded image, enables the enterprise to control supply and capture the gains from their investment in new technology and development of differentiated products that can yield price premiums, especially when demand is inelastic.

Consumer demand for goat’s milk products, however, is again affected by substitute dairy products and prices (sheep’s milk in particular, and modified dairy cow products like low-lactose cow’s milk to a lesser extent) so there is always this competitive environment to be considered when setting prices for the end user. Moreover, it’s important for managers and owners to recognise that vertically integrated structures place greater demand on operators to acquire skills in both production and processing as well as marketing.

The production starting point in the dairy goat supply chain designed here is, again (like the other supply chains), an elite breeding herd of 35 females and one male. This elite herd can supply all the breeding stock for a dairy goat supply chain that produces 600 kids/year and eventually produces 354,629 litres of milk/year, 50% of which is made into whole goat’s milk and the rest into cheese, WMP and SMP. The end product is a combination of cheese, WMP, SMP and whole-fluid milk sold in the supermarket. The elite herd supplies replacements for a grandparent herd of 70 females and two males which, in turn, supplies the replacements for 195 commercial females and eight males in the parent herd. In this model, production is undertaken by the single vertically integrated producer that turns out 354,629 litres of milk and 420 kids for sale each year, after losses and replacements. The economies of scale in the farm stage of dairy goat production are unclear and untested because even if the lowest-cost stocking level was, for example, 2,000 breeders (which we suspect it probably is) there is the problem of marketing the output at price premiums.

30 Stuckey (1985) found that, while most industries prefer to buy or sell into open markets, when reliance on arm’s length markets is too expensive or too risky (because of the risk of price exploitation or quantity rationing during the industry’s booms and slumps) they will be more inclined to vertically integrate. These conditions occur when four industry structural factors are present: a) small number of buyers or sellers (e.g. single processor); b) transactions occur frequently between the parties (e.g. daily milk deliveries); c) assets are durable and specific to the activity and act as a barrier to exit (e.g. dairy processing equipment); and d) significant amount of uncertainty exist about future industry conditions.

91

7.4 Dairy goat product analysis In the dairy goat supply chain there are many different processing options, depending on the product and market requirements. The dairy goat business model described here has two basic income streams, dairy products and livestock including: • whole fresh milk • cheese • yoghurt • WMP • SMP • male kids • female kids suitable as replacements for re-stockers • culled does.

There are numerous further product possibilities within these groups, especially in regard to the cheese types, yoghurts and milk modifications, not to mention more exotic options like skin-care products, vitamins and nutrition, perfumes and cosmetics.

Readers wishing to establish a dairy goat enterprise are referred to the 2002 RIRDC report by Stubbs A. and Abud G., which describes details on physical requirements, especially infrastructure and feeding. For more detailed information about the meat side of goats, including carcass and co-product yields, the notes by McGregor (2006) and Pinkerton (2006) are useful and provide the base for the estimated yields of meat from male kids should the producer wish to continue down this value chain.

Each situation for establishing a new business like a dairy goat enterprise requires detailed and careful analysis to ensure it is designed and developed according to capacity and resources available and the market segments being pursued.

The total costs (including profits) for delivering and presenting for sale a one-litre carton of whole milk at a supermarket (August 2006) in an Australian city are estimated to be $A3.97/litre in a single-litre carton. The single largest cost in this supply chain is processing ($1.20/litre, equivalent to 30% of total supply-chain costs), followed by the retail supermarket and farm production activities where costs are estimated to be $0.79/litre and $0.76/litre respectively.

The value-chain activities for whole goat’s milk production, through to the retail end, and their respective estimated costs are shown in Chart 7.7.

92

Chart 7.7: Dairy goat supply-chain costs: by activity: one litre package

Grandparent herd

Processing

Supermarket

Packaging materials

0

0.2

0.4

0.6

0.8

1

1.2

1.4

$/litre

Elite herd Parent herd Storage Distribution

In this value chain, a farm operating surplus of $0.15/litre is included as a cost in the farm production activities, which in total amount to $0.76/litre. Table 7.6 lists the costs and revenue at the farm gate and prior to processing. The farm production enterprise in this study is separated into three sub-enterprises with herds of 35, 70 and 195 milking does for elite, grandparent and parent groups. These herds have different feed use and production levels. The elite herd produces 1,278 litres/year/doe; the grandparent herd 1,214 litres/year/doe, and the parent herd 834 litres/year/doe. Days of lactation are 284 for all groups. The feed allowance for each doe is 450 kg/doe at $0.30/kg and this includes supplements for kids.

An allowance of $0.14/litre for operating surplus is included as a cost in processing and $0.23/litre in retailing. Inclusion of these profit costs was the only way we could reconcile our costs estimates with an actual price of $3.97/litre of goat whole milk. This was the average price in several Superbarn, Woolworths and on-line retail stores on 11 August 2006. In addition, an extra cost was imposed at the retail level for product rejections which were assumed to be 5% of sales.

The overall supply chain makes a profit, at the price of $3.97/litre, of 10% on sales (after tax), equivalent to a net profit (after tax) of $0.42/litre. This profit is after allowing the $0.15/litre farm cash operating surplus and other profits for processing and retailing.

The largest cost items in the dairy value chain are general operating expenses (profit allowances for farm production and retailing, plastic containers, distribution, storage, fuel and oil, rent and herd costs) which collectively account for 42% of total supply-chain costs (Chart 7.8). Labour accounts for 24% of total supply-chain costs and materials (including feed) for 5.5%.

The profit incorporated in the supply-chain budgets here is a relatively high 10% on sales (compared to 3.5% for dairy cow’s milk). We have also incorporated a 5% product reject rate at the retail level to accommodate “past-expiry-date” events.

There appear, at first glance, to be inefficiencies in the dairy goat supply chain with potential for excess profits in production, processing and retailing. These surpluses, however, are more likely to be due to the relatively high risk associated with a specialist product. The price elasticity of demand for fluid cow’s milk has been estimated (Brunstad et al.) to be relatively low (0.3) compared to 0.5 for cheese and 1.0 for butter and milk powder, with elasticities higher than these estimates for export sales and especially to developing countries. For dairy goat products the elasticities of demand are likely to be lower than they are for dairy cow products because they are typically pitched to consumers with special needs. (More research into the price elasticity of demand for goat’s milk products would be

93

useful.) If the price of goat’s milk was reduced, by say 50%, to just over $2.00/litre in the supermarket it would still be 25% more expensive than cow’s milk and the increase in demand, we suspect, would be negligible. Supermarkets respond to this situation by offering what seem to be relatively high prices to suppliers and adding an extra margin themselves, but there are ceilings to demand irrespective of what the elasticity of demand might suggest.

Table 7.6: Breakdown of annual cash income and operating costs ($/farm and c/litre milk produced) for the synthetic goat dairy farm of 300 milkers

Operating costs Case farm

(total revenue $A) $/unit Quantity and product

Total cash dairy income $270,365 $0.748/litre 354,269 litres whole milk at farm gate (352,498 at retail level)

Income from culled does 4,180 $55/animal 76 live animals Income from slaughter goats 6,270 $30/animal 209

Income from dairy doe replacements 7,315 $55/animal 133

Income from buck sales 250 $125/animal 2 Other income 470 Co-products Total farm revenue 288,850 On-farm costs Labour costs $98,840 20.00/hour 4,942 hours Feed costs $40,459 0.30/kg 450 kg/doe (300 does) Other costs: fuel, oil, electricity, herd costs transport, depreciation, investment cost)

$96,423 0.26/litre various

Cash operating surplus $53,128 15.0/litre 354,269 litres

Source: Study data

Chart 7.8: Resource use: dairy goat value chain: whole milk: farm to retail

Labour

Set-up designInvestment

00.20.40.60.8

11.21.41.61.8

$/litre

Materials Generalexpenditure

M & E

94

7.5 Cheese production Goat’s milk cheese features significant variations in prices according to geographic origin, package type and size, and type of cheese produced. At the time of writing this report, goat’s milk cheddar was selling in supermarkets as a house brand for the equivalent of $30.00/kg in 180 gram packages. As it is with whole milk this is again about a 250% higher price than with cow’s milk cheddar. As it is with whole-milk processing, the goat’s milk is produced on farm and taken through to pasteurisation to destroy bacteria. In terms of adding value to whole goat’s milk from cheese production it is estimated that an efficient goat’s cheese processing plant could plan around revenue of $20.00/kg of output at the factory gate before delivery to the retailer. The milk required to make 1.0 kg of goat’s cheese is about 8.33 litres. Therefore, the whole-milk equivalent value to make 1.0 kg of cheese would be about $6.33. This implies that cheese production has potential to add about $13.67/kg to an equivalent quantity of whole milk.

7.6 Main messages from the dairy goat’s whole-milk value chain There are several features of the dairy goat’s whole-milk value chain that are unique to this type of enterprise: • The dairy goat value chain features relatively high prices for whole milk at the retail level. At the

time of writing this report, goat’s milk at $3.72 – 4.19/litre, was selling in the supermarket for a price 250% higher than cow’s whole milk ($1.62/litre).

• The activity costs along the dairy goat supply chain are higher than for cow’s milk at all the major stages, from production through to retailing. The cost disadvantage starts with on-farm labour. It takes an estimated 15 hours/doe of labour in a goat enterprise compared to 23 hours/dairy cow, but the output from the dairy cow is at least six times higher than from the goat doe.

• The price elasticity of demand for dairy goat’s milk products is probably very low and lower than that of cow’s milk (more research is needed on this important issue for strategic planning) and this may explain the presence of what seem to be relatively high margins for production, processing and retailing of goat’s milk. Furthermore, the price elasticity of supply is also likely to be relatively low, given the capacity constraints on the industry. These conditions present the potential for uncertainty and volatility in prices. Already, at the retail level, we observed price differences of almost 15% between different supermarkets for goat’s milk, but with cow’s milk the differences are usually less than 5%. The relatively high risk in the dairy goat supply chain creates the conditions for successful vertically integrated structures, though it’s important to recognise that skills in product development, brand management and marketing generally take on added importance in a vertically integrated enterprise.

• The traditional competitiveness challenge facing all producers of dairy products (from cow’s to sheep’s and goat’s milk) still apply to dairy goat enterprises. This means ongoing attention to the growth in productivity of yields/animal, coupled with continuous attention to optimising pasture and supplementary feed supply systems, as well as ongoing genetic improvement. The returns to good technical and financial management are likely to be just as high as they are with dairy cow enterprises. Among the technical measures of influence on dairy goat performance at the production level are reproductive and feed conversion efficiency, and further research into measures that improve performance of these factors could be valuable to the industry.

• For the future, dairy goat producers also face the prospect of more competition from low-cost cow’s milk, with additives and modifications to make it look and function more like goat’s milk.

• Processors play a less pivotal role in the dairy goat supply chain than in the dairy cow supply chain, mainly because of the small size of the industry which limits exploitation of economies of scale and the ongoing risk of unutilised capacity for those who do expand into a large-scale enterprise. Vertically integrated businesses have a higher chance of success in the goat supply chain than in the dairy cow supply chain due to the risks facing specialist processors and the potential for unutilised capacity.

95

• While supermarket returns account for a relatively high share of the dairy value-chain costs they

appear not to be not excessive in the context of suppliers gaining market access and reaching and meeting consumer needs in the lowest-cost way. Furthermore, retailers face the prospect of higher than normal product expiry dates with dairy goat products compared to dairy cow products because turnover is so much lower.

• The relative levels of profit/litre of milk generated by each activity in the goat’s milk supply chain reflect, approximately, the extra risks associated with goat’s milk production, processing and retailing.

96

8. The dairy sheep value chain

8.1 Background There were an estimated 1.1 billion head of sheep in the world in 2004–2005, with about 22% (our estimate) used for milking (FAO Statistics 2006)31. An estimated 64% of the world’s milking sheep flock is located in developing countries and 36% in developed economies. Australia had an estimated 2,000 head of dairy sheep being milked in 200532.

The estimated world production of sheep’s milk was 8.6m tonnes (whole fresh equivalent is about 8.6bn litres) in 2005, of which we estimate about 3.33m tonnes (39%) was used for making sheep’s cheese, with an estimated 5.27m tonnes (61%) used for other dairy products including whole milk, yoghurts, ice cream and exotic products like sheep’s milk soap33. Compared to cow’s milk production a relatively large proportion of sheep’s milk is produced in developing countries, though this share is not as high as it is for goat’s milk (Table 8.1). These shares of milk production from the different species reflect, in part, the relative labour intensity of production which would favour developing countries when the milking activity is relatively labour intensive, as it is with sheep and goats, and developed countries when it is capital-intensive, as it is with dairy cattle.

The leading sheep’s milk producers are China (1.12m tonnes, equivalent to 13% of world output), Italy (0.82m tonnes), Turkey (750,000 tonnes), Greece (700,000 tonnes), Syria (604,200 tonnes) and Spain (400,000 tonnes).

Table 8.1: World milk production by species, 2005 (fresh milk) (tonnes)

Buffalo milk Dairy cattle Goats Sheep Camel Total Australia (10,149,000) (4,800) (2,300) (10,156,100) Developed countries

174,105 348,805,285 2,704,750 3,245,705 354,927,545

Developing countries

76,909,346 180,857,274 9,735,088 5,366,544 1,310,722 274,178,975

World 77,083,451 529,662,559 12,439,838 8,612,249 1,310,722 629,108,820

Source: FAO Statistics, Foster et al., and own estimates

Notes: 1) FAO Statistics do not include goat’s and sheep’s milk data for Australia and the estimate here is derived from Foster et al. and our own estimates. 2) Australian data is included in Developed countries. 3) The Australian, Developed countries and World data are adjusted up from FAO data to include Australian data for sheep and goat’s milk.. 4) There are unofficial comments that Australian production of goat’s cheese could have been 500t in 2005, but there is no background survey date to that estimate.

China is the fastest-growing sheep’s milk producer, growing from 594,000 tonnes in 1990 to 1.12m tonnes in 2005. Over the same period sheep’s milk production in Turkey has fallen by about the same amount China has increased. In 1990 Turkey was the largest producer with 1.145m tonnes, but by 2005 this had fallen to 750, 000 tonnes. The growth in developing countries has been over 9% (in

31 The number of sheep milked is deduced from the estimated world sheep’s milk production quantity of 8.6m tonnes and average world yield of 46.3 kg/sheep milked. 32 Data on Australian sheep’s milk production is limited and unreliable. The FAO have no sheep’s milk production recorded for Australia. 33 Refer, for example, to Penn Oak Farm’s sheep soap website: http://sheepsoap.com/about.shtml

97

total) over this same period compared to less than 5% for developed economies, though the EU (original group of 12 countries) has grown by 14% over the same period.

While sheep’s milk represents just 1.3% of the world total milk production, sheep’s cheese represents about 3.6% of world cheese production (Table 8.2), suggesting a level of comparative advantage for sheep’s cheese.

Table 8.2: World cheese production by species, 2005 (tonnes)

Buffalo Dairy cattle (whole milk)

Dairy cattle

(skim milk)

Goat Sheep Whey cheese

Total

Australia n.a. (380,000) (217) (182) (380,399) Developed countries

14,329 13,510,788 1,619,694 216,211 392,499 54,407 15,807,928

Developing countries

249,750 1,399,263 542,208 221,801 273,861 560 2,687,443

World 264,079 14,910,051 2,161,902 438,012 666,360 54,967 18,495,371

Source: FAO Statistics, Foster et al. and own estimates

Notes: 1) FAO Statistics do not include goat’s and sheep’s cheese data for Australia and the estimate here is derived from Foster et al. and our own data. 2) Australian data is included in Developed countries. 3) The Australian, Developed countries and World data are adjusted up from FAO data to include Australian data for sheep’s and goat’s milk.

It is also noticeable that, although developed countries account for only 37% of fresh sheep’s milk production, when it comes to sheep’s cheese production the share of developed countries’ output is 59%. From this it is deduced that over 60% of fresh sheep’s milk is used to make cheese in developed countries, but in developing countries only 25% is used for cheese and the rest probably for a mixture of yoghurts and whole milk (Chart 8.1).

World sheep’s cheese output (666,360 t) is relatively small compared to that from dairy cows, but it is second in the overall rankings and ahead of goat and buffalo cheese.

Chart 8.1: Milk and cheese, by country and product group: market shares 2005

0.00

0.20

0.40

0.60

0.80

1.00

proportion

Developed countries Developing countries

Whole sheep milk Sheep cheeseTotal world all milk Total world all cheese

World imports of sheep’s cheese were estimated by the FAO to be 57,600 tonnes in 2004, with a value of $US334m. Developed countries account for 99% of imports of sheep’s milk cheese with the US (32,713 tonnes in 2004) the dominant market accounting for 57% of total world imports. The average value of world imports of sheep’s milk cheese was $US5.80/kg in 2004. Italy (22,000 tonnes), Greece

98

and France, account for 80% of world exports of sheep’s milk cheese.

The value chain of dairy sheep production and processing in Australia is somewhat similar to the dairy goat value chain (Chapter 7). The industry is small, reliant on niche markets, relatively unregulated (compared to dairy cow’s milk), at least from a marketing perspective, and features an environment that encourages or relies on private sector innovation and entrepreneurship.

Food safety regulations tend to be applied with neutral impact on all dairy products, irrespective of species. While authorities have been more lenient on sheep’s milk producers in the past, the mood is changing and the regulatory environment has become more severe. For example, in July 2003 the NSW Food Production (Dairy Food Safety Scheme) Regulation 1999 was amended to include goat and sheep farms that supply sheep’s and goat’s milk, speciality cheese and yoghurts for human consumption. These businesses now require a license to operate. The Safe-Food NSW Authority has developed a code of practice that applies to all milking animals. Compliance with the HACCP food safety program is required. HACCP (hazard analysis at critical control points) is basically a value-adding practice. In all states the requirements for sheep’s and goat’s milk production and processing are now in line with those of cow’s milk. There is, however, a review of pasteurisation requirements for cheese.

The continued ban on using unpasteurised milk to make cheese can be viewed from different perspectives. First it might be seen as a food safety measure for consumers to guard against bacteria contamination. Alternatively it might be seen as a protection measure to preserve the status quo of traditional cheese producers using pasteurised milk. Then again, if the rules for pasteurisation are different for sheep’s milk compared to cow’s milk this would also seem to be a distortion. The US, which is the largest importer of sheep’s cheese, still has a ban on imports of unpasteurised cheese. In Australia imports of cheese made from raw milk are allowed but the products must conform with the bacterial contamination standards of the Australian Quarantine Inspection Service (AQIS). While it is understood that some imported Roquefort34 cheese has failed the AQUIS E.coli tests (Tolra 2006), and been seized for destruction, there is evidence of some of the cheeses gaining entry. In August 2006 we observed Papillon Roquefort Blue (www.roquefort-papillon.com) cheese in David Jones’ Bondi Junction delicatessen at $89.95/kg.

Compared to the dairy cow structure the dairy sheep industry, like the goat industry, is much less organised into cooperatives and tends to be individual enterprise focused and more vertically integrated. The Appellation d’origine contrôlée (AOC) (a set of government rules and regulations that cover how various products are originated and controlled)) in France describes four main organisational categories for approved cheese production in France ( Refer to Table 7.3 above). There are many Fermier and Artisanal structures in most countries (see Table 7.3 for an explanation of these terms) though use of unpasteurised milk for cheese is prohibited in many countries including Australia. Nevertheless, as it is with goat’s milk production and processing, there are some signs of larger-scaled processing operations entering the market and they will most certainly introduce more severe cost competition than has been the case with the cottage-styled operations that have dominated the industry. The Ewenity Dairy Cooperative (www.ewenity.com) in Ontario is a small dairy sheep cooperative with five members who have consolidated their processing and marketing operations for the purpose of delivering lower-cost whole milk, cheese and yoghurt from sheep’s milk. The typically small enterprise size in the sheep’s milk industry means that it also has high costs and faces many of the same problems facing goat’s milk producers, especially high unit labour costs.

Sheep’s milk has distinctively different characteristics to goat’s and cow’s milk. The fat, protein and total solid’s content is almost double that of cow’s and goat’s milk, which gives it an obvious

34 Roquefort is a famous French blue cheese made from raw sheep’s milk and named after Roquefort-sur-Soulzon in the south of France. Roquefort, the name, has a protected designation of origin and may only be applied to cheeses aged for three months in the caves of Roquefort-sur-Soulzon. Penicillium roquefort is the mold found in the caves and used to contribute to the distinctive flavour of the cheese, though the mold is now made industrially. There are only seven producers of Roquefort including Roquefort Société (http://www.roquefort-societe.com/) and Roquefort Papillon.

99

advantage in making cheese, having to use not much more than half the milk to make the same quantity of cheese . The typical composition of sheep’s milk into its major components and compounds is shown in Chart 8.2. (Note: there is again some variation in these percentage compositions due to environmental conditions and breed used for milking.) While sheep’s milk has similar constituents to goat’s and cow’s milk there are important differences in fat and protein types and structure, and lactose content.

Like goat’s milk, sheep’s milk has small fat globules and a high proportion of short- and medium-chain fatty acids. This is seen as aiding digestibility and reducing the effect on cholesterol. Sheep’s milk also has a following of people, especially and children, affected by allergies to cow’s milk and other products. Sheep’s milk is also recognised for its capacity to enhance the performance of other milks in making cheese. For example, the recovery rate of milk solids from camel’s milk can be increased by 50% by adding 10–15% sheep’s milk (FAO 2006). The high fat content and alpha-hydroxy acid properties of sheep’s milk are also seen as useful for enhancing the moisturising properties of soap and rejuvenating and softening the skin. It can also improve the buffering capacity of other milks. High buffering means the lactic acid bacteria need to produce more acid from lactose in order to lower the pH of the milk. Two cheeses that have identical pH values, but sourced from milks with different buffering capacities, may have very different lactic acid concentrations. This property is seen as useful for people with stomach ulcers.

The Spanish cheese makers summarise the differences in attributes of cheese made from cow’s, goat’s and sheep’s milk and the opportunities for blending this way:

1. Cow’s milk is the base ingredient of blended-milk cheeses, with goat’s and sheep’s milk being added in varying proportions according to the attributes desired in the final product. The rule of thumb is: the more cow’s milk it contains, the simpler and cheaper the cheese will be while the opposite is true of sheep’s milk. Milk blending allows the skilled cheese maker to enhance and impart character in the flavour to approach what most consumers like and want.

2. Generally speaking, cows’ milk provides most of the mass, flavor and desired acidity level in this type of cheese. Goat’s milk contributes whiteness (cow’s milk gives a yellow hue) and mildly tart flavor. Sheep’s milk increases flavour, richness and butter texture since it is rich in dry extract and fat content. The more sheep’s milk in the cheese, the better the cheese.

The “somewhat unique” high solids content properties35 of sheep’s milk means it can be a stand-alone milk or cheese or be used to impart some benefits as a blend with other milk and milk derivatives, especially cow’s milk and camel’s milk (see above). While the main distribution channel for dairy sheep’s milk products has, like goat’s milk, been through the smaller gourmet and speciality retail outlet this is changing and the supermarkets are now starting to show more interest in stocking the product. In part this reflects the growing presence of gourmet sections in supermarkets, but it also reflects the growth of dairy sheep’s milk, cheese and yoghurts, as well as exotic products like sheep soap, lotions and lip balm (http://sheepsoap.com/index.shtml). To take advantage of interest from higher-volume outlets, however, requires reliable and regular supply of safe foods, which presents new challenges for the typical sheep’s milk enterprise.

35 “Somewhat” unique, because as Haenlein (2005) observes, buffalo (16.9%), reindeer (36.7%) and yak (17.9%) have a least the same or even higher solids content than sheep’s milk.

100

Chart 8.2: Sheep’s milk: composition by main constituents

Raw milk

Fat (6.7%)

Milk solids(18.3%)

Milk solids-not fat (SNF)(11.6%)

Water (82.7%]

Minerals(0.7%) Lactose (4.7%) Protein (6.0%)

Whey protein(1.31%)

Casein (4.69%)

Vitamins (A, B1, B2, C, D)Potassium89-136 mg/100 g

Calcium162-259 mg/100 g

Source: Derived from Sahan N. et.al (2005); FAO (2006); and British Sheep Dairying Association. A summary of comparable properties of sheep and other milk is shown in Table 8.3.

101

Table 8.3: Sheep’s milk compared to cow’s milk and human milk

Sheep Goat Cow Human Fat % 6.7 3.8 3.6 4.0 Solids-not-fat % 11.6 8.9 9.0 8.9 Lactose % 4.7 4.1 4.7 6.9 Nitrogen x 6.38% 3.4 3.2 1.2 Protein % 6.0 3.0 3.0 1.1 Casein % 4.7 2.4 2.6 0.4 Calcium % CaO 0.21 0.19 0.18 0.04 Phosphorus P2O5 % 20 .27 .23 .06 Chloride % .12 .15 .10 .06 Iron (P/100,000) .07 .07 .08 .2 Total fat in 245 g of milk (saturated % in brackets)

17 (56%) 10 (33%) 8 (23%) 11 (25%)

Vitamin A (i.u./g fat) 83 39.0 21.0 32.0 Vitamin B (ug/100 m) 83 68.0 45.0 17.0 Riboflavin B2 (ug/100ml)

325 210.0 159.0 26.0

Vitamin C (mg asc. a/100ml)

3.0 2.0 2.0 3.0

Vitamin D (i.u./g fat) 0.18 .07 0.7 0.3 Calories /100ml 102 70.0 69.0 68.0

Source: http://www.realfoodliving.com/goatmilk.htm ; http://www.sheepdairying.co.uk/Milk.htm; www.sasheepdairy.co.za; and various others.

A further assessment of comparable properties of different milks can be viewed at the Nutrition Data website (http://www.nutritiondata.com/facts-B00001-01c201Z.html). Table 8.4 provides a brief summary of the conclusions for unmodified milks from this site. Readers can experiment with the data for their own products and compare it with other species’ milks. It is of some interest to note the substitutability of the differently modified milks of which there are many (from low lactose to low fat etc.). This underlines the importance of remaining competitive through low-cost operations and development of a vast range of modified products to overcome perceived health attribute weaknesses against competitors.

102

Table 8.4: Food impact assessment of different milks

Goat Sheep Cow Soy Human Weight loss rating

3.0 stars* 2.75 stars 3 stars 4.25 stars 2.8 stars

Optimum health rating

3.0 stars 3.0 stars 2.8 stars 4.75 stars 2.4 stars

Weight gain rating

2.25 stars 2.75 stars 2.1 stars 2.5 stars 2.0 stars

Glycemic index† 7 8 7 3 5 Good features Protein,

riboflavin, calcium and phosphorus.

Protein, riboflavin,

vitamin B12, calcium and phosphorus.

Protein, riboflavin,

calcium and phosphorus.

Low in saturated fat, and very low in

cholesterol. Good source of vitamin E,

iron, magnesium, phosphorus, copper and selenium, and a

v. good source of vitamin A, vitamin

B12 and manganese.

Low in sodium. It is also a

good source of vitamin C.

Bad features High in saturated fat

High in saturated fat

High in saturated fat

n.a High in saturated fat, and

large portion of

the calories

come from sugars.

*Star ratings out of five for best. †For more information on the glycemic index go to http://www.glycemicindex.com/. Source: Nutrition Data: http://www.nutritiondata.com/

The traditional dairy cow industry is allocating significant resources to research and development of new products with medicinal and health benefits. This expenditure will result in increasing competition for dairy cow substitute products like sheep’s milk and cheese. With costs rising faster than prices received there is the typical long-term downward trend in the “terms-of-trade” even though it may be more moderate with dairy sheep’s milk. In this environment, for producers to achieve income growth, growth in productivity is essential. The five main drivers of dairy farm efficiency are: • Dairy shed technology to improve labour productivity and enhance quality control. • Proportion of land irrigated, which may be less important for dairy sheep than it is for the

typical dairy cow enterprise, though this may be due more to access compared to the typical dairy cow farm.

• Feed concentrates used. While less significant than technology and irrigation, the high-performing dairy sheep enterprise is likely to rely, like the dairy cow and dairy goat enterprise, on feed concentrates, especially during droughts and to smooth out normal seasonal fluctuations in pasture growth. Achieving the optimal combination of pasture, supplementary feed and use of irrigated pasture is one of the major challenges for dairy production from all species, with dairy cow production the clear leader of the field.

• Farm size. Large farms tend to be more efficient, though this has to be considered in association with market outlets. Bencini and Dawe (1998) refer to sheep milking enterprise sizes ranging from 100–2450 ewes up to 3,000; Cameron’s Meredith Dairy is milking 700 ewes and 750 does; and Fransplaas in South Africa has 230 sheep milkers.

103

• Yield of milk per sheep. Yields for dairy sheep vary, like goats, significantly across breeds and feeding conditions. An average yield in Australia in 2001 could have been 200 litres/lactation, ranging from 0.75 – 1.5litres/milker/day over a 150–220 day lactation period. As with dairy cows the high-efficiency enterprises are likely to feature relatively high yields (Fransplaas in South Africa reports 700 litres/ewe for their top ewes). Berger (2005) indicates an average yield of 331 litres/year from adult ewes at the Spooner Agricultural Research Station, University of Wisconsin and notes that increased yields have been achieved mainly by extending the milking period from 100 to 190 days. World sheep’s milk yields are typically very low, including those of exporters like France and Italy (Chart 8.3).

Chart 8.3: Dairy sheep yields: Australia and selected countries, 2005

Australia

GreeceDeveloping countries

0

50

100

150

200

Litres/milked/goat/year

World France Italy Developedcountries

Source: FAOStatistics and various Australian sources

Dairy sheep farms face the same challenges as those faced by dairy cow farms, especially if the industry is to expand into export markets. This means coming to grips with larger enterprise size, higher female productivity and optimising stocking rate and feed supplements. This underlines the importance of whole-farm management, the timing of feeding, and quality and cost of inputs used. The relatively low yields achieved from sheep dairy enterprises in other countries would seem to present opportunities in export markets for large and well-managed operations. While the sheep’s milk enterprise operates in a more specialised product area than the dairy cow enterprise, it, like the goat’s milk operator, faces the traditional pressure to achieve competitive levels of growth in productivity to survive against international competition.

8.2 The flow of products and yields in the dairy sheep value chain The stages in the dairy goat value chain are shown in Chart 8.4. There are two basic product streams at the farm level: milk sales and livestock (comprising culled sheep, male lambs and replacements sold for re-stockers). The cheese value chain is shown in more detail in Chart 8.5. The livestock, milk (and its derivatives), and by-product flows for dairy sheep are shown in Chart 8.6. The technical ratios are derived from previous studies and searches of various publications, noting there are significant variations according to feed, environment and breeds.

8.3 Size and structure in the dairy sheep chain The breeding structure and numbers within each activity along the sheep’s milk supply chain are based on the requirements for a minimum-efficient-sized milk and cheese processing plant, which is judged to have the capacity to process at least 140,000 litres/year and 600 litres/day or more when operating

104

at full capacity. (This is the minimum processing size that Dixon (2005) suggested in his address to the Great Lakes Dairy Sheep Symposium). The design of an efficient sheep’s milk supply chain requires an initial assessment of the efficient size for each of the activities along it, along with the risk of being able to fully utilise whatever capacity is settled on. It is the least costs size of operation for each activity that governs the procurement requirements. Usually it is found to be the processing activity where economies of scale are strongest and this means that a supply-chain leader is likely to emerge at this point because of its dominant position.

The supply-chain leader can set about sourcing products and services in the most efficient way possible from efficient-sized suppliers of raw milk. Sometimes the processor will find it efficient for suppliers to be organised into cooperatives which can help in facilitating regular supply of material and in negotiating acceptable prices for sustained supply of raw milk from producers. The British Sheep Dairy Association (2000) recommended that a viable sheep’s milk producing enterprise would have at least 250–300 ewes with an average yield of 250 litres/year. This suggests the processor could be supplied by two producers. Alternatively, it could be supplied from one large producer which could be vertically integrated.

For the sheep dairy supply chain the basic structure described here is an integrated farm of 300 ewes, with 50% of the milk made into fresh whole milk, for distribution either to other manufacturers of cheese or yoghurt or to retailers, 25% made into cheese (hard and soft), and 25% into yoghurt. Sale of sheep’s milk direct to the public is less common in Australia and many developed country markets, but more common in developing countries. The Fransplaas sheep dairy in South Africa sells 50% of their production as whole sheep “sweet” milk ready for direct consumption.

The basic sheep dairy business model described here is, like the goat business model, a variation from most of the other enterprises assessed in this study, which are not vertically integrated and typically comprise a number of producers selling to a large scale processor that exploits the available economies of scale. The problem with applying this large-scale business model to the sheep dairy is that the sheep’s milk producer has to be located near to a processor and that may be neither practical nor an economically rational action to take, especially with land values in traditional dairy cow areas being very high.

As discussed above, the main reason, for establishing a vertically integrated business is to enhance control of marketing and brand development, and to reduce risk. As a relatively small business operating in a niche market there are stronger reasons for developing a vertically integrated business than would be the case with dairy cow production where large and efficient-sized processors exist. It is relevant to note again that it is the relative responsiveness of suppliers and end-market consumers to price changes that influence the respective revenue shares of the activities undertaken in the dairy sheep value chain. The more inelastic their supply, the more will be the gains captured by the producers (Freebairn, Davis and Edwards 1982) when they introduce a new technology, such as an improved high-milk-yielding dairy sheep breed.

A vertically integrated sheep’s milk breeding, production, processing and distribution system, operating under a focused branded image, enables the enterprise to control supply and capture the gains from their investment in new technology and development of differentiated products that can yield price premiums, especially when demand is inelastic. The basic strategy is to allocate just enough, and no more, milk to those products where demand is inelastic to maximise revenue and this can be at a very high price and to move the balance of supply into other product markets where demand may be a little more elastic. Through careful allocation of supply to the different products and in combination with brand development, revenue can be maximised. Consumer demand for sheep’s milk products, however, is again affected by substitute dairy products and prices (e.g. goat’s milk and modified dairy cow products) so there is always this competitive environment to be considered when setting prices. Moreover, it’s important for managers and owners to recognise that vertically integrated structures place demand on operator’s skills in production, processing and marketing.

105

Chart 8.4: Dairy sheep value chain

1. Production

Elite breedingherd

Grandparentherd Parent herd

Ew es culled, w ethers sold andew e replacements for

re-stockers ...export or local

2. Raw Milk Distribution

Raw milk storage,refrigeration, freight,cartage & handling

3. Processing

Pasteurisation

Water, w aste,detergents,sanitisers

Weigh

Specialty markets,incl. exports for

lamb

4. Effluent & Emissions

Wrap & pack5. Product Packaging, Storage Distribution

Transport Warehouse Wholesale

6a. Retail - supermarket/gourmet deli

Storage Preparation Location & display Promote & sell

6b Retail - food service sector (restaurants, catering etc.)

Storage Meal design One-to-onecustomer service

Promote & sale

Location & ambience

End consumer

LandPastureIrrigation

Rainfall and Purchased WaterBuildings and equipment

Purchased and GrownFeed supplementsGenetics

Risk managementWhole farm management skills

Farm inputs

Milkextraction

Skim milk

Whole milk

Whey

CurdMatured hard cheese (cheddar,

mozzarella, provolone etc.)

Rennets, penicillen, milkfat, vinegar,enzymes

WMP

SMP

Separation &standardisation

CreamSkim milk

Whole milk

Homogenisation & deodorisation

Casein

UHF milk

Soft cheese (fetta, creamcheese,cottage cheese), Cheddar

Packagingtype

106

Chart 8.5: Cheese value chain map

Raw milkinflow

Pre-treatment &standardization

Maturedcheese

Pasteurisation

CoagulationSlicing

Draining

PressingBrine sprickling

Maturation

Curd

FermentsRennet

CaKl2, KNO3

Conditioning

Early stage processing

Packaging

Raw materialsCheese milk

Lactic, ripened or culture butter Whey path

Whey

Filtration

FilteredWhey

Mixing &pasteurisation

SugarFlavouringColouring

Whey drinks

Conditioning

Matured cheese path

107

Chart 8.6: Dairy sheep’s milk conversion ratios

a.) Production

Ewes (300)

Rams (8) or artificialinsemination

2.0 egg/femaleNon-fertile eggs

(%)

Fertile eggs(95%)

570 lambs(wt.3.5kg)

357 sold; 74 retained; 36losses

(wt.16 kg @ 56 days)

b.) Milk processing

Fresh goat's milk[140,000 litres]

Whole milk [50%]70,000 litres

Cheese [25%]35,000 litres

Yoghurt [25%]35,000 litres

Whey powder ['x'kg]

182,000 litresWaste

Waste treatment

'x' kg w hey liquid

Waste water discharge[1.3 litres/litre of milk

input]

Multiple ovulation and embryotransfer

'x' eggs/female

Artificialinsemination?

140,000 litres/year/enterprise 1 enterprise140,000 litres for factory

66,500 litres of saleablepasteurised goat milk

6,370 kg cheese

99.5%conversion

18.2% conversion ratio

38,500 litres ofyoghurt

10.8% conversion

9.8% conversion

w hey permeate streamcondensate

ionic w astedetergents

Irrigated farm land

Water consumption[1.9 litres w ater/litre of

milk input]. Total forplant = 266,000

litres/year

Biological oxygen demand (BOD) - 1,500 mg/l ... 691 kg/year

Chemical oxygen demand (COD) - 2000 mg/l ... 364 kg/yearFat - 150 mg/l ... 27 kg/year

Total nitrogen (N) - 100 mg/l ...18 kg/yearTotal phosphorus (P) - 30 mg/l ...5 kg/year

c.) Effluent and waste recovery and recycling

3,500 kg of milkpowder, starter cultures

& other ingredientsWhey proteinconcentrate Food supplement

for athletes

108

The production starting point in the dairy sheep supply chain designed here is, again (like the other supply chains), an elite breeding flock of 45 ewes and one ram. This elite flock can supply all the breeding stock for a dairy sheep supply chain that produces 570 lambs/year and eventually produces 140,000 litres of milk/year, 50% of which is made into whole milk, 25% into cheese and the rest into yoghurt. The end product is a combination of cheese, yoghurt and whole fluid milk. The elite flock supplies replacements for a grandparent flock of 90 ewes and two rams which, in turn, supplies the replacements for 165 commercial ewes and four rams in the parent flock. In this model, production is undertaken by the single vertically integrated producer that turns out 140,000 litres of milk and 570 lambs for sale each year, after losses and replacements. The economies of scale in the farm stage of dairy sheep production are unclear and untested because, like the goat enterprise, even if the lowest-cost production size was, for example, 2,000 ewes (which it probably is) there is the problem of marketing the output at the price premiums which maximise profit.

8.4 Dairy sheep product analysis In the dairy sheep supply chain there are, as with other dairy species, many different processing options, depending on the product and market requirements. The dairy sheep business model described here has two basic income streams, dairy products and livestock, within which there are seven products: • whole fresh milk • cheese • yoghurt • male lambs • female lambs suitable as replacements for re-stockers • culled ewes and rams • wool.

There are numerous further product possibilities within these groups, especially in regard to the cheese types, yoghurts and milk modifications, not to mention more exotic options like sheep’s milk skin-care products, vitamins and nutrition, perfumes and cosmetics.

Readers wishing to establish a dairy sheep enterprise are referred to these informative sources: the British Sheep Dairy Association (www.sheepdairying.co.uk), the Dairy Sheep Association of North America (http://www.dsana.org/) and the University of Wisconsin (Sheep Extension Department) (http://www.uwex.edu/ces/animalscience/sheep/).

Each situation for establishing a new business like a sheep dairy enterprise requires detailed and careful analysis to ensure it is designed and developed according to capacity and resources available, and the market segments being pursued. The sheep dairy requires an active product development program because it is competing against growing competition from low-cost, modified dairy cow milk products and emerging dairy products from other animal species like buffalo (16.9% solids in the milk), reindeer (36.7% solids) and camel (claimed by FAO to be “the dairy product of the future”). Haenlein (2002b) points to the presence of a uniquely high content of medium-chain triglycerides (MCT) in sheep’s milk fat, which limit cholesterol deposition and produce other health benefits, and also notes that the sheep dairy industry could do more research, development and promotion of these properties to enhance price premiums for sheep dairy products. Bencini (2005) examined the effect of different feed rations on the conjugated linoleic acid (CLA) content and concentrations of omega-3 fatty acids in sheep’s milk fat. The 2003 Canadian Workshop on the role of CLA in human health confirms the health benefits and points to commercial opportunities for sheep’s milk producers, but also cow’s milk producers. The development of new products that can be supported by health benefit claims is taking on added importance for the sheep’s milk industry. The functional milks (that is, those fortified with extra minerals, vitamins etc) and yoghurt or milk drinks with added health benefits are experiencing what can only be described as exceptional growth rates in many developed economy markets (“What’s new in food technology and Manufacturing 2006”, www.foodprocessing.com.au).

109

The “one-shot functional milk” drinks market (growing at over 30%/year), which started in the mid-1990s, is now the second largest dairy beverage category by value in Europe and accounts for 7.9% of value, but only 1.6% of volume. This performance demonstrates that growth can be achieved with price premiums in niche markets, providing the products meet the more discerning requirements of consumers who are prepared to pay price premiums.

8.4.1 Cost of production at the farm level The supply chain designed here is built around a flock of 300 milking ewes. Table 8.5 shows the basic assumptions used in a comparative cost assessment with an equivalent-sized goat’s milking herd and a 200-cow milking herd. Two key assumptions are the yield of milk/animal and the average price of milk, the impact of which flows through with a major impact on financial returns and on the value added through the supply chain. The milk yields assumed for dairy cows, dairy goats and milk sheep are all achievable (according to various records), but if they were achieved, they would place their producers in the top 10% of producers in most countries. Table 8.6 shows the costs and returns by species, given the assumptions of Table 8.7. The dairy cow data is actual information collected by the Kyabram Dairy Centre in Victoria (Moran 2002) in 2002, with adjustment for fuel costs. This provides a benchmark for other enterprises. Labour costs and labour use, also an important variable, are collected from various studies across Canada, US and UK. A labour rate of $20/hour is assumed for Australia in 2006.

Table 8.5: Assumptions: enterprise structure & performance, by species, 2006

Assumptions Dairy cows Dairy goats Dairy sheep Number milked 200 300 300 Cattle equivalent 200 60 54 Average yield (litres/year) 7,536 1,180 466 Total milk produced (litres/enterprise) 1,507,200 354,000 139,800 Average price ($/litre) $0.31 0.75 1.5 Progeny for sale (number) 180 420 357 Average value of progeny sold 150 76 76 Average yield of wool (kg) 2.9 Average value of wool ($/kg)* 4.5 Land used (ha) 125 37.5 33.75 Stocking rate 1.6 8.00 8.89

*at 28–30 micron fibre diameter Source: Study data

110

Table 8.6: Cost of producing milk: by species, 2006

Projected income Dairy cows Dairy goats Dairy sheep Milk $467,232.00 $265,500.00 $209,700.00 Progeny sold 27,000.00 31,920.00 27,132.00 Wool sold 3,915.00 Sub-total $494,232.00 $297,420.00 $240,747.00 Direct expenses Herd/flock costs Artificial Insemination 9,000 9,000 9,000 Herd testing 4,500 4,500 4,500 Animal health 3,768 1,130 1,017 Calf/kid/lamb rearing 7,536 4,130 4,036 Sub-total 24,804 18,760 18,553 Shed costs Power and heating 6,030 5,427 4,884 Dairy supplies (detergents, gloves etc.) 6,030 5,427 4,884 Sub-total 12,060 10,854 9,769 Feed costs Fertiliser 21,100 6,330 5,697 Lease and agistment 13,565 4,070 3,663 Fodder 21,100 6,330 5,697 Concentrates 81,390 24,417 21,975 Irrigation water 16,580 0 0 Fuel and oil 13,575 12,218 10,996 Weed and pest control 7,540 2,262 2,036 Repairs and maintenance 19,600 17,640 15,876 Sub-total 218,570 94,974 85,477 Overhead cash costs Paid labour 43,709 7,104 7,104 Administration 15,072 15,072 15,072 Sub-total 58,781 22,176 22,176 Overhead imputed costs Family labour 67,824 67,824 67,824 Depreciation 21,100 21,100 21,100 Sub-total 88,924 88,924 88,924 Total 384,365 222,355 211,230 Costs/litre of milk 0.26 0.63 1.51 Operating surplus $109,867.00 $75,065.00 $29,517.50 Profit/litre at farm gate $0.07 $0.21 $0.21

The use of rotary dairy parlours has the potential to substantially improve labour productivity. Both sheep and goat enterprises (15 hours/animal) suffer significantly from their relatively high use of labour compared to dairy cows, which require about 27 hours/animal, and which produce at least six times as much milk as a milking goat and 16 times as much milk as a milking sheep. The difference in labour productivity is revealed clearly in terms of volume of litres/hour (Chart 8.7).

111

Chart 8.7: Farm labour productivity, by species

It is also worth noting the structure of enterprise income flows. Income from livestock sales and products other than milk account for around 10% or less of total income. This underlines the importance of specialisation. It is best to be either in milk or out of it altogether and into just livestock sales for meat. Many analysts have recommended joint attention to both milk and livestock products, but this leads to serious competitiveness problems against dairy cows in particular. In selection for high-performing milk animals there is little point in compromising milk yields and labour productivity to achieve gains in an enterprise that accounts for 10% of total income.

Using the income data from Table 8.8 the financial returns to the different species at the farm operating level were calculated and these are shown in Table 8.9. It is estimated there would be about $1.75m of capital tied up in the dairy cow enterprise, compared to $0.615m for the goat dairy and $0.55m for the sheep dairy. These capital assumptions have impact on returns to investment which show the dairy goat enterprise to be generating a return of nearly 10% after tax, compared to 5% for dairy cows and 4.3% for dairy sheep (Chart 8.8). Capital gains on land and stock are not included.

Chart 8.8: Return on invested capital (after tax), by species

0

2

4

6

8

10

% ROI

Cows milk Goat's milk Sheep milk

The assumptions employed will vary significantly across farms and for this reason readers should interpret the data with considerable caution. For example, just by increasing the yield of milk from 466 litres/ewe to 600 litres/ewe the sheep dairy goes from having the lowest (4.3%) ROI to the highest (13.1%). Chart 8.7 shows the impact of varying milk yield on the dairy sheep enterprise.

0

50

100

150

200

250

300

litres milk/hour

Cows milk Goat's milk Sheep milk

112

Table 8.7: Technical aspects and financial returns, by species, 2006.

Cows/operator/ hour

Dairy goats/ operator/hr

Dairy sheep/ operator/hr

Milking technology Rotary 95 na na Swingover herringbone 55 na na Double-up herringbone 47 na na Walk-through 36 na na

Feed requirements Feed required (kg Dry Matter/day) Milking animal 17 3.40 3.06 Dry animal 9 1.80 1.62 Yearling female (12–24 mo.) 8 1.60 1.44 Young female (3–12 mo.) 4 0.80 0.72 Labour requirements Hours/animal 27 15 15 Total hours 5400 4500 4500 Litres/hour 279.11 78.67 31.07 Labour rate $/hour 20 20 20 Estimated capital required Land and buildings $/animal 6,250 1250 1125 Livestock $/animal 1,500 300 200 Plant and equipment $/animal 1000 500 500 Total capital: by asset Land and buildings 1250000 375000 337500 Livestock 300000 90000 60000 Plant and equipment 200000 150000 150000 Total capital 1750000 615000 547500 Taxation Income tax (20%) $21,973.40 $15,013.00 $5,903.50 Post-tax surplus $87,893.60 $60,052.00 $23,614.00 ROI (post-tax surplus/total capital) 5.02% 9.76% 4.31%

113

Chart 8.9: Milk yield impact on ROI: sheep’s milk enterprise

-2

0

2

4

6

8

10

12

14

ROI (%)

600 litres 550 litres 500 litres 466 litres 400 litres

Yield/ewe/year

The ROI calculations at the farm level are very sensitive to yield, quite sensitive to farm gate price of whole milk and also quite sensitive to the productivity of labour. Chart 8.10 shows the various combinations of milk yield and milk price to achieve different levels of required ROI. For example, if the required ROI is 15%/year then this can be achieved with a milk price of $1.90/litre or more and yield of at least 500 litres/ewe.

Chart 8.10: Parametric budget graphs: sheep’s milk enterprise: impact of price and yield

-10

-5

0

5

10

15

20

25

30

35

40

400 466 500 550 600 650 700

Milk Yield (Litres/ewe/year)

ROI (%)

$A1.3/litre 1.4 1.5 1.6 1.7 1.8 1.9 2

114

The third main influence on ROI is the productivity of labour. The projections in Chart 8.10 are based on a labour rate of 15 hours/ewe, but if this could be improved to, say, just 10 hours/ewe the ROI would increase to 8.7%, assuming yield of 466 litres/year and price of $1.50/litre (Chart 8.11)

Chart 8.11: Impact of labour productivity on ROI

-6

-4

-2

0

2

4

6

8

10

12

14

ROI (%)

5 10 15 20 25Labour hours/ewe

8.4.2 Beyond the farm gate Even though the business model described here for the sheep dairy is vertically integrated it’s useful to examine the separate activities of production, milk processing, cheese processing etc.

For a new milk processing plant the costs are closely related to capacity, but economies of scale exist. That is, costs increase with capacity, but not to the same extent. After reviewing a considerable volume of literature (e.g. Dixon 2005; Dalton et al. 2002) on milk processing at different plant sizes we developed a simple economies-of-scale formula that seems to fit the costs of milk processing. The formula takes this form36:

Cost (C) = aCAPb

Where C = total annual processing costs; CAP = annual processing capacity (litres); and a and b are constant and scale coefficients to be estimated. When b < 1.0 there are economies of scale. Ideally, we should estimate the economies-of-scale coefficients for each of capital and variable costs, though there is also an argument that variable costs also have the same economies of scale as capital items. Using the data from various studies on milk processing we find this formula seems to work reasonably well over a large range of processing costs:

C = 10.46 (CAP) 0.8

For a relatively large milk processing plant (e.g. 118m litres/year, which is what was used for the dairy cow processing plant — see next chapter) the total annual costs are estimated to be around $30m, equivalent to $0.25/litre. For a 66m litres/year plant costs are estimated to be around $19m, equivalent

36 This is simply an application of the engineer’s 0.6 rule, which they developed for estimating the capital costs of plants and objects with different sizes. In brief, the engineer’s formula indicates that costs increase in accordance with capacity, but generally not to the same extent. More specifically:

C2 = C1 (X1/X2) 0.6

where C1 and C2 are the costs of two pieces of equipment and X1 and X2 are their capacities. For an application of the formula to economies of scale and its limitations, readers are referred to Moore (1959).

115

to $0.29/litre. For a very small plant of around 129,000 litres, costs are estimated to be around $128,000, equivalent to $0.99/litre (Chart 8.12).

Chart 8.12: Milk processing costs, by plant size

0

0.2

0.4

0.6

0.8

1

1.2

128,7

93

257,5

85

515,1

71

1,030

,342

2,060

,684

4,121

,367

8,242

,735

16,48

5,469

32,97

0,938

65,94

1,876

78,73

6,580

78,73

6,580

118,1

04,84

4

Milk processing capacity (litres/year)

$/litre

The total costs of producing pasteurised sheep’s milk from the plant with capacity of 139,800 litres are shown in Table 8.8.

Table 8.8: Sheep dairy: milk processing costs

Annual costs ($A)

Year 2006 Sheep dairy Average % of

total costs Land & buildings $17,056 12.2 Labour 43,897 31.4 Equipment 24,745 17.7 Supplies 42,220 30.2 Electricity 6,291 4.5 Fuel & oil 1,678 1.2 Water & sewerage 1,398 1 Product loss 1,678 1.2 Operating capital 839 0.6 Total $139,802

The next stage is the cost of making cheese, noting there are many different types of cheese, such as Roquefort fresh (e.g. mozzarella), white mould (e.g. brie), soft (e.g. feta), semi-hard (e.g. cheddar), hard (parmesan), blue (e.g. gorgonzola), rind-washed (e.g. taleggio) and blended types (e.g. cow’s and sheep’s milk mix, semi-hard). They have different ingredients and maturation times and therefore very different costs. The budget shown in Table 8.9 provides a broad average indication of cheese costs for a plant using 139,800 litres of milk to produce around 25,000–27,000 kg of cheese.

116

Table 8.9: Sheep dairy: cheese processing costs

Annual costs ($A)

Year 2006 Sheep dairy Average % of

total costs

Land & buildings $10,000 0.03

Labour $66,500 0.20

Equipment $12,280 0.04

Supplies $11,480 0.04

Electricity $13,965 0.04

Fuel & oil $3,914 0.01

Water & sewerage $3,262 0.01

Product loss $3,914 0.01

Marketing $195,641 0.60

Operating capital $1,957 0.01

Insurance etc. $3,290 0.01

Total $326,203 1.00

The most prominent cost item in the sheep’s cheese budget is for marketing (which includes packaging), which accounts for 60% of total costs. This level of marketing is recommended by Dixon (2005). The labour input is for two people working full-time in cheesemaking. The total cheese processing costs are equivalent to about $12.50/kg excluding milk used. With milk valued at $1.50/litre the total average cost of making sheep’s milk cheese is around $20.60/kg.

Turning to yoghurt the unit costs fall substantially in comparison to cheese production. Unit costs are now estimated to be around $3.00/kg, though again costs vary with marketing expenditure and ingredients. In August 2006 sheep’s milk yoghurt was selling for $6.50/500 grams in the Bondi Junction branch of David Jones. Table 8.10 provides a broad indication of yoghurt costs for a plant producing around 28,300 kg of yoghurt.

Table 8.10: Sheep dairy: yoghurt processing costs

Annual costs ($A)

Year 2006 Sheep dairy

Average % of total costs

$ Costs/kg

Land & buildings $2,500 0.03 0.10

Labour $16,625 0.20 0.64

Equipment $3,070 0.04 0.12

Supplies $6,116 0.07 0.24

Electricity $3,491 0.04 0.13

Fuel & oil $979 0.01 0.04

Water & sewerage $816 0.01 0.03

Product loss $979 0.01 0.04

Marketing $48,910 0.58 1.89

Operating capital $489 0.01 0.02

Insurance etc. $823 0.01 0.03

Total $84,797 1.00 $3.00

117

8.5 The overall value chain for the sheep dairy The total average costs (including profits) for the sheep dairy supply chain are estimated to be $6.47/litre (including sales commission of 1%) over the 138,800 litres. These costs include the on-farm production; the whole-milk pasteurisation process for all 138,800 litres, 50% of which is sold as whole milk (probably to other cheese manufacturers), 25% retained for cheese processing (34,700 litres), and 25% for yoghurt processing. This is purely hypothetical. Supply-chain leaders will set the proportions according to their product focus. The total revenue for the whole supply chain is $898,452. This does not include the value added for sales of whole milk beyond the sale point, that is, by external cheese makers.

The single largest cost activity in this supply chain is the main whole-milk processing ($1.79/litre, equivalent to 28% of total supply-chain costs), followed by retailing ($0.79/litre), then cheese manufacturing ($0.69/litre) and yoghurt processing ($0.60/litre).

Chart 8.13: Dairy sheep supply chain costs, by activity

The value-chain activities for whole sheep’s milk production, though to the point of retail, and their respective estimated costs are shown in Chart 8.13. In this value chain a farm operating surplus of $0.21/litre is included as a cost in the farm production activities. An allowance of $0.14/litre for operating surplus is included as a cost in processing and $0.23/litre in retailing. Inclusion of these profit costs was the only way we could reconcile our costs estimates with a actual prices in retail stores of $41.20/kg for cheese and $12–13/litre for yoghurt. The overall supply chain makes a profit, at the price of $3.97/litre, of 10% on sales (after tax), equivalent to a net profit (after tax) of $0.65/litre). This profit is after allowing the $0.15/litre farm cash operating surplus and other profits for processing and retailing. In practice it would be captured or shared by either retailer or supplier or both.

The largest cost items in the dairy value chain are general operating expenses ($2.42/litre to cover profit allowances for farm production and retailing, plastic containers, distribution, marketing, storage, fuel and oil, rent, and herd costs) which collectively account for 37.5% of total supply-chain costs (Chart 8.14). Our allowance for marketing of cheese and yoghurt accounts for 22% of general operating expenses. Labour accounts for 26% of total supply-chain costs and materials (including feed) for 8.9%.

The profit incorporated in the supply-chain budgets here is, like the dairy goat supply chain, a relatively high 10% on sales (compared to 3.5% for dairy cow’s milk). We have also incorporated a

Grandparent herd

Whole milk processing

Cheese

Yoghurt Proc.

Supermarket

0

0.2

0.4

0.6

0.8

1

1.2

1.4

$/litre

Elite herd Parent herd Cheese Storage Distribution

118

5% product reject rate at the retail level to accommodate “past-expiry-date” events. There appear, at first glance, to be inefficiencies in the dairy sheep supply chain with potential for excess profits in production, processing and retailing. These surpluses, however, are more likely, as, with the dairy goat enterprise, to be due to the relatively high risk associated with a specialist product. The price elasticity of demand for fluid cow’s milk has been estimated (Brunstad et al.) to be relatively low (0.3) compared to 0.5 for cheese and 1.0 for butter and milk powder, with elasticities higher than these estimates for export sales and especially to developing countries. For dairy sheep products the elasticities are likely to be lower than they are for dairy cow products because they are typically pitched to consumers with special needs, but probably higher than for dairy goat products. (More research into the price elasticity of demand for sheep’s milk products would be useful.)

Chart 8.14: Resource use, sheep dairy value chain, whole milk, farm to retail

Labour

Set-up design

Investment

0

0.5

1

1.5

2

2.5

$/litre

Materials Generalexpenditure

M & E

8.6 Main messages from the dairy sheep value chain There are several important features of the sheep dairy value chain: • As with the dairy goat chain the dairy sheep supply chain features relatively high prices at the

retail level. It therefore becomes important to carefully investigate consumer sensitivity to prices and identify those segments of the market with a willingness to pay high prices.

• The activity costs along the dairy sheep supply chain are higher than for cow’s milk at all the major stages, from production through to retailing and also higher than for dairy goats. The cost disadvantage starts with on-farm labour. It takes an estimated 15 hours/ewe of labour in a sheep dairy enterprise compared to 23 hours/dairy cow, but the output from the dairy cow is more than 15 times (11 times when solids content is compared) higher than the ewe. Even when compared to dairy goats the productivity of dairy sheep is still less than 40% (35% when solids content is compared) of dairy goats on the typical farm.

• There is significant potential to improve dairy sheep productivity by use of specialised milk producers which could increase milk yields to 500–700 kg/lactation from less than 500 (often less than 400) and lambing rates to 2.25/ewe from less than 2.0.

119

• The price elasticity of demand for dairy sheep’s milk products is probably very low and lower

than that of cow’s milk (more research is needed on this important issue for strategic planning) and this may explain the presence of what seem to be relatively high margins for production, processing and retailing of sheep’s milk and its derivative products, cheese and yoghurt. Furthermore, the price elasticity of supply is also likely to be relatively low, given the capacity constraints on the industry. These conditions present the potential for uncertainty and volatility in prices. At the retail level there are significant price differences between similar dairy sheep products.

• The relatively high risk in the dairy sheep supply chain creates the conditions for successful vertically integrated structures, though it’s important to recognise that skills in product development, brand management and marketing generally take on added importance in a vertically integrated enterprise. Increased resources are required for marketing, which could account for more than 50% of cheese processing costs. Vertical integration should not be pursued unless there is an associated capacity and willingness to establish and maintain a major marketing activity.

• The traditional competitive challenges facing all producers of dairy products (cow’s, sheep’s and goat’s milk) still apply to dairy sheep enterprises. This means ongoing attention to the growth in productivity of yields/animal, coupled with continuous attention to optimising pasture and supplementary feed supply systems, as well as ongoing genetic improvement. The returns to good technical and financial management are likely to be just as high as they are with dairy cow and dairy goat enterprises. Among the technical measures of influence on dairy sheep performance at the production level are reproductive and feed conversion efficiency. Further research into measures that improve performance of these factors could be valuable to the industry.

• For the future, dairy sheep producers also face the prospect of more competition from low-cost cow’s milk, with additives and modifications to make it look and function more like sheep’s milk.

• Processors play a less pivotal role in the dairy goat supply chain than in the dairy cow supply chain, mainly because of the small size of the industry which limits exploitation of economies of scale and the ongoing risk of unutilised capacity for those who do expand into a large-scale enterprise. Vertically integrated businesses have a higher chance of success in the dairy sheep supply chain than in the dairy cow supply chain due to the risks facing specialist processors and the potential for unutilised capacity. Nevertheless, the presence of significant economies of scale in milk processing means cow’s milk will continue to have a cost advantage that can only be neutralised by product development and marketing.

• While supermarket returns account for a relatively high share of the dairy value-chain costs they appear not to be excessive in the context of gaining market access and exposure to a large number of dairy product consumers. Furthermore, retailers face the prospect of higher than normal product expiry dates with dairy sheep products compared to dairy cow products.

• The relative levels of profit/litre of milk generated by each activity in the sheep’s milk supply chain reflect, approximately, the extra risks associated with sheep’s milk production, processing and retailing.

120

9. The dairy cattle value chain

9.1 Background There were about 1.36 billion head of cattle in the world in 2004–2005, with about 17.5% used for milking (FAO Statistics 2006). Australia had a milking herd at the end of June 2005 of around 2.01 million head (Australian Bureau of Agricultural and Resource Economics (ABARE) 2005) which was equivalent to about 8% of the total cattle herd (>25m head) in Australia and less than 1.0% of the world dairy cattle herd. Over 75% of the Australian dairy herd is located in Victoria and NSW. Total production from this Australian herd was about 10.1bn litres in 2004–2005, which was equivalent to 1.9% of world production of whole fresh milk. In the international market Australia’s share of all dairy products was about 15%. The EU, Australia and New Zealand account for almost 90% of world trade in dairy products.

The value chain of dairy production and processing in Australia was once a simple system, dominated by a heavily regulated domestic market, enterprises based on whole milk as a commodity and farm systems based mainly on natural grass pastures for feeding. Today the export market for the Australian dairy industry accounts for more than 50% of sales (compared to around 7% of global dairy product sales for all countries) and is the growth sector, especially for small economies like Australia. The growth performance and prospects are now highest with heavily branded products like yoghurts and cheeses, with grain supplements and irrigation now an integral part of high-performing dairy cow enterprises. It is estimated that under the incentives of deregulation about 80% of milk produced by the Australian dairy industry is used in products directly affected by export returns (Ridge Partners 2004). In 2005 the value of exports from the Australian dairy industry were about $A3 billion, making it the third largest dairy product exporter in the world, after New Zealand. Victoria is the main milk-producing state, accounting for over 60% of production and 80% of exports.

The typical composition of dairy cattle milk into its major components and compounds is shown in Chart 9.1. It is the basic nutritional value of milk that creates value in the dairy cow supply chain. Although nearly 90% of the weight of milk is water it is the water that carries more than 100 solid substances, either in solution, suspension or emulsion (Wattiaux 2006). For example: • casein, the major protein component of milk, is dispersed in the form of numerous, tiny solid

particles (named micelles) that remain in suspension • fat and fat soluble vitamins take the form of an emulsion, a suspension of small liquid globules

that do not mix with water in milk • lactose (milk sugar), some proteins (whey), mineral salts and other substances that are soluble and

dissolve entirely in the water in milk.

Casein micelles and fat globules create the physical characteristics of milk and enable taste and flavour for product development in the form of butter, cheese, yoghurt etc.Milk is probably recognised most by human nutritionists for its capacity to supply daily dietary needs of calcium, but it is also recognised as a food with a unique balance of water, energy, protein, fat, lactose and minerals. There is, however, significant variation in the composition of milk, depending on breed and genetic selection within breeds, stage of lactation, feed input (quantity and quality), seasonal conditions, time of the day, udder health and processing methods (Haenlein 2002a). The potential to manipulate milk characteristics and yield has prompted some groups to promote a reversion back to the original characteristics of cow’s milk (http://www.realmilk.com), produced by natural pastures, with no supplements, antibiotics or pasteurisation. Whether or not there is a segment in the market prepared to pay the price premiums needed for this type of system remains to be seen. More generally, dairy products are currently viewed positively in the constant search for optimal nutritional requirements for humans. This is, however, a highly competitive food market, and value-adding farms and processors will need to constantly anticipate the emergence of new rivals and ways of adding new attributes to counter new claims for better performance.

121

Chart 9.1: Cow’s milk components

Raw milk

Fat (3.7%)

Milk Solids(12.6%)

Milk solids-not fat(SNF) (8.9%)

Water(87.4%]

Minerals(0.7%)

Lactose(4.8%)

Protein(3.4%)

Whey protein(0.6%)

Casein (2.8%)

Vitamins (A, B1, B2, C, D)PotassiumCalcium

Source: Ramesh C. 1997, 'Dairy-Based Ingredients', American Association of Cereal Chemists, Eagan Press Handbook

The main distribution channel for dairy products in Australia is the supermarket which accounts for an estimated 61% of all sales, followed by other retailers (27%) and the food services sector (12%) (ABARE 2005). Within the food service sector the hotels and clubs are major markets and account for 46% of all dairy product sales to this sector, followed by cafés and restaurants (31%) and takeaway outlets (23%).

The main dairy products from Australia for the export market are cheese, whole-milk powder (WMP) and skim milk powder (SMP) (Chart 9.2). With exports accounting for more than 50% of Australian sales it is clear that value-adding strategies require a thorough understanding of destination market requirements and their preparedness to pay premiums for different product and support service attributes. ABARE (2005) notes constraints on supply among major dairy product exporting countries, which suggest a continuation of favourable export prices and market opportunities. Nevertheless, the favourable prices for dairy products in export markets will eventually generate new suppliers and more competition with downward pressure on prices expected over the medium-to-longer term. East Asia and China in particular are major growth markets, though some of these countries are also likely to become important suppliers in the long run. Argentina, Brazil and India are identified as countries with the greatest prospect to expand production and exports.

122

Chart 9.2: Milk product exports, by category: Australia, 2001–2002 to 2004–2005

0

200

400

600

800

1000

1200

$m [Australian]

2001-02 2002-03 2003-04 2004-05

Cheese Butter and butterfat SMP Cassein WMP Other (incl. condensed milk)

Source: ABARE Statistics, “Rural Commodities”, 2005

The basic generic milk products and their derivatives are shown in Chart 9.3. It is from this basic structure that numerous branded products emerge. Product development is an integral function of dairy processor’s performance in Australia as suppliers aim to meet the needs of an increasingly health-conscious consumer and deal with the risk of new research and information arriving about connections between food types and health. While branded products, especially in cheese and yoghurts, have significant growth prospects, the basic commodity-type products remain very important. An effective supply-chain strategy requires preservation of both the cost-sensitive commodity market and exposure to those segments where product and brand development are drivers of market share. Dairy Farmers, for example, an Australian owned company, lists nearly 50 products in the four main categories that it supplies to satisfy both branded and commodity-styled markets.

123

Chart 9.3: Generic cow’s milk and derivative milk products

Manager

WheySkim milkpowder (SMP) Cheese

Milk fatWhole Milk Powder(WMP)

Ultrafilteredmilk

Whey Curd

Casein

Caseinate

Milk proteinconcentrate (MPC)

Whey proteinconcentrate

(WPC)

Source: Wisconsin Center for Dairy Research

Evaporation

Drying

Fat separation, evaporation/drying

Growth in productivity is of equal importance to product development and marketing capacity for Australian dairy-products enterprises. With costs rising faster than prices received, there is the typical long-term downward trend in the “terms-of-trade”. In this environment, for producers to achieve income growth, growth in productivity is essential. In a study of 252 dairy farms over 1996–2000, Kompass and Che (2004) identified five main drivers of dairy farm efficiency: • Dairy shed technology. High-efficiency farms tend to use “swing-over” and rotary technology

while low-efficiency farms used mainly walk-through technology. Note the case study at the end of this chapter on the use of robots on dairy farms).

• Proportion of land irrigated. Farms in the high-efficiency group had a relatively high proportion of their land (37.5%) irrigated compared to 1.3% for the low-performing group.

• Feed concentrates used. While less significant than technology and irrigation, the high-performing group tended to use more concentrates during the peak season.

124

• Farm size. Large farms tended to be more efficient, though again this was not strongly significant. • Yield per cow. Yields for the high-efficiency group were 5,000 litres/cow compared to

3,000 litres for the medium-efficiency group and 2,400 litres for the low-efficiency group. Australian dairy cow yields, while well above the world average, are still well below those achieved in the US and Europe (Chart 9.4). Nevertheless, there are producers in Australia who are obtaining yields of 40 litres/day from their elite cow groups (producing more than 12,000 litres/year) (“Landline” April 2006).

Chart 9.4: Dairy cow yields: Australia and selected countries, 2005

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Litres/cow

World Australia NZ France UK US

Source: FAO Statistics 2006

A US study of dairy farms in 11 states found that the variation in producer returns was due mainly to the size of the operation, with cow productivity, stocking rate and feed supplements consumed also important (El-Osta and Johnson 1998). It would, however, be simplistic to conclude from this that every Australian dairy farmer (and in NZ for that matter) should set out to match the yield of their European and US rivals. The reality is that climatic conditions and assistance arrangements are vastly different, as are the relative cost of land and other resources. Doyle, Ho, Armstrong and Malcolm (2003), in a case study of a Kyabram (Victoria) dairy farm, found that while intensification and grain supplements can improve productivity and profitability there are higher risks and the response is relatively low for cows grazing high-quality pastures.

In 1993–1994 FarmStats Australia, in a study of 89 Western Districts dairy farmers in Victoria, found that financial performance of dairy farmers was due more to the quality of overall farm management, the timing of activities and the quality of inputs used. They found the low-performing dairy farms did not differ significantly from the high-performing group in their stocking rate and use of supplementary feed.

9.2 The basic dairy value chain The strategic challenge in establishing a start-up dairy value chain is, like many agricultural supply chains, to have a supply-chain size that captures both the cost advantages of economies of scale and the product differentiation possibilities needed for smaller markets. A reliable supply of high-quality raw milk is clearly a critical part of the set-up requirements because it is essential that capacity be fully utilised if the cost economies of scale are to be realised. The minimum-sized milk processing plant is

125

judged here to be 120,576,000 litres/year, supplied by 80 specialist dairy producers (average of 1.5m litres/year) with each cow producing an average 8,129 litres/year. This plant size is similar to that identified by Dalton, Criner and Halloran (2002) for fluid milk processing in the State of Maine in the US. The economies of scale of this sized plant over two smaller plant sizes (66m litres/year (small plant) and 79m litres/year (medium plant) are shown in Chart 9.5. There are much larger plant sizes than this in Australia (e.g. Murray Goulburn, the plants from which account for more than 40% of Australian-manufactured dairy exports) and the US, though their cost advantage is unclear and the risks to continuity of supply potentially larger.

Chart 9.5: Economies of scale in processing ($Us/litre processing cost only)

0.15

0.16

0.17

0.18

0.19

0.2

Small plant Medium plant Large plant

The raw milk supply resource is assumed to be a relatively intensively managed and high-performing herd compared to a current Australian average cow productivity of 5,300 litres/cow. Nevertheless, some producers are achieving high yields and enterprise profits with careful management. Donovans Dairy in South Australia is reported to be producing 19m litres of milk per year from 2,000 cows.

At the farm level the dairy producer has a significant number of options for achieving improvements in productivity, ranging from genetics to feed supplements, use of irrigated pastures and preparing calves as co-products for high-value markets. For example, it is now possible to purchase sexed semen to enable production of just heifers for lucrative export and domestic markets willing to pay $1,250/head or more. The range of options available and skills required to successfully identify and implement those options underline the importance of whole-farm management skills in dairy production. James Mann at Donovans Dairy says the priorities for them are “…research into plant species, pasture, crop management and whole-farm systems … I am looking for certainty about my future … access to natural resources, reliable power supply, good roads, less red tape, plus greater certainty of costs and returns.”(ADIC Dairy Industry Breakfast 2004).

There are similar challenges at the processing level in achieving the right balance of product development and marketing, plant size and utilisation of plant capacity, and overall financial management skills. Carts 9.6, 9.7 and 9.8 illustrate the growing importance of price premiums and brand management in dairy products. The cheese category stands out as the product with most differentiation potential, while milk prices exhibit a relatively low range, though even here there is potential to double the retail value with the addition of flavouring and lower fat. Yoghurt, like butter, also exhibits a wide range of prices, underlying its differentiation possibilities.

126

Chart 9.6: Selected cheese product retail prices, Australia, May 2006

0

10

20

30

40

50

60

$A/kg

HomebrandCheddar

Jindi TripleCream

CottageCheese Natural

King Is Blue Margaret RiverCamembert

Kraft Parmesan

Source: Greengrocer.com cheese product prices adjusted to equivalent 1 kg weights, May 2006

Chart 9.7: Selected milk product retail prices, Australia, May 2006

0

0.5

1

1.5

2

2.5

3

$A/kg

Woolworthswhole fresh

Woolworthsfresh lite

DevondaleLonglife

DevondaleLonglife Skim

Woolworthsfresh skim

Woolworthsflavoured choc.

Farmers Unionice coffee

127

Chart 9.8: Selected yoghurt product retail prices, Australia, May 2006

012345678

$A/kg

Woolworthswhole fresh

DevondaleLonglife

Nestle AllNatural

Dairy FarmersNatural

Dairy FarmersLow Fat

AttikiAcidophilus No

Cholestrol

9.3 The flow of products and yields in the dairy value chain The overall milk value-chain product flow is shown in flowchart 9.9, which shows only the main activity categories and product flows. From production through processing to retailing there are different combinations of land, labour and capital required at each activity to enable presentation of a product to consumers. There are environmental impacts at both production and processing levels. Arriving at the optimal supply-chain structure with optimal production, processing, distribution and retailing providers is a challenge for supply-chain leaders and a large number of operators.

As noted, the product development and branding possibilities and choices for milk are significant within the major categories of whole milk, skimmed milk, cream, butter and cheese. Charts 9.10, 9.11 and 9.12 show, in slightly more detail, the basic activities for butter, cheese and milk powder production. For butter production the initial activities (filtration, clarification, separation and pasteurisation) are the same as for whole-milk production, but unlike milk production there is no homogenisation activity because the cream has to be preserved.

Chart 9.13 shows the estimated product yields for this synthetic plant with input of 120m litres of raw milk/year. The plant could produce a diverse range of products comprising cheese (38% of milk input used), whole milk (18%), WMP and SMP (19% each), BMP (2%) and butter oil (3%), with some 3,000 tonnes of whey powder captured as a co-product from cheese processing. The conversion factors/ratios shown in Chart 9.13 are derived from various publications including the FAO (2006), UNEP (2005) and specific research results like that of Nono et al. (2006) and the Department of Environment (2005). It is important to note that conversion ratios depend on the responsiveness of the recipient, technology and work practices. Doyle et al. notes that diminishing returns are a universal characteristic of biological responses. They found, for example, that marginal milk responses to supplements can be low (less than 0.5 kg butterfat equivalent/1.0 kg concentrate) for cows grazing high-quality pastures and high (more than 1.0 kg butterfat equivalent/1.0 kg concentrate for cows grazing low-quality pastures. On average they found an average conversion of 0.7 kg of butterfat/1.0 kg of dry matter. This translates to a feed conversion ratio of 1.43 using the traditional feed-to-animal-weight-gain ratio terminology. The complexity of responding to feed conversion ratio data is further underlined by Edmeades and Brier (2005). Old technology and poor work practices can reduce the yield of saleable product and increase waste and effluent discharge levels in both production and processing activities. FAO research shows a general trend of increased conversion ratios (that is, high extraction of product components from raw materials). For example, at the processing level, milk powder (whole and skimmed) yield increased from 11.7 to 12.8% (that is, 12.8 kg of butter from 100 litres of raw milk) over the 30-year period ended 1995.

128

Chart 9.9: Dairy cow value-chain activities

1. Production

Elite breedingherd

Grandparentherd Parent herd Calves -for

which market?

2. Raw milk distribution

Raw milk storage,refrigeration, freight,cartage & handling

3. Processing

Pasteurisation

Water, w aste,detergents, sanitisers

Weigh

Specialty markets,incl. export of live

heifers,

4. Effluent & emissions

Wrap & pack5. Product packaging, storage distribution

Transport Warehouse Wholesale

6a. Retail - Supermarket/Gourmet Deli

Storage Preparation Location & display Promote & sell

6b Retail - Food Service Sector (restaurants, catering etc.)

Storage Meal design One-to-onecustomer service

Promote & sale

Location & ambience

End consumer

LandPastureIrrigation

Rainfall and Purchased WaterBuildings and equipment

Purchased and GrownFeed supplementsGenetics

Risk managementWhole farm management skills

Farm inputs

Milk extraction

Cream

Skim milk

Whole milk

Whey

CurdMatured hard cheese (cheddar,

mozzarella, provolone etc.)

Rennets, milk fat,vinegar,enzymes

WMP

SMP

Separation &standardisation

CreamSkim milk

Whole milk

Homogenisation & Deodorisation

Butter

Butter milk

Casein

UHF milk

Matured soft cheese (creamcheese,cottage cheese)

Packagingtype

129

Chart 9.10: Butter value-chain activities

Milk inflow Pre-treatment &separation

Bulk packaging [25kg packs]

Pasteurisation

Cooling

Churning &w orking

Ageing

Culture products& innoculation

Freezing & storage

Product

Main processing activities

Thaw ing

Consumer packaging[10-15 gm, 250 gm,

500 gm packs]

Chill storage

Distribution toretailers

Food service

Deli and corner stores

Supermarkets

Raw materials

Cream

Bulk distribution

Buttermilk

Lactic, ripened or culture butter

Sw eet cream butter

Packaging, storage & distribution

130

Chart 9.11: Cheese value-chain activities

Raw milkinflow

Pre-treatment &standardisation

Maturedcheese

Pasteurisation

CoagulationSlicing

Draining

PressingBrine sprickling

Maturation

Curd

FermentsRennet

CaKl2, KNO3

Conditioning

Early stage processing

Packaging

Raw materialsCheese milk

Lactic, ripened or culture butterWhey path

Whey

Filtration

FilteredWhey

Mixing &Pasteurisation

SugarFlavouringColouring

Whey drinks

Conditioning

Matured cheese path

131

Chart 9.12: Milk powder value-chain activities

Milk inflowStandardisedmilk (whole or

skimmed)

Bulk packaging[25 kg packs]

Preheating

Evaporation

Measuring &weighing

Spray drying

Storage

ProductMain processing activities

Consumer packaging[10-15 gm, 250 gm,

500 gm packs]

Distribution toretailers

Food service

Deli and corner stores

Supermarkets

Raw materials

Bulk distribution

Packaging, storage & distribution

132

Chart 9.13: Dairy milk and milk product conversion ratios

a.) Production

Female cow (200)

? Bull (5) or artificialinsemination

1 egg/femaleNon-fertile eggs

(10%)

Fertile eggs(90%)

180 calves (wt.40kg)

180 calves(wt.45 kg)

b.) Milk processing

Fresh milk[120,576,000 litres]

Whole milk [18%]21,703,680 litres

Cheese [38%]45,818,880 litres

WMP [19%]22,909,440 litres

SMP [19%]22,909,440 litres

BMP [2%]2,411,529 litres

Butter oil [3%]3,617,280

Whey powder[3,843,654 kg

150,748,800 litresWaste

Waste treatment

39,220,961 kgwhey liquid

Waste water discharge[1.3 litres/litre of milk

input]

Multiple ovulation and embryotransfer

100 eggs/female

Artificialinsemination

1,507,200 litres/year/enterprise 80 enterprises120,576,000 litres for factory

Butter [9%] 10,851,840 litres

21,595,516 litres of saleablepasteurised milk

5,498,265 kgcheese

99.5%conversion

12% conversion ratio

542,592 kg butter

2,474,219 kg WMP

2,474,219 kg SMP

5% conversion

10.8% conversion

10.8% conversion

144,691 kg BMP

180,864 kg butter oil

6% conversion

5% conversion

9.8% conversion

whey permeate streamcondensate

ionic wastedetergents

Irrigated farm land

Water consumption[1.9 litres water/l i tre ofmilk input]. Total forplant = 229,094,400

litres/year

Biological oxygen demand (BOD) - 1,500 mg/l ... 682t/yearChemical oxygen demand (COD) - 2000 mg/l ... 909t/year

Fat - 150 mg/l ... 68t/yearTotal nitrogen (N) - 100 mg/l ...45t/year

Total phosphorus (P) - 30 mg/l ...14t/year

133

9.4 Product costs analysis The total costs for delivering and presenting for sale a two-litre carton of whole milk at a supermarket at an Australian city (in May 2006) are estimated to be $A2.78/two-litre carton, equivalent to $1.388/litre. The single largest cost activity in this supply chain is processing ($0.385/litre, equivalent to 28% of total supply-chain costs), followed by the retail supermarket and farm production activities where costs are estimated to be $0.31/litre for each. The next highest cost is in distribution ($0.14/litre) and storage ($0.06/litre). The value-chain activities for whole-milk production, though to the retail end, and their respective estimated costs are shown in Chart 9.14.

Chart 9.14: Dairy supply-chain costs, by activity, 2-litre package

Grandparent herd

ProcessingSupermarket

Packaging Materials

00.05

0.10.15

0.20.25

0.30.35

0.4

$/litre

Elite herd Parent herd Storage Distribution

In this value chain (Chart 9.14) a farm operating surplus of $0.10/litre is included as a cost in the farm production activities. The costs are derived from the 2002 report by Moran (2002) on dairy farm costs at Kyabram, Victoria. An allowance of $0.05/litre for profit is included as a cost in retailing.

Table 9.1: Breakdown of annual cash income and operating costs ($/farm and c/litre milk produced) for dairy farmers (Moran 2002)

Operating costs Average farm Average (c/litre milk

produced) Typical range (c/litre milk

produced) Total cash income $420,300 31.3 29.4 – 32.3 Herd costs $27,400 2.0 1.9 – 2.1 Shed costs $10,310 0.8 0.8 – 0.9 Feed costs $169,500 12.6 12.6 – 13.3 Cash overhead costs $39,200 2.9 2.2 – 3.9 Imputed overhead costs $95,800 7.1 5.7 – 6.4 Cash operating surplus $173,875 13.0 9.3 – 14.2

The production enterprise in this study is separated into three sub-enterprises with herds of 40, 80 and 80 milking cows for elite, grandparent and parent groups. These herds have different feed use and production levels. The elite herd produces 11,200 litres/year; the grandparent herd 7,750 litres/year

134

and the parent herd 5,490 litres/year. They each have different feed supplement consumptions of 2.3, 2.1 and 2.0 t/year/milk cow.

The overall supply chain makes a profit of 3.5% on sales (after tax), equivalent to a net profit (after tax) of $0.05/litre. This profit is assigned to processing, which has no inbuilt profit allowance.

The largest cost items in the dairy value chain are general operating expenses (profit allowances for farm production and retailing, plastic containers, distribution, storage, fuel and oil, rent and herd) which account for 55% of total supply-chain costs (Chart 9.15). Labour accounts for 22% of total supply-chain costs and materials (including feed) for 12%.

Chart 9.15: Resource use in dairy value chain for whole-milk production

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

$/litre whole milk

Materials Labour Expenses Machinery Investments EBIT Income tax

The unit costs of milk processing when added to the profit allowance of $0.05/litre amount to $0.43.5/litre. ABARE (2005) estimated that the earnings of milk processors varied according to their ownership, with farm cooperatives showing relatively low returns on sales of around 2% compared to their corporate rivals which showed returns (earnings before interest and tax, or EBIT) of 7% or more on sales. The profit incorporated in the supply-chain budgets here is 3.5% on sales, but it could be less with a cooperative structure and more with a corporate structure. To the year ended June 2005 Fonterra Co-op Group realised a profit after tax of $205m, equivalent to 1.7% on sales revenue; Nestlé achieved a profit of $117.3m, equivalent to 4.8% of sales revenue; and Murray Goulburn achieved a profit of $53.6m, equivalent to 2.9% of sale revenue (Dairy Week, 25 November 2005).

A feature of the dairy whole-milk sector, like many agricultural supply chains, is the relatively high capital-intensity of farm production compared to processing and retailing. At the farm level there is about $0.75/litre of capital required, $0.55/litre at the processing level, and $0.35/litre at the retail level (Chart 9.16). These relative levels of capital commitments generate associated differences in profits/litre. From a profit perspective dairy producers are estimated to make the highest profit/litre, followed by processors and retailers.

At the retail level the profit allowance is $0.05/litre, equivalent to 3.6% of the sales value of $1.388/litre. To the year ended June 2005 the net profit on sales for all sales by Woolworths (Woolworths 2006) was 2.5% and for Coles Myer (Coles Myer 2006) it was 1.85%. The profit share of sales by each activity declines as milk moves through the value chain (Chart 9.17).

135

Chart 9.16: Capital-intensity through the dairy whole-milk value chain

00.10.20.30.40.50.60.70.8

$ capital/litre of whole milk produced

Dairy production Processing Retail

Chart 9.17: Profit shares, dairy whole-milk value chain

0

2

4

6

8

10

$/litre

Production Processing Retail

The capital-intensity estimate is based on a total farm asset value of $10,000/ha, including land and stock (at 1.65cows/ha) and other assets. The processing value is based on capital requirements of $0.55/litre and retail of $0.35/litre. The retail capital intensity is based on the average-sales-to- capital ratio of 26% for Woolworths and Coles Myer for the year ended June 2005. For processing there is significant variation in capital intensity, ranging from $1.00/litre for Fonterra Co-op Group down to $0.54/litre for Bonlac and $0.70/litre for Tatura Milk.

The described milk supply chain produces an estimated 120m litres of fresh milk, with a gross value of $166.6 m/year.

136

9.5 Main messages from the dairy cow whole-milk value chain There are several important findings from the study of the dairy whole-milk value chain: • The dairy value chain features significant competition, especially between producers, with

continuous growth in productivity essential for maintaining competitiveness. The main challenge is to continue the productivity in yields/cow through least-cost solutions which are likely to require continuous attention to optimising pasture and supplementary feed supply systems, as well as ongoing genetic improvement. Farm amalgamations will remain an important measure for reducing overall unit costs, especially labour.

• Processors play a pivotal role and are the leaders in the dairy supply chains, but they face major competition in supplying retailers and maintaining supplies of raw material to enable their plants to run at high levels of capacity utilisation. Product development will remain a major profit driver for processors and a critical task for a successful dairy value chain.

• While supermarket returns account for a relatively high share of the dairy value-chain costs they appear not to be not excessive in the context of reaching and meeting consumer needs in a low-cost way and generating acceptable returns to capital.

• The relative levels of profit/litre of milk generated by each activity in the milk supply chain reflect, approximately, the relative differences in capital intensity of different activities through the supply chain.

9.6 Cheese production In many cheese-processing enterprises there is also production of butter and whey powder as a co-product of the cheese process. As it is with whole-milk processing, the milk is produced on-farm and taken through to pasteurisation to destroy bacteria. In terms of adding value to whole milk from cheese production it is estimated that a large cheese and butter processing plant could plan around revenue of $12.50/kg of output. The milk required to make 1.0 kg of cheese is about 8.33 litres. The whole-milk equivalent value of this would be about $8.75. This implies that cheese production adds about $3.75/kg to an equivalent quantity of whole milk. The Bega Cheese factory in south-eastern Australia has revenue of around $250m/year from 20m kg of cheese and butter.

137

Case study: Automation in dairy production enterprises Max and Evelyn Warren at Winnindoo in Gippsland, Victoria, milk 200 cows using a fully automated robotic dairy (http://www.roboticdairy.com/visits.htm) using Lely Industries equipment (www.lely.com). The Warren’s website has a video showing the robot and milking shed in operation. Lely Yellow Astronaut milking robot

The automated milking system (AMS) has attracted a significant level of interest, with Lely Industries reporting significant growth in sales across many countries in both developed and developing economies. The main claims of the AMS relate to labour savings, with positive impact on milk yield. Lely states: “According to a study* conducted by the Finnish Pellervo Economic Research Institute and published in February, 2005, the economic profitability of robotic milking systems is better than that of milking parlours. The comparative study of this institute into automated milking systems versus milking parlours has shown that the main economic benefit is clearly due to the decrease in labour costs. Labour costs in automatic milking are €312/cow lower than those connected with milking parlours and this difference is more than enough to compensate for the higher investment for an automated milking system. In terms of economic profitability, the net return for automated milking systems remains €100/cow above that of milking parlour systems. Due to increased milking frequency, this improved profitability is achieved even without any additional milk production.” An independent study of 22 dairy farms using robots, by Fisher, McKnight and Rodenburg (2002), at the University of Guelph in Canada, found that for most users, the performance of AMS had exceeded or met expectations and there was a significant difference in milking labour costs compared to conventional milking systems. The savings were 2.26 minutes/day/cow, which translates to almost eight hours/day for a herd of 200 milkers. Whether or not this generates a viable return depends very much on the cost of labour. When labour was priced at $7/hour the investment was not viable, but when it was $16/hour the investment was viable. A Lely robot is available in four models, ranging from around $200,000 to $250,000. One robot was handling an average of 56 cows, though some operators were achieving as many as 80 cows/day. In addition there is the cost of the milking parlour to house the robots and support equipment, which could be $250,000 for a system handling 180 cows. Fisher’s research did not find any significant increase in yield/milker from using the robot. *Terhi Latvala – Antti Suokannas, 2005. “Adoption of Automatic Milking System: Profitability and reasons for adoption”, Pellervo Economic Research Institute report no. 192, ISBN 952-5299-90-2 (NID), ISBN 952-5299-91-0 (PDF), ISSN 1456-3215.

138

10. Pig value chain 10.1 Background There were an estimated 961 million head of pigs in the world in 2004–2005 (FAO Statistics 2006), with 71% of stock located in developing countries and 29% in developed economies. Australia had an estimated 2.5 million head of pigs in 2005. From this livestock the estimated world production of pig meat was 102.4m tonnes in 2005 (from 1.3 billion slaughtered animals and an average weight of 78.3 kg), of which we estimate 38% was in developed countries and 62% in developing countries. Pig meat has the highest volume in overall meat production and accounted for 38% of total world meat production of 265m tonnes in 2005. Australia produced just over 388,000 tonnes of pig meat in 2005 (with an average slaughter weight of 72 kg/animal) and it ranks third after beef, veal and chicken in terms of national production. Compared to beef, veal, chicken and turkey, a relatively large proportion of pig meat is produced in developing countries, though this share is not as high as it is for buffalo and goat meat (Table 10.1). These shares of the different meats reflect, in part, access to low-cost feed concentrates and, in part, the relative labour intensity of production and processing which would favour developing countries when the activity is relatively labour intensive, as it seems to be with pig meat.

China (50.1m tonnes, equivalent to 49% of world output) is the largest producer of pig meat, followed by the USA (9.4m tonnes), Germany (4.5m tonnes), Brazil (3.12m tonnes), France (2.3m tonnes), Poland (1.9m tonnes), Denmark (1.8m tonnes), Italy (1.5m tonnes) and the Netherlands (1.3m tonnes).

Table 10.1: World meat production, selected species, 2005 (tonnes)

Beef & veal Pig meat Turkey meat

Goat meat

Chicken meat

Rabbit meat

Buffalo meat

Australia 2,139,948 388,434 28,700 16,750 735,625 n.a. n.a. Developed countries 29,391,004 38,982,864 4,699,471 195,351 31,599,018 548,530. 3,389 Developing countries 30,799,904 63,458,284 468,089 4,361,081 8,875,484 613,643 3,156,926 World 60,190,908 102,441,148 5,167,560 4,556,432 70,474,502 1,162,173 3,160,315

Source: FAO Statistics, Foster et al., and own estimates Note: FAO Statistics do not include rabbit and buffalo meat data for Australia, but it’s likely to be a very small quantity.

Brazil is the fastest-growing pig-meat producer, with a threefold increase from one million to over three million tonnes from 1990 to 2005. China is also experiencing fast growth, of over 100% from 24m tonnes in 1990 to over 50m tonnes in 2005. Production in all developing countries has doubled on average over the same period compared to almost no change in average developed country production. Canada and Denmark, however, are two countries moving against the trend with growth rates of over 70% and 50%, respectively, over the same period. Meanwhile, the Netherlands is heading in the opposite direction with a decline of 23% over the same period.

There is a wide range of slaughter weights across countries, from 20 kg/animal in Laos to 120 kg in Austria, reflecting, among other things, economic conditions and local preferences.

There were also about 22 million live pigs traded globally in 2004 (2.3% of total stock) with the US (39% of total imports) and Germany (21%) the main destinations. In 2004 there were 3.2m tonnes of pig meat imported globally, 85% of which was by developed countries (Table 10.2) with Western Europe accounting for 69% of total exports. Denmark alone accounts for nearly 30% of global exports and this is all controlled by one company or cooperative (see below). Major importing countries include Germany (492,000 t), Russia (395,000t) and the USA (376,000t). Nearly 70% of imports are accounted for by the EU, but this is almost all intra-EU trade. For Australia the main export markets are Singapore (over 40% of exports), Japan, New Zealand and the Philippines.

139

Table 10.2: World pig-meat trade, 2004 (tonnes)

Imports Exports

Total quantity (tonnes)

Total value ($US’000)

Average value

($US/kg) Total

quantity Total value

($US) Average

value $US) Australia 61,040 173,673 2.85 46,140 122,346 2.65 Developed countries 2,706,202 5,641,235 2.08 4,056,910 9,490,578 2.33 Developing countries 555,075 865,435 1.56 254,201 402,694 1.58 World 3,261,277 6,506,670 1.99 4,311,111 9,893,272 2.29

Source: FAO Statistics

The value chain of pig production and processing in Australia is somewhat similar to the poultry value chain where a few large processors dominate processing and are supplied by a large number of producers, often under contract. In 2004, an estimated 92% (5.45m) of pigs were sold directly to abattoirs with 4–5% (260,000 pigs) sold through saleyards and the remainder disposed of through other means (personal correspondence, Australian Pork Limited). In Australia the ten largest abattoirs account for over 70% of national slaughterings, but in countries like Denmark there is much more concentration of ownership of processing, suggesting the presence of significant economies of scale. The cooperative, Danish Crown (www.danishcrown.dk), with 20,000 farm producer members who control it, has a 90% share of the pig-processing market in Denmark and there is only one other abattoir. Danish Crown produces 10% of EU pork and 1% of world pork. Danish Crown is the world’s largest pork exporter and accounts for a significant 20% of world trade in pork. The cooperative has a strategy of cooperation for competitive advantage along the whole supply chain.

In Australia an estimated 65% of pork is sold through retailers direct to the public and 35% to the food service sector. In the US, 50% of fresh pork and 40% of processed pork is sold to the food service sector (Pan 2002) and the balance to the public through retailers.

While the pork industry in developed countries is dominated by arms-length commercial abattoirs, in developing countries like China there would be more than 75% of production undertaken by small landholders in back-yard, peasant-style operating conditions. This is one reason for the low level of exports from developing countries like China, though this is expected to change with expanded commercialisation of production.

Table 10.3 shows the USDA’s recently revised nutrient dataset for fresh pork. Pork is rated highly as a source of protein and selenium, but lowly for its saturated fat and sodium content (http://www.nutritiondata.com/).

140

Table 10.3: Composition of pork, fresh, loin, sirloin (roasts), bone-in

Nutrient name Unit N1 Lean and fat Lean only2 Source code3

Raw Cooked (roasted) Cooked (roasted) 100g 115g 100g 85g 100g 85g

Water g 12 70.29 80.83 59.26 50.38 61.74 52.48 1

Energy kcal 0 175 201 231 196 204 173 4

Calories from fat kcal 0 81 94 117 99 85 72 4

Protein g 12 20.46 23.53 26.6 22.61 27.78 23.61 1

Total lipid (fat) g 12 9.03 10.39 12.98 11.03 9.44 8.02 1

Ash g 12 0.95 1.09 1.07 0.91 1.12 0.95 1 Carbohydrate, by difference g 0 0 0 0 0 0 0 7

Fibre, total dietary g 0 0 0 0 0 0 0 7

Sugars, total g 0 0 0 0 0 0 0 7

Calcium mg 12 14 16 15 13 13 11 1

Iron mg 12 0.82 0.94 0.94 0.8 0.96 0.82 1

Sodium mg 12 56 65 57 49 59 50 1 Vitamin C, total ascorbic acid mg 0 0 0 0 0 0 0 7

Vitamin A IU 1 0 0 0 0 0 0 1 Fatty acids, total saturated g 0 3.009 3.46 4.153 3.53 2.872 2.441 4 Fatty acids, total trans. g 0 0.084 0.096 0.104 0.088 0.063 0.054 4

Cholesterol mg 4 70 81 89 75 89 76 1, 4

Magnesium mg 12 23 27 25 21 26 22 1

Phosphorus mg 12 208 240 228 193 235 200 1

Potassium mg 12 335 386 340 289 352 299 1

Zinc mg 12 1.95 2.24 2.52 2.14 2.62 2.23 1

Selenium mcg 12 29.2 33.6 44.4 37.7 46.4 39.4 1

Thiamin mg 4 0.492 0.565 0.638 0.542 0.665 0.565 1, 4

Riboflavin mg 4 0.276 0.318 0.36 0.306 0.376 0.32 1, 4

Niacin mg 4 6.089 7.002 7.855 6.677 8.165 6.94 1, 4

Pantothenic acid mg 0 0.837 0.963 1.035 0.88 1.074 0.913 4

Vitamin B6 mg 0 0.754 0.867 0.748 0.636 0.784 0.666 4

Vitamin B12 mcg 0 0.56 0.64 0.64 0.55 0.61 0.51 4 1 NDB no: To be assigned 2 Cuts were cooked with separable fat present; separable fat was removed prior to nutrient analyses 3 Source codes: SC =1: analytical data; SC= 4: Imputed data and # of observations set at 0; SC=7: assumed zero Source: USDA Agricultural Research Service

141

The following diagram shows the main primary cuts of pork. The breeding of pigs has been focused on those with long loins where the highest-quality meat is located and highest prices are realised. In most developed economies a large proportion (50% or more) of the pork is processed further with curing to form ham and bacon.

Source: The Meat Man – www.askthemeatman.com

A summary of comparable properties of pig and other meats at a carcass level, including meat, fat and skin, in the raw state, is shown in Table 10.4. High saturated fats and cholesterol adversely affect the health ratings of all main meats except rabbit.

Table 10.4: Pig meat compared to beef, turkey, rabbit and chicken

Beef, raw fresh

carcass

Chicken, broiler, back, meat & skin,

raw

Duck, meat &

skin, raw.

Pig, raw fresh

carcass

Rabbit, raw, domestic,

composite of cuts

Turkey, composite,

raw Average total fat (% of content) 22 28.8 39.4 35 5.5 13 Saturated fat (% of content) 9.2 8.5 13.2 12 1.8

3.6

Cholesterol (mg per 100g) 74 79.7 76 74 56.8 74 Sodium (mg per 100 grams) 59 64.4 63.1 42 41 65.9 Protein (%) 17 13.6 11.5 13.9 20 18 Iron (% daily values, 2000 calorie diet & 454g meal) 47 5.1 13.2 47 8.8 9.1 Negatives Saturated

fat Saturated fat High

saturated fats

High saturated

fats High chol. High chol.

Positives Protein, vitamin B12

& low sodium

Protein, low sodium

Low sodium

Protein, thiamin & selenium

Niacin, vit B6, B12, P, Se, protein,

low Na

Protein, Se & low Na

Optimum health star rating 2 stars 1.75 stars 1.75 stars 1.5 stars 2.25 stars 2 stars

Source: http://www.nutritiondata.com/facts-B00001-01c20b6.html.

142

When fat is trimmed all the meats show significant improvements in terms of lower fat content and cholesterol and this improves their rating in the optimal health scale (Table 10.5).

Table 10.5: Boneless pork compared to boneless beef, turkey, rabbit and chicken

Beef-raw, bottom sirloin,

trimmed to zero fat.

Chicken breast meat, raw

Duck-raw,

domestic meat only

Boneless pork loin,

fresh

Rabbit, raw,

domest.

Turkey, raw, meat

only Average total fat (%) 7.1 9.2 5.8 7.1 5.5 2.8 Saturated fat (%)

3.6 2.3 2.2 2.7 1.8

1.1 Cholesterol (mg per 100g) 64 64.4 76.6 49.1 56.8 65 Sodium (mg per 100g) 53.6 63.2 73.7 358 41 70.1 Protein (%) 21.4 20.7 18.2 18.75 20 21.7 Iron (% of daily values with 2000 calorie diet & 454g meal) 7.1 4.6 13.1 4 8.8 8.2 Negatives

High cholesterol

High chol.& trans fats

High chol. High chol. & sodium.

High chol.

High chol.

Positives

Protein, vitamin B12, B6, P, Zn,

Se & low sodium

Protein, niacin

vitamin B6, Se & low

sodium

Thiam, ribofl,

niacin, vit B6, pant acid, P,

Se, protein

Protein

Niacin, vit B6, B12, P,

Se, protein, low Na

Niacin, vit B6, P, Se, Zn, protein

Optimum health star rating 2.1 stars 2 stars 3 stars 1 star 2.25 stars

2.25 stars

10.2 Drivers of competitiveness Achieving best practice throughout the value chain remains an ongoing challenge in the highly competitive pork industry which is subject to growing exports (world exports of pig meat have increased 34% over the period 2000–2004). The following factors have been identified as important contributors to pig industry competitiveness by various researchers across countries: • Economies of scale — production and processing. In 2003 the 3% of producers with 1,000 or

more breeding sows in Australia accounted for over 50% of the total sow numbers (Productivity Commission 2005). Rutten (2005), in an assessment of PigCHAMP benchmark data from the US observes that the average number of pigs weaned per mated female per year (a key performance indicator) are higher for larger-sized operations of over 1000 sows, due in part to higher farrowing rates of large producer enterprises (79.6%) compared to small enterprises with less than 500 sows (74%).

• Economies of scale — processing level. The five largest abattoirs account for over 50% of pigs slaughtered in Australia. Australian Pork Limited have a slaughter/processing target/enterprise of 40,000–50,000 pigs/week in a single shift (2.0–2.5m/year) (Australian Pork Limited 2005), but this is still relatively small compared to Smithfield Food’s plant at Tar Heel, NC in the US which has capacity to process 32,000 head/day (over 200,000/week). Nevertheless, smaller plants continue to be developed. US-based Triumph Foods has recently built a larg-scale plant with capacity to process 1,000 pigs/hour, which could process over 4m/year with two shifts. The Meadowbrook Farms Cooperative (http://www.farms.coop/) plant in Illinois was launched in 2004 with capacity to slaughter just 3,000/day and is ranked in the top third of US plants for production efficiency.

143

• Utilisation of capacity. At the same time, utilisation of capacity is a critical requirement for competitiveness. AusPork’s Dayelsford abattoir has capacity to slaughter 6,500–7,000 pigs/week in a single shift, but was only achieving 3,500–4,000/week, which is less than 30% utilisation of capacity (Productivity Commission 2005). Fabiosa, Hu and Fang (2005) describe commercial pig abattoirs in China operating at 17% of capacity. Under-utilisation of capacity can quickly erode the cost advantages of scale. Hobbs and Martin (1999) showed that by working two shifts/day the cost savings can almost achieve the same gains as a 100% increase in capacity where only one shift is used (Chart 10.1).

Chart 10.1: Impact of plant size and number of shifts worked: costs saved

02468

101214

Canadian $/kg

20,000 30,000 45,000Capacity used

Single shift Two shift

• Close integration between production and processing. The combined importance of economies

of scale and high utilisation of capacity creates a major incentive for close integration between production and processing. Smithfield Foods, the largest pork processor in the US (25% of country capacity) and the world (with revenue of $US11 billion in 2006), also owns the third-largest producing firm and has firm contractual arrangements with other suppliers including feed concentrates (Lawrence 1998).

• Management of nutrition and feed, as the major production cost (about 60% of farm costs), take on added importance, especially with evidence of major variations in feed conversion ratios from 2.6 to over 4:1 (Taylor and Roese 2006)37. Improved feed conversion efficiency has been achieved through genetics (focus on fast-growing, lean animals), improved knowledge of energy value of feeds, improved housing facilities, feed additives and general management improvement. Miller (2003) identifies growth-promoting antibiotics as an important source of productivity improvement, contributing a 0.5% improvement in daily weight gains, a 1.1% increase in feed conversion ratios, and reduced mortality of 0.22%.

• Sow fertility. Producers in Canada and the Netherlands are achieving 30 pigs weaned per mated female, which is over 30% above the Australian benchmark target of Australian Pork Limited and the actual level of 20. In a comparison of key performance indicators at the production level ABARE observed Australia (19.7 in 2002) to be relatively low on pigs weaned per mated female compared to Denmark (23.7 in 2002), but so also was Canada (20.2) and the US (19.5).

37 Australian Pork Limited’s benchmark target is 2.68 kg of feed per kg of liveweight.

144

10.3 The flow of products and yield from the pig supply chain The flow of livestock and yield of meat and co-products from the pig supply chain is show in Chart 10.2. The data used is derived from various research publications and should be viewed as being mainly from above-average enterprises, though some viewers can no doubt point to much higher performance data. For example, in Denmark many producers are achieving 30 pigs weaned/sow/year, which is some 24% higher than that indicated in Chart 10.2. Similarly, in Canada some enterprises are achieving 30 pigs weaned/sow/year. Big Sky Farms (www.bigsky.sk.ca/whoweare.html) in Saskatchewan has a “30 Pigs Breeding Group” which is being used to improve gilt performance, and which has a target of 30 pigs weaned per mated female per year. The PigCHAMP benchmark in the US, however, is 21 pigs weaned/sow/year (Rutten 2005).

The product yields in Chart 10.2 are derived from three different research publications produced by Liu (2005), Hambrock (2005) and Fabiosa et al. (2005). They all produce some variation in yields, but all agree that the yield of edible meat from pork (over 55%) is relatively high compared to cattle and lamb (less than 50%). In turn, this typically means the co-product revenue from pork is relatively low, though Fabiosa et al. in their study of the pork industry in China found that relatively high prices are paid in that country for co-products. Pig’s lard, lungs and kidneys were all selling for over $US2.00/kg in Shanghai in 2005. Co-product prices in China are relatively high compared to that of traditional edible meat cuts from pork in that country. Hayes and Clemens (1997), as cited by Fabiosa et al., note that US and Asian consumers of pork have complementary outcomes in that they each have a preference for different parts of the same animal. The same complementary effect is likely to exist for Australian and Asian consumers and is a subject that’s worthy of further research for pork and other meats.

Chart 10.3 shows a basic value chain from a task perspective. Effective integration of activities along the value chain has emerged as an important requirement for competitiveness in the pork industry. Efficient integration can reduce the risk of low utilisation of capacity, especially at the processor level, and improve the reliability of supply for retailers and communication of market information from consumers to operators throughout the value chain.

It is estimated that about 40% of pig meat consumed in Australia is in the form of fresh pork (Productivity Commission 2005) with the balance used in further processing. Information about the distribution between the food processing and end-user sectors is not readily available. We estimate the food service sector could account for around 20–25% of the pork market, compared to 27% for beef and 32% for chicken. Food service outlets include restaurants, hotels, hospitals and clubs. Supermarkets and specialised butchers shops and delicatessens would account for a large share of sales direct to consumers.

145

Chart 10.2: Pig-meat supply chain, by product yield

a.) Production

Sow (18-20)

Boar (1)

30eggs/female/year

Non-fertile eggs(10%)

Farrowing rate-Fertile eggs (90%)

27 piglets (wt.1.4 kg)

b.) 1st stage processing c.) 2nd stage processing

Bone-in carcass(73.5 kg)

Shoulder meat (11.6 kg)

Loin chops (13.8 kg)

Ham (17.7 kg)

Co-products (19.92 kg)

Edible boned-outmeat (53.58 kg)

Co-products(46.42:26.5 kg +

19.92 kg transferredin from boning)

Shrinkage & loss.(5.75 kg)

Offal (17.5 kg)

Hide, skins (3 kg)

Fat (3 kg)

Bone (14.17 kg)

Blood (3 kg)

Offal products:feet (2.0 kg)liver (1.0 kg)heart (0.5 kg)head, incl jow els(4.0 kg)tails 0.2 kgneckbones 1 kgother (8.8 kg)

Skin (3 kg)

Renderedproducts:

tal low (5.75 kg)bloodmeal (600 g)

meatmeal (6.65 kg)

Effluent (6 kg)

1 kg

Litters:2.2/sow/year

24 weaners (wt.5.8 kg)

23 growers (wt.23 kg)

22 sale pigs (wt.100 kg)

11% loss

4% loss4% loss

Hind leg (6.0 kg)

Bellies (12.5 kg)

Spare ribs (2.9 kg)

146

Chart 10.3: The pig production, processing and service value chain

a.) Production

Sow (18-20)

Boar (1)

30eggs/female/year

Non-fertile eggs(10%)

Farrowing rate-Fertile eggs (90%)

27 piglets (wt.1.4 kg)

b.) 1st stage processing c.) 2nd stage processing

Bone-in carcass(73.5 kg)

Shoulder meat (11.6 kg)

Loin chops (13.8 kg)

Ham (17.7 kg)

Co-products (19.92 kg)

Edible boned-outmeat (53.58 kg)

Co-products(46.42:26.5 kg +

19.92 kg transferredin from boning)

Shrinkage & loss.(5.75 kg)

Offal (17.5 kg)

Hide, skins (3 kg)

Fat (3 kg)

Bone (14.17 kg)

Blood (3 kg)

Offal products:feet (2.0 kg)liver (1.0 kg)heart (0.5 kg)head, incl jow els(4.0 kg)tails 0.2 kgneckbones 1 kgother (8.8 kg)

Skin (3 kg)

Renderedproducts:

tal low (5.75 kg)bloodmeal (600 g)

meatmeal (6.65 kg)

Effluent (6 kg)

1 kg

Litters:2.2/sow/year

24 weaners (wt.5.8 kg)

23 growers (wt.23 kg)

22 sale pigs (wt.100 kg)

11% loss

4% loss4% loss

Hind leg (6.0 kg)

Bellies (12.5 kg)

Spare ribs (2.9 kg)

147

10.4 Structure in the pig-meat value chain The requirement for a minimum-efficient-sized pig-meat processing plant is judged here to have the capacity to slaughter at least 2.5m/pigs/year with an average liveweight of 100 kg/animal. This sized operation is not the least-cost size (refer to Section 10.2), but it would face less risk in maintaining a high level of capacity utilisation of say 85% or more. It is envisaged a plant of this size could be supplied by 100 producer enterprises, each having 1,000 relatively high-performing sows (comprising 20 elite breeders, 40 grandparent and 940 parents in a closed breeding herd) that deliver 25,035 pigs for slaughter each year.

The design of an efficient pig supply chain requires an initial assessment of the efficient size for each of the activities along it, along with the risk of being able to fully utilise whatever capacity is settled on. Again, it is the least costs size of operation for each activity that governs the procurement requirements that flow from that activity and usually it is found to be the processing activity where economies of scale are strongest and the firms very large. It is at this point that a supply-chain leader is likely to emerge. The supply-chain leader can set about sourcing products and services in the most efficient way possible from efficient-sized suppliers of livestock. Sometimes the processor will find it efficient for suppliers to be organised into cooperatives which can help in facilitating regular supply of material and in negotiating acceptable prices for sustained supply of pigs from producers. Alternatively, it could be more efficient to vertically integrate backwards and take ownership of supply.

10.5 Pig-meat product analysis As with other animals and their associated food products there are many different processing options, depending on the product and market requirements and the extent of forward integration undertaken. Producers may part with ownership at the livestock level and leave it to abattoirs beyond this point. Many processors concentrate on the abattoir task and leave the carcass break-up and further product development to specialist firms. The pig value-chain business model described here has the following revenue possibilities:

Live animal: 100 kg

Carcass: 73.5 kg38 of which: • saleable, boneless and skinless retail meat products: 53.58 kg

o 11.68 kg of ham (excludes 6.02 kg of bone and skin) o 10.76 kg loin chops (excludes 3.04 kg of bone) o 9.61 kg shoulder meat (excludes 1.99 kg of skin and bone) o 9.38 kg bellies (excludes 3.12 kg of skin) o 2.9 kg spareribs o 5.25 kg sausages o 4.0 kg feet, tail and neck-bones

• main co-products: 32.0 kg o 17.5 kg offal o 3.0 kg skin o 13.00 kg rendered product (tallow, blood-meal, meatmeal)

38 These yields are derived from several publications including the USDA publication, “Weights, Measures, and Conversion Factors for Agricultural Commodities and Their Products”.

148

Table 10.6 contains a more detailed breakdown of co-product yields, along with prices.

Table 10.6 : Pork product prices, August 2006

Quantity per animal (kg) Price ($/kg) Revenue

Saleable meat retail products Ham (200 gram pack) 11.68 17.71 206.85 Loin chops (390 gram pack) (includes bone) 13.8 8.78 121.16 Shoulder (1.5 kg pack) (includes bone) 11.6 8.49 98.48 Bacon (750 gram pack) 6.5 11.83 76.89 Spareribs (510 gram pack) 2.9 12.50 36.25 Sausages 7.10 12.98 37.38 Total 53.58 574.01

Co-products Feet (front toes on) 2.0 1.60 3.2 Liver (petfood) 1.00 0.50 0.5 Heart 0.5 1.28 0.64 Kidney 0.5 1.08 0.54 Head 4.00 6.00 24 Salivary glands 0.2 1.28 0.26 Tongue 0.5 4.40 2.2 Snout 0.25 1.34 0.33 Ear 0.25 1.25 0.31 Lungs (petfood) 1.25 0.12 0.15 Other offal 7.05 1.00 7.05 Skin (belly and back fat) 3.0 0.88 2.64 Tallow (edible) 5.75 1.06 6.1 Bloodmeal 0.6 1.44 0.86 Meatmeal 6.65 0.58 3.86 Total 33.50 52.64

Source: 1. Co-product prices are derived from “USDA By-Product Price Report” 25 Sep. 2006, except for ears which are derived from Fabiosa et al. 2005. All prices are converted to $A at $US0.76/$A. The wholesale prices for co-products are marked up 100% to arrive at a retail estimate. 2. Saleable meat retail product prices are from Greengrocer.com.au (27 Sep. 2006), which is already in $A and at a retail level. 3. Co-product quantities are derived from Hambrock (2005), Fabiosa et al. (2005), and USDA (2006).

On 7 October 2006 we conducted a brief survey of retail prices for 30 pork-bacon products mainly at major supermarkets and specialised butchers shops in the Canberra–Quenbeyan region of NSW and ACT. The average retail price of the pork-bacon products was $10.20/kg. Supermarket prices tended to be 15–20% higher than those for similar products in butchers shops, but the products in supermarkets tended to be all pre-packed, with set weights in polyethylene-wrapped plastic trays, whereas the butcher shops had a relatively high proportion of product available in consumer-selected weights and packed at point of sale. Organic pork was selling at a price premium of 120% or more of the standard pork products. There are numerous further product possibilities within these groups, including grinding, curing, rind removed, smoking, tenderising and joint products (e.g. with cheese or sauce). Readers wishing to establish a pig-processing enterprise are referred to the following site for useful information about product possibilities: http://www.askthemeatman.com/pork.htm.

149

10.6 Cost of production at the farm level The production part of the supply chain designed here is built around a sow unit of 1,000 breeders. Table 10.7 shows the basic assumptions used for this herd. Three key assumptions are the feed conversion ratio (3.26), the number of pigs weaned/sow and the average weight of finished pigs, the impact of which flows through to financial returns and value added through the supply chain. The number of pigs weaned and the weights of finished pigs are all achievable (according to various records), but they would place producers in the top 5% of producers in Australia and most other countries. The feed conversion ratio of 3.26 could be improved on with some producers achieving less than 3.0. Table 10.8 shows the costs and returns, given the assumptions of Table 10.7.

Table 10.7 Pig Production Enterprise: Main Enterprise Assumptions

Number of sows 1,000 Structure: closed herd — 20 elite sows, 40 grandparent, 940 parent., 50 boars, AI. Boars (% of sow numbers) 5 Death rates:

• sows 2.0 • weaners 10.0 • feeders/baconers 2.0

Average pigs weaned/sow 26.0 Total finished baconer pigs delivered to abattoir 25,035 Average price received ($/kg)39 $2.49 Carcass weight (HSCW)40 73.5 Average value of progeny sold 183 Enterprise revenue (incl. 300 backfatters) 4,581,781 Average carcass yield (%) 73.5 Days to sale weight 160 Weaning age (days) 21 Feeder age (days) 42 Baconer age (days) 100 Feed conversion ratio41 3.26 Labour (hours/sow) 31.45 Labour rate ($A/hour) 20.00

39 Price of $2.49/kg HSCW for 230–275 kg animals was published in ‘Eyes and Ears: Market News for the Australian Pork Industry’, 27 September 2006 40 HSCW-Hot Standard Carcass Weight. For further explanation of the carcass trim standard for HSCW visit the AUS-MEAT website: http://www.ausmeat.com.au/. 41 Feed Conversion Ratio (FCR) of 3.26 is derived from the average for the fully integrated operation, including feed for sows, weaners, feeders and baconers and the total liveweight of sales, including backfatters.

150

Table 10.8: Cost of producing baconer pigs, from sow to sale, 2006

Projected income Value ($A) Progeny sold as baconers (25,035 at 73.5 kg at $2.49/kg) 4,581,781 Backfatters (300 at 125 kg at $1.25/kg) 46,875 Sub-total $4,628,656 Direct expenses Herd/flock costs Artificial insemination ($15/sow) 15,000 Herd recording and testing 7,500 Animal health ($40/sow) 40,000 Sub-total 62,500 Shed costs Power and heating ($30/sow) 30,000 Sanitary supplies (detergents, gloves etc.) 1,500 Sub-total 31,500 Feed costs Sow (1,050 kg/sow at $0.30/kg ) 315,000 Boars (734 kg/boar at $0.30/kg) 11,010 Gilts (350) (70 kg/gilt at $0.30/kg) 7,350 Feeder pigs (27,000) (22 kg/feeder at $0.30/kg) 178,200 Grower pigs (26,500) (250 kg/grower at $0.30/kg) 1,987,500 Sub-total 2,499,060 Fuel and oil ($24/sow) 24,000 Repairs and maintenance ($15/sow) 15,000 Licensing and registration (10/sow) 10,000 Sub-total 49,000 Overhead cash costs Paid labour (20 hours/sow at $20/hr) 400,000 Paid labour (0.35 hrs/feeder) 189,000 Administration (4 hours/sow) 100,000 Sub-total 689,000 Overhead imputed costs Family labour (2 hours/sow) 50,000 Depreciation: ($21/feeder) 567,000 Depreciation: ($12/grower) 318,000 Sub-total 985,000 TOTAL 4,316,060 Costs/kg HSCW 2.30 Costs/kg liveweight 1.69 Operating profit $312,596 Profit/kg at farm gate (HSCW) $0.17

The total cost of production is estimated to be $1.69/kg liveweight, which is about 10% above the benchmark target set by Australian Pork Limited. Feed is the major cost item in all pig production enterprises, accounting for almost 60% of total expenditure. In response, the Australian Pork Cooperative Research Centre is allocating 35% of its $81m research budget to the development of specialised grain feeds with high levels of digestible energy, which can improve the feed conversion

151

ratios achieved by pig enterprises. Antibiotic growth promoters (AGPs) have improved daily weight gains and feed conversion ratios, but the EU has now banned their use at sub-therapeutic levels42 and this is likely to place further pressure on feed conversion ratios and profitability. Nevertheless, improved feed conversion efficiency is likely to be the best prospect for achieving a farm cost of $1.69/kg liveweight. Feed conversion ratios for pigs are affected by their need for shelter (Bactawar 2003), by use of feed additives (Schinckel, Richert and Einstein 2000), by achieving the right balance between energy and protein at different growth stages (O’Connell 2004) and by adoption of best management practices generally, usually those which seem to be associated with large-sized enterprises (Losinger 2004). The following feed conversion ratios in Table 10.9 are estimated for pig production.

Table 10.9: Feed conversion ratios (FCR), pig production

FCR: Liveweight FCR: Carcass-weight FCR: Boneless and skinless

weight Mid-point Range Mid-point Range Mid-point Range

Pig meat 3.00 2.00–4.00 4.1 2.72–5.44 5.6 3.73–7.47

The next major cash outlay is for labour, with an estimated 35.45 hours/sow, equivalent to 54.4 kg HSCW/hour. Stender (2004), in a study of Iowa pork producers, noted that producers with low overheads (pen farrowed, bedded systems) were more labour-intensive enterprises than traditional systems. Moving to a new system with higher labour productivity has to be considered carefully because overheads are already a relatively high cost. Labour in the above budget generates revenue of $131/hour which is relatively high for agriculture and any move to decrease the quantity of labour input would need to consider carefully the impact on quality and the value of output.

10.7 Processing As it is with milk and other meat-processing plants the costs of pork processing are closely related to plant size and full utilisation of capacity. Costs increase with capacity, but not to the same extent. Australian Pork Limited (2005) have a slaughter processing scale target of 40,000 to 50,000 pigs/week for Australian processors, with 100% utilisation for a single shift. The processing activity described here is a plant with slaughtering capacity of 2.5m/year, which is fully utilised in a single shift. This is still a relatively small plant compared to some of the plants in the US (refer to Section 10.2 above).

The revenue generated by this supply chain is estimated to be $10.71/kg on average for the edible main meats and $1.57/kg for the co-products (Table 10.10). The total volume of edible meat produced by the supply chain is 187,757,200 kg (HSCW) and of co-products 117,392,053. The total value of output at the retail level is estimated to be $2.01 billion/year, of which co-products account for 8.4%43. This output is generated by 100 producers each delivering 25,035 baconers weighing on average 100 kg (liveweight) and 73.5 kg HSCW, along with 300 backfatters weighing 125 kg.

The retail value of co-products from an operation of this size would be around $131.6m/year, equivalent to a significant 6.5% of total value.

The processing costs for the plant are shown in Table 10.10. Labour, and packing and processing materials are the main processing costs. Fixed costs (depreciation, labour etc.) are estimated to be about $38m/year. If two shifts were worked at full capacity for the full year it is estimated the processing costs would be $0.10/kg lower.

42 Antibiotic use is generally classified as sub-therapeutic if it is used to improve animal performance (e.g. through growth promotion) and therapeutic if used to treat specific health problems. Sub-therapeutic use typically involves lower dosages and extended periods of use, compared to therapeutic use which involves higher dosages for a short time (Miller 2003). 43 The co-product value is slightly higher than that estimated by Liu (2005), who indicated by-product revenue to be 7.5% of gross income.

152

Table 10.10: Pig processing costs

Annual costs ($A)

Year 2006 Costs Average % of

total costs

Land & buildings (depreciation 2.5%) $10,753,535 5.9

Labour: variable 68,556,394 37.9

Labour: fixed 7,500,000 4.1

Plant and equipment 19,774,662 10.9

Packing and processing materials 41,831,016 23.1

Electricity 7,605,639 4.2

Fuel & oil 5,704,230 3.2

Repairs and maintenance 3,612,679 2.0

Transport 3,802,820 2.1

Water & sewerage 4,753,524 2.6

Product loss 5,069,444 2.8

Operating capital 1,877,572 1.2

Total $180,841,515 100

Processing cost $0.96/kg

10.8 The overall value chain for the pig supply chain The total average costs (including profits) for the pig supply chain are estimated to be $10.71/kg (including sales commission of 1%) over the 187m kg of pig meat (HSCW). These costs include the on-farm production, first- and second-stage processing (including evisceration, carcass splitting into untrimmed cuts, second-stage processing into wholesale cuts (trimmed and boneless), third-stage processing into cured and sliced products, distribution, storage and retailing. The total revenue for the whole supply chain is $2.01 billion.

The single largest cost activity in this supply chain is the retail activity ($3.94/kg, equivalent to 37% of total supply-chain costs), followed by production ($2.44/kg of which feed is $1.52) and then third-stage processing ($1.41/kg), followed by first- and second-stage processing ($1.11/kg). Chart 10.4 shows the estimated price spreads and shares of retail revenue for supply-chain activities

Chart 10.4: Pig supply-chain activities, by cost ($A/kg HSCW)

0

0.5

1

1.5

2

2.5

3

3.5

4

$/kg

Feed Production total Process (1,2) Process (3) Retailing

Activity

The percentage shares of activities along the supply chain are shown in Chart 10.5.

153

Chart 10.5: Value chain shares, by percentage of retail value

05

10152025303540

%

Production Processing Retail Other service

The largest cost items in the pig value chain are general operating expenses ($7.04/kg, which covers meat curing and additional processing, advertising and promotion ($0.843/kg), rent, electricity, storage and general operating expenses (Chart 10.6). Labour accounts for 11% of total supply-chain costs and materials (including feed) for 16.5%.

The profit incorporated in the supply-chain budgets here is, unlike the dairy-goat supply chain, a relatively low 2.5% on sales (compared to 3.5% for dairy cow’s milk and 10% for dairy goats). We have also incorporated a $0.045/kg product reject rate at the retail level to accommodate “past-expiry-date” events for products.

Chart 10.6: Resource use: pig-meat value chain, farm to retail

LabourSet-up design

Investment

012345678

$/litre

Materials Generalexpenditure

M & E

154

10.9 Main messages from the pig-meat value chain There are several important features of the pig-meat value chain: • The pig-meat production and processing supply chain is dominated by large and efficient

producers and processors. Small-sized producers and processors face significant cost disadvantages that are accentuated if they do not fully utilise capacity and adopt best management practices.

• Pig-meat production is generally more technically efficient than that of competing meats, as evidenced by its relatively high feed-to-meat conversion ratio.

• There is still significant potential to improve the feed conversion ratio from more than 3 (3.26:1 in the supply chain described here) to less than 3, through improved genetics and improved feed product efficiency.

• As with other animal product supply chains there is the risk of under-using a producer’s capacity and this risk leads to an examination of vertically integrated structures, though it’s important to recognise that skills in product development, brand management and marketing generally take on added importance in a vertically integrated enterprise.

• The traditional competitive challenges facing all producers of animal products also apply to pig-meat enterprises. This means ongoing attention to the growth in productivity of feed, yields of saleable meat or animals, and ongoing genetic improvement. The returns to good technical and financial management are likely to be just as high as they are with competing meat enterprises.

• An important element of competitiveness is the yield from co-products. The important contribution of this activity seems to be underrated by the pork industry. For example, there is an opportunity to market co-products like, pig’s lard, lungs and kidneys to Asian consumers who have high regard for these products and willingness to pay.

• For the future, pig-meat producers face growing competition from imports, especially from countries with access to reliable supplies of low-cost feed.

• Animal industries based on concentrates, grain and other purchased inputs face growing risks of supply shortages in Australia, with drought conditions leading to growing domestic feed prices. Product prices for imported products will not necessarily track the price of feed costs, especially where the source country has a reliable supply of feed grain.

• Processors play an increasingly pivotal role in the pig-meat supply chain, mainly because of the potential to exploit economies of scale and the ongoing risk of unutilised capacity for those who do expand into a large-scale enterprise.

• Supermarket returns account for a relatively high share of the dairy value-chain costs and they appear to be excessive in an industry with widespread adoption of quality management systems, reliable supply and relatively low product defaults.

155

11. Discussion of overall results As found in Part 1 of our study of value chains there is great diversity in NAP supply chains in terms of the intensity of production systems, scale of operations, feed conversion efficiency, and end-product focus. This diversity ranges from food services to general retail and across consumer product groups, from food to leather, textiles and clothing, and it provides a platform for growth and adaptability to rapidly changing environmental and economic conditions, consumer preferences and regulatory requirements.

The growth potential for all industries examined is quite strong and for some, like the turkey industry, it appears to be very strong. But for the growth to actually happen, integration and coordination mechanisms along all supply chains will have to improve. Consumers are becoming increasingly selective about food quality, the nutrient content of food, and food safety. These concerns are being reflected in changing and more onerous regulations, especially in export markets. Efficient supply chains that can deliver and satisfy consumer requirements at least cost will emerge as the leaders. These leaders will feature systems that take advantage of new labour- and capital-saving technologies, that are highly responsive to constantly changing consumer preferences, and that are constantly looking for better ways to improve coordination between production, processing and markets. The rewards will be in the form of better market access and price premiums for their reliability of supply.

Collaboration between firms is emerging as an increasingly important component of competitive advantage in all industries (Economist Intelligence Unit (EIU) 2006). It is being driven, in part, by the diverse range of issues affecting consumer preference, including ethical, environmental and cultural influences. Government and non-government organisations, as well as commercial supply chains have an interest in these issues. EIU research showed collaboration to be enhanced most when participants in the supply chain have a shared or similar attitude towards treatment of external stakeholders and employees and a willingness to improve standards as part of the price of collaboration. Collaborative relationships were seen to be developed most when participant organisations had effective interpersonal, managerial and project management skills. Some of these issues may be seen as outside the traditional role of RIRDC research, but the evidence on collaboration shows it to be an increasingly important limiting factor and driver of the adoption process. There is no doubt that technology and work practices are critical factors in competitiveness, but collaboration and interpersonal skills along the value chains, including at the production level, are emerging as equally important.

The traditional dairy cattle and pig-meat industries are supply-chain leaders across the whole dairy and meat industries. These are large industries with competitive strengths in economies of scale in production and processing, low-cost operations, major R&D budgets and significant resources for marketing and product development.

Chart 11.1 shows the comparative costs of production and first-stage processing (abattoir) in the meat industries. The comparative costs are indicative only and should be examined with caution as they are derived from data of different origin and from plants of different sizes. In addition, where major joint products are produced (e.g. emu oil, skins and meat) we have allocated costs to the different products, not simply to meat.

156

Chart 11.1: Comparative costs of production and processing

0

1

2

3

4

5

6

7

$/kg dressed

Emu Pig Rabbit TurkeySpecies

Cost of production Cost of processing

While most of the NAP industries suffer disadvantages in competing against the traditional large industries, there are exceptions, including turkey production. In addition, NAP industries have the potential to offset basic cost disadvantages through improved supply-chain coordination, better use of processing capacity, better use of their co-product resources and improved consumer awareness of the nutritional value of their products.

There are four common value-chain drivers that emerge in each of the examined NAP industries:

1. Growing consumer demand for nutritious, low-fat food. This is likely to result in declining market share for foods that fail to meet consumer expectations on these attributes and growing opportunities to capture market share and price premiums for those foods and industries that can meet consumer expectations. The turkey industry, for example, is well placed to emerge as a recognised source of protein with low fat content and superior nutrient value. This industry has potential to be the largest NAP industry within the next five years.

2. High grain and feed concentrate prices as a result of both unfavourable climatic conditions and competing demand for use of grains for industrial products. This is likely to affect most adversely those animal industries with poor feed-to-saleable-meat conversion ratios and those facing competition in both export and domestic markets from imports, especially imports from countries with reliable access to low-cost feed. A comparison of feed conversion ratios across the animal species is shown in Chart 11.2. The NAP industries would benefit from further research into identifying improved feed concentrates with higher energy content (this could be undertaken in conjunction with feed suppliers), better understanding of animal nutrient requirements at different growth stages (feed conversion ratios decline after reaching advanced liveweights) and more research into improved, lower-cost forage-based feeding systems.

3. Growing regulations in support of more informative product labels and improved traceability systems that enable food to be traced from the food product used by the consumer to the feed used by the animal. As this report is being finalised (December 2006) the Food Standards Agency in the UK has announced its intention to introduce more detailed food labelling that will enable consumers to easily identify the fat, salt and sugar content of foods. Traceability systems are being called on to enhance both food safety and animal welfare. These regulations will start to impact significantly on market access over the next five years, creating problems for those industries that ignore regulatory requirements and opportunities for those industries that can meet regulatory requirements.

157

Chart 11.2: Feed conversion ratios by animal species

Dairy goats

Silkworm

0

2

4

6

8

10

12

14

16

Feed Used: Weight Gained Ratio

Dairy cattle Dairy goats Dairy sheep Silkworm Turkey

4. Growing cost of labour and limited access to labour in some regions. This will mostly affect labour-intensive industries and labour-intensive activities in all industries, with increasing rewards for the adoption of labour-saving technology and measures that improve the productivity of labour, without compromising on quality. A comparison of labour required to produce a litre of milk underlines the challenges faced by the dairy sheep and dairy goat industries in competing with cow’s milk on cost alone (Chart 11.3). The labour cost problem may drive some activities to low-cost off-shore locations. Other solutions are likely to include better access to mobile labour (e.g. backpackers) and unskilled immigrants (most meat-processing activities do not require high skill levels).

Chart 11.3: Farm labour productivity, selected dairy animals

0

50

100

150

200

250

300

Litre of milk/hour labour

Dairy cow Dairy goat Dairy sheep

The market shares held by developed and developing countries in the different NAP products provides some insight into differences in labour intensity and the comparative advantages of different country groups in the production of different meats. Chart 11.4 shows the relative market shares (that is, share of production) in 2004 of developed and developing countries for the different NAP industries examined. Meats produced mainly in developed countries could signal some level of comparative advantage for high-labour-cost countries, though it could be temporary, as the growth rate of production in almost all meats is increasing in developing countries.

158

Chart 11.4: World production shares, by country group and animal species

00.10.20.30.40.50.60.70.80.9

1

Proportion of world production

Beef & veal Pig meat Turkeymeat

Goat meat Chickenmeat

Rabbitmeat

Buffalomeat

Australia Developed countries Developing countries World

The four drivers outlined above are set to become permanent features of the NAP industry environment and to result in more complex supply chains for NAP industries. Effective supply-chain collaboration can help participants deal with complexity and the four threats outlined above. For NAP industries there remains the ongoing challenge of overcoming the disadvantage of small size and being an attractive partner for a larger distributor or retailer who is likely to be the supply-chain leader. There are options for dealing with the size problem. One option is to form collaborative supply-chain networks (co-operatives and joint ventures) that create sufficient volume and reliability of supply to attract the interest of larger retailers with dominant supply-chain positions (the dairy cattle industry has used this approach to advantage). The impact of size on unit costs of production and processing is illustrated in the comparison of milk production and processing costs by different animal species (Chart 11.5). The sheep and goat dairy processing facilities are less than 3% of the size of the typical dairy cow processing facility and that presents a fundamental cost disadvantage where economies of scale exist (Chart 11.6).

Chart 11.5: Comparative dairy production and processing costs

0

0.5

1

1.5

2

$/litre whole milk

Dairy cattle Dairy goats Dairy sheep

Cost of production Cost of processing

159

Chart 11.6: Milk processing costs, by plant size

0

0.2

0.4

0.6

0.8

1

1.2

128,7

93

257,5

85

515,1

71

1,030

,342

2,060

,684

4,121

,367

8,242

,735

16,48

5,469

32,97

0,938

65,94

1,876

78,73

6,580

78,73

6,580

118,1

04,84

4

Milk processing capacity (litres/year)

$/litre

The second option for dealing with the economies-of-scale problem is to make sure existing capacity is fully utilised. By working two shifts/day, processing costs can be reduced by 10–20%. The third option is to simply focus on supplying one or two smaller, speciality stores (the game meat industries are using this approach). A fourth option is to market direct to the consumer through the Internet or through an Internet intermediary (everything from goat’s cheese to silk scarves and silk noils are being sold direct over the Internet). A final option is to focus more on the differentiating attributes of the product and persuade users that the utility gained from these products exceeds the extra costs involved. Brand development is not very strong in any of the NAP industries.

There are continuing common themes across all of the NAP supply chains. Feed costs take on particular importance for intensively run operations like turkeys, but the same problems affect traditional industries like pigs and dairy cattle, sometimes to an even greater extent, especially when their feed conversion ratios are poor. Measures that can either reduce feed costs or improve feed conversion and the yield of higher-priced meat and skins/leather can transform the competitiveness of these value chains. Capturing the full value of co-products is an area requiring more research. Co-product revenue can make an important contribution to offsetting processing costs and in some situations (e.g. rabbits) it can even emerge as the major product.

Seemingly small things can have a big impact on some of the value chains. The two most prominent examples are genetic improvement, through an elite grandparent stock selection system (supplied by either a supply-chain leader or other producers with large numbers of livestock), and a livestock identification and traceability system. Advanced genetic improvement, and livestock identification and traceability systems have a small direct impact on overall supply costs, but a potentially major impact on productivity and end-market product values, and food safety and security. Without genetic improvement and effective identification and traceability systems, the NAP supply chains are vulnerable to growing consumer preferences for knowing more about the origin and treatment of food along the value chain. Furthermore, livestock identification and traceability systems make it easier to implement advanced genetic improvement schemes. The supply chains of animal industries that fail to implement identification and traceability systems are likely to become increasingly uncompetitive and vulnerable to shifts in market preferences for improved food security.

160

The food services sector is emerging as an important market for all the main meat industries. This market has different requirements and different levels of add-on services including cuts/slices of meat, different-sized birds and different packaging. Suppliers need to recognise this market’s requirements and how it can be integrated with other markets. In a similar vein there is evidence of different cultural requirements. For example, Asians have a high demand and preparedness to pay high prices for offal and organs of some animal species. More research could be undertaken into the identification of demand for different meat and co-products by people of different ethnic origins and in identifying ways of delivering products efficiently to what appear to be complementary markets.

Many supply-chain studies focus on the apparent presence of abnormally high returns to supermarkets and other retailers. Supermarket and restaurant returns, as we have seen in this study, figure heavily in value-chain costs, accounting typically for 30–50% of total costs to the end consumer. In some situations the margins are difficult to explain (e.g. silk, where retail returns could be over 50%), but in many cases it is the cost of market access, and often the costs and risks of retailing are not fully recognised. For example, products with low turnover have relatively high capital-holding costs and risks of not selling before their use-by date. In any event, direct selling to food service sectors, gourmet delicatessens and restaurants, and through the Internet provide alternative outlets if supermarket costs are judged to be too high or their access ineffective.

There is great diversity in NAP supply chains in terms of the intensity of production systems, scale of operations, feed conversion efficiency, and end-product focus. This diversity ranges from restaurant meals to high-fashion leather garments, and can provide a platform for growth and adaptability to changing environmental and economic conditions. The growth potential for all industries is quite strong so long as supply chains are designed and developed to take advantage of new technologies, and supply-chain leaders provide adequate resources and skills to improve coordination between production, processing and markets.

161

12. Conclusions and recommendations Supply-chain management takes on added importance for NAP industries because of their small size, which reduces their cost competitiveness against traditional, larger animal industries. NAP industries can counter this disadvantage by developing unique and highly differentiated, branded products for specialty markets that are prepared to pay price premiums to cover the cost disadvantage. Some of these industries have important attributes that have not been fully exploited. All NAP industries will have to create better supply chains to contend with the challenges of higher feed and labour costs and growing consumer demand for safe and nutritious, non-fatty food that can be traced back to the point of origin.

Recommendations 1. Collaboration. Further research could be undertaken into identifying skills, systems and practices to enhance collaboration between NAP supply-chain partners. The cluster concept for industry development could be examined in detail.

2. Labour problems. Further research could be undertaken into measures to resolve the labour shortage and cost problem, including identification of labour-saving technologies and improved work practices, and measures to improve access to immigrant and itinerant labour.

3. Utility management. Research shows that many processors could reduce their consumption of water and power without compromising on quality management and food safety. Further research could examine utility management and procurement practices and identify case studies in this area for the NAP industries.

4. Identification and traceability systems. NAP industries could be encouraged to adopt effective identification and traceability systems to enhance market access and to meet consumer expectations in this area. Further research could be undertaken to monitor changes in traceability regulations in key international markets. Further research could also be undertaken into examining consumer willingness to pay price premiums for products that come from supply chains with traceability systems.

5. Product and market development — elasticity of demand. Due to the scarcity of research on the subject it would be useful to undertake research into measuring the price elasticity of demand for a range of NAP industry products. This information is important for making strategic decisions about product and market development.

6. Bioactive compounds in NAP co-products. Further research could be undertaken into identifying bioactive compounds in NAP co-products, the markets for these products and the yields and product conversion ratios from co-products. In addition, there is a need to also examine commodity co-product possibilities including conversion of waste into energy.

7. Co-product processing costs and expanded marketing possibilities. Co-product processing cost and marketing possibilities need further investigation. In some cases there are potential high returns, but sometimes there are very high costs associated with the specialised extraction, storage and processing routines. Another aspect of marketing is that there are significant cultural differences in preferences for some co-products. With pigs, for example, Asians have a high preference and willingness to pay for lard, lungs and kidneys, which could sell for $2.00/kg, but they may have less interest in the traditional cuts like spare ribs and roast which Western consumers are more interested in. It would be useful to identify and examine the cultural preferences for different NAP co-products and how this could be integrated with demand for traditional cuts.

8. Feed conversion efficiency. Further research could be undertaken into practices that improve feed conversion efficiency. There is evidence of a positive correlation between turkey meat consumption and carcass size, but at the same time research shows that feed conversion ratios decline with carcass size. More research could examine these relationships in detail to enhance understanding of consumer requirements and the cost trade-offs.

162

9. Forage feeding systems. Feeding systems based on forage materials instead of concentrates could enable lower feed costs, so long as energy and protein requirement for the animal is not compromised. The forage feeding systems could be examined in more detail with a multi-disciplinary approach considering biological, technological and economic conditions for each animal species.

10. Retail margin variation. Retail margins are subject to significant variation, even during periods of seemingly stable prices for the underlying meat and dairy products. It would be useful to understand the reasons for this variation as it may enable suppliers to better meet the needs of retailers and end consumers.

11. Promoting nutritional value and low fat content. The underlying nutritional value and low fat content of many NAP industry products has not been fully exploited and further research could be undertaken into identifying advertising and promotional methods to improve awareness at the consumer, wholesale and retail levels.

12. Understanding technical efficiency ratios. Technical efficiency ratios like feed-consumption-to-liveweight or product gain (e.g. silk or milk) need to be interpreted with caution as stand-alone indicators because they do not include costs and prices or the moving marginal productivity of inputs. More research could be undertaken to explain the role of technical efficiency ratios in whole-farm planning and profit maximisation.

13. Nanotechnology is likely to influence all agricultural supply chains over the next decade through technological breakthroughs in the method and cost of making ingredients and in packaging. A scoping study could be commissioned to explore the impact of nanotechnology on NAP industries and identify priorities for research in this area.

163

References ABARE 2005, Dairy 2005: Situation and Outlook: Report to the Australian dairy industry, AFFA,

Canberra ABARE Statistics 2005, “Rural commodities”, Canberra ADIC (Australian Dairy Industry Council) 2004, “Farmers set dairy industry challenges”, Address by

James Mann to the ADIC Breakfast meeting, Melbourne, 26 November Agricultural Utilization Research Institute 2002, “Alternative livestock species in the State of

Minnesota”, Study by AURI AG Innovations Agriculture and Agri-Food Canada 1999, “Snapshot of the Canadian ostrich, emu and rhea industries”,

Marketing and Industry Services Branch, Canada Alberta Agriculture Food and Rural Development 2006, “Business performance tools in an Alberta

cheese production and marketing enterprise”, AFRD, Canada Alliance Consulting 2004, Cost Analysis of NLIS Compliance for Beef Producers, Report for Meat

and Livestock Australia. Amaefule K.U., Iheukwumere F.C. and Nwaokoro C.C. 2005, “A note on the growth performance and

carcass characteristics of rabbit, fed graded dietary levels of boiled pigeon pea seed (Cajanus Cajun), College of Animal Science and Animal Health, Michael Okpara University of Agriculture, Umudike, Nigeria

Austrade 2005, “Dairy industry capability”, Austrade, Canberra Australian Bureau of Statistics 2001, Manufacturing Industry, catalogue 8221. Australian Pork Limited 2005, “Competing to win: the competitiveness of the Australian pig

industry”, Sydney, April Australian Poultry CRC 2006, “The industry in brief”, Poultry CRC, University of New England Australian Wool Industry Taskforce 1999, “Diversity and innovation for Australian wool”, Report of

the Wool Industry Future Directions Taskforce Volume 2: Main Report and Appendices July, Commonwealth of Australia

AWI 2006, “Sheep’s back to mill 2003–2004”, Sydney Bactawar B. 2003, “Hoop shelters for grower-finisher pig housing”, Ministry of Agriculture, Food and

Fisheries, British Columbia Bao-tong Hu and Hua-zhu Yang 1984, “The integration of mulberry cultivation, sericulture and fish

farming”, FAO Corporate Documentary Respository, NACA/WP/84/13 Barneveld R.J. 2006, “Modern pork production: balancing efficient growth and feed conversion with

product quality requirements and consumer demand”, Barneveld Nutrition Pty Limited, Qld Bencini R. 2005, “Dairy products and farming techniques for the sheep milking industry”, RIRDC

Publication No 05/142 Bencini R. and Dawe S. 1998, “Sheep milking”, The New Rural Industries: A Handbook for Farmers

and Investors, RIRDC Canberra Bender M. 2005, “Sustainable production systems for range-reared standard turkeys”, American

Livestock Breeds Conservancy, Pittsboro NC. Benson F. and Holle D. 2003, “Commercial ostrich production”, presentation to the World Ostrich

Association Conference, Versailles, France Berger Y.M. 1998, “An economic comparison between a dairy sheep and a non-dairy sheep

operation”, Spooner Agricultural Research Station, University of Wisconsin–Madison Blake J.P. and Hess J.B. 2004, “Effect of protein on growth and carcass yield of emu”, International

Journal of Poultry Science 3 (3): 211–214 Blythman J. 2002, “Are you being served?” The Guardian, 20 July. Boyce Chartered Accountants 2005, “Australian cotton comparative analysis”, Cotton Research and

Development Corporation British Sheep Dairying Association 2000, http://www.sheepdairying.com/ Brunstad K.J., Gaasland I. and Vardal E. 2001, “Efficiency losses in milk marketing boards: the

importance of exports”, The Norwegian School of Economics and Business Administration, Helleveien 30, 5045 Bergen-Sandviken, Norway

Canadian Workshop on the role of Conjugated Linoleic Acid (CLA) in Human Health, Winnipeg,

164

March 13–15 Cavani C. and Petracci M. 2005, “Rabbit meat processing and traceability”, Department of Food

Science, University of Bolgna Changing World Technologies 2006, http://www.changingworldtech.com/. Coase, R. 1937, “The nature of the firm”, Economica. Coles Myer 2006, Annual Report, corporate.colesmyer.com.au Dairy Week, The weekly news bulletin on the Australian & New Zealand dairy industry, week ended

25 November 2005 Dalton, T.J., Criner, G.K. and Halloran, J. 2002, “Fluid milk processing costs: current state and

comparisons”, Dairy Sci. 85:984–991 Danish Meat Research Institute 2000, “Poultry abattoirs can save considerable amounts of water and

energy”, Report on the project “Implementation of cleaner technology in the poultry abattoir branch”, Danish Poultry Meat Institute

Department of Environment and Heritage 2005, “Cleaner production demonstration project at Bonlac Foods, Stanhope”, Case study on corporate sustainability, DEH, Canberra

Department of Primary Industries Victoria 2002, “Emus”, Agricultural Notes AG0655 Dingle J.G., Hassan E., Gupta M., George D., Anota L. and Begum H. 2005, “Silk production in

Australia”, RIRDC Publication No. 05/145 Dingle J. 2000, “Silk production in Australia”, RIRDC Publication No. 00/56 Dino Meat Company 2006, www.dinomeat.com (FAQ). Directorate of Sericulture (undated), “Sericulture manual: standard operating procedures”, Assam

Khanapra Dixon P. 2005, “Starting a new milk processing facility: consideration and costs”, address to the Great

Lakes Dairy Sheep Symposium, Vermont, November 3–5. Doyle P.T., Ho, C., Armstrong D.P. and Malcolm L.R. 2003, “Modelling feeding system efficiency

and profitability of an irrigated dairy farm”, Animal Production in Australia 25, 45–48 Dzialowski E.M. and Sotherland P.R. 2004, “Maternal effects of egg size on emu dromaius

novaehollandiae egg composition and hatchling phenotype”, The Journal of Experimental Biology 207 597–606

DuPont Speciality Grains 2000, “Optimum research report: utility of OPTIMUM High Oil corn grain for commercial turkeys”, DuPont Speciality Grains, Johnston, Iowa

Eady S. 2005, “Crusader: a production system for Australian farmed rabbits”, RIRDC Publication No. 05/038

Eady S. 2003, “Farmed rabbits in Australia”, RIRDC Publication No. 02/144 Economist Intelligence Unit 2006, “Companies without borders: collaborating to compete”, Economist

Intelligence Unit briefing paper, London. Download paper at www.economist.com/sponsor/BT Edmeades D.C. and Brier G. (2005), “Optimising fertilizer use on the dairy farm”, Acknowledge,

Hamilton NZ El-Osta H. and Johnson J.D. 1998, “Determinants of farm financial performance”, Technical Bulletin

No. 1859, Resource Economics division, Economic Research service, US Department of Agriculture

Evans M. 2004, “Wedge politics”, Good Living, Sydney Morning Herald, August 3 Fabiosa J., Hu Dinghuan and Fang C. 2005, “A case study of China’s commercial pork value chain”,

MATRIC Research Paper 05-MRP 11, Midwest Agribusiness Trade Research and Information Centre, Iowa State University

Fanatico A. 2003, “Small scale poultry processing”, National Sustainable Agricultural Information Service, Fayetteville AR, US

FAO 2006, “Inter-temporal changes of conversion factors, extraction rates, productivity of crops and livestock and related matters: 1963–67 to 1993–97”, FAP Statistics Division, FAO Rome

FAO Statistics 2006, Agricultural data: FAO stats, FAO Rome FarmStats Australia 1996, “Dairy farm benchmark handbook”, Report for the Dairy Research and

Development Corporation March 1996. Unpublished Feedback 2003, “Making the most of supply chain opportunities”, January/February, MLA, Sydney Fisher J.W., McKnight D.R. and Rodenburg J. 2002, “Economics of robot milking systems for dairy

cows in Ontario”, University of Guelph, Canada

165

Food and Agriculture Organisation 2003, “Small scale poultry processing: introduction to the poultry processing industry”, FAO Animal Production and Health, paper 98, http://www.fao.org/docrep/003/t0561e/T0561E01.htm

Flynn P. 2003, “The XML FAQ”, http://www.ucc.ie:8080/cocoon/xmlfaq-acro Foster M. 1999, “Prospects for the farmed rabbit industry in Australia” RIRDC Project No. ABA-7A Foster M. 2005, “Emerging animal and plant industries: their value in Australia” RIRDC Publication

No. 05/154 Foster M, Jahan N and Smith P. 2005 ‘Value of Australia’s Emerging Agricultural Industries’, RIRDC

Report No. 05/154 Freebairn, J.W., Edwards, G.W. and Davis J.S. 1982, “Distribution of research gains in multistage

production systems”, American Journal of Agricultural Economics, February pp. 39–46 Gooch M. 2002, “A theoretical analysis of leveraging competitive advantage through physical and

virtual value chain interaction”, Agricultural Adaptation Council, Ontario. (Reproduced on http://www.agrifood.info/ChainsNet/Indexes/supplychains.htm)

Gordimer R. 2005, “Say cheese: kosha kopy”, Jewish Action, Winter pp. 64–66 Gormone I. and Balnave D. 1995, “The effect of dietary lysine and methionine concentrations on the

growth characteristics and breast meat yields of Australian broiler chickens”, Australian Journal of Agricultural Research 46(8), pp. 1569–1577

Gottliebsen R. 2003, “Supply chain’s new gravy train”, The Weekend Australian, 29–30 March , p. 42.

GreenGrocer.com, dairy food products list, www.greengrocer.com.au Haenlein G. 2002(a), “Nutritional value of ewe and goat’s milk”, Cooperative Extension Dairy

Specialist University of Delaware, USA Haenlein G. 2002(b), “The nutritional value of sheep’s milk”, Cooperative Extension Dairy Specialist

University of Delaware, USA Haenlein G. 2002(c), “Alternatives in the dairy goat market”, Cooperative Extension Dairy Specialist

University of Delaware, USA Hambrock B.W. 2005, “Linear fat measurement to predict pig carcass composition”, thesis submitted

to the Department of Animal Sciences, Faculty of Agricultural Sciences, Tshwane University of Technology, RSA

Hayes D. and Clemens R. 1997, “The Chinese market for US pork and pork variety meats”, US Meat Export Analysis and Trade News, Meat Export Research Centre, Iowa State University

Hines P. 1994, “Creating world class suppliers”, Pitman, London (cited in Gooch 2002). Holmes M.S. and Curry D. 2001, “New generation cooperatives: Iowa Turkey Growers Cooperative

and West Liberty Foods”, Illinois Institute for Rural Affairs, Macomb IL Industry Search 2001, “Supply-chain management: more strategies for adding value”,

http://www.industrysearch.com.au/ Hobbs J.E. and Martin L.J. 1999, “Impact of packer consolidation on future structure and profit in the

pork industry”, Advances in Pork Production, vol.10, p. 11 JM Poultry Technology BV, The Netherlands (personal communication) Koch, C. 2002, “The ABCs of supply chain management”, Executive Editor, CIO,

http://www.cio.com/research/scm/edit/012202_scm.html Kompass, T. and Tuong Nhu Che 2004, “Production and technical efficiency on Australian dairy

farms”, Asia Pacific School of Economics and Government, ANU Canberra Koontz H. and O’Donnell C. 1976, Management: A systems and contingency analysis of managerial

functions, p. 686, McGraw-Hill Kogakusha, Tokyo Kusnaman J. 2004, “Development planning and project cycle analysis for sericulture in Central Java”,

PhD dissertation, Humboldt University Berlin Landline 2006 (ABC TV program), “Dairy farms use gender selection process”, Report by Tim Lee

with James Mann at Donovans Dairy in South Australia Lawrence J. 1998, “Competition in pork processing”, Ag Decision Maker Newsletter, Iowa State

University, June Lawson M. 2003, “Customer-power drives changes”, Australia Financial Review (special report:

“New supply chain”), 13 March, p. 3 Lehmann D., Pack M. and Jeroch H. 1996, “Response of growing and finishing turkey toms to dietary

166

lysine”, Poultry Sci June: 75(6) pp. 711–8 Leuck, D., Haley, M. and Harvey, D. 2004, “US 2003 and 2004 livestock and poultry trade influenced

by animal disease and trade restrictions”, USDA, LDPM-120-01, July Liu D.C 2005, “Better utilization of by-products from the meat industry”, Department of Animal

Science, National Chung-Hsing University, Taiwan Losinger W.C. 2004, “Feed conversion ratio of finisher pigs in the USA”, USDA, Animal and Plant

Health Inspection Service, Fort Collins, Colorado McGregor B. 2006, “Meat and offal yields of goats”, Agricultural Notes, AG 0999, Department of

Primary Industries, Victoria Meat and Livestock Australia 2006, Bioactives Bulletin, June, Sydney Memieth, E., I. Radnai, L. Sipos, 2004. “Comparison of carcass traits and meat quality of Hyplus

hybrid, purebred Pannon White rabbits and their crossbreds”, 8th World Rabbit Congress, Puebla City, Mexico, 321– 436

Meyn Turkey & Duck Processing, The Netherlands, personal communication. Miller G.Y. 2003, “Productivity and economic effects of antibiotics used for growth promotion in US

pork production”, Journal of Agricultural and Applied Economics, Dec. Mills, K. 2003, “Coles upgrades its supply chain”, The Australian, April 1, p. 31 Ministry of Commerce 2003, “Anti-dumping investigations concerning imports of mulberry raw silk

(not thrown) originating in or exported from China PR” New Delhi 3 July Moore F.T. 1959, “Economies of scale: some statistical evidence”, Originally in the Quarterly Journal

of Economics, Reprinted in Mansfield E. 1971, Microeconomics: Selected Readings, W.W. Norton & Company Inc. NY

Moran J. 2002, “Managing dairy farm costs”, Kyabram Dairy Centre, Kyabram, Victoria Mounter S.W., Griffith G.R. and Piggott R. 2005, “The payoff from generic advertising by the

Australian pig industry in the presence of trade”, Australasian Agribusiness Review, vol. 13, paper 4

Nicholls, J. 1998, “Investigation of growth rate and cost factors affecting commercial emu rearing (NAP) using cool climate forage based production systems”, RIRDC Project No. NAP-15

Norbest Cooperative 2006, “Turkey facts – quick facts”, Norbest, Midvale Utah Nono J.Y., Libouga D.G., Ngongang D., Ramet J.P. and Parmentier M. 2006, “Feasibility of cheese

production and whey valorization in the Adamawa Province”, African Journal of Biotechnology vol. 5 (6), pp. 517–522, 15 March

Noor, Z.A.M. 2003, “Duck meat production”, Department of Veterinary Services, Malaysia O’Connell K. 2004, “Response of grower-finisher pigs to lysine in the diet”, Teagasc, Moorepark. Ollinger M., MacDonald J. and Madison M. 2000, “Structural change in US chicken and turkey

slaughter industry”, ERS, USDA, Agricultural Economics Report No. 787 O’Keefe M. and McEachern, S. 2001, “The perishable food industry: ripe for success”, Reproduced on

http://www.agribusiness.asn.au/ChainsNet/Indexes/oKeeffe1.pdf O’Malley P. 1998, “Emu farming”, in The New Rural Industries: A Handbook for Farmers and

Investors, RIRDC Canberra Oteku I.T. and Igene J.O. 2006, “Effect of diet types and slaughter ages on carcass characteristics of

the domestic rabbits in humid Southern Nigeria”, Pakistan Journal of Nutrition 5(1): pp. 01–05 Pan Chenjun 2002, “The supply chain of pork: US and China”, Rabobank International Pel-freeze Biologicals 2006, http://www.pelfreez-bio.com/Home.asp. Pennsylvania State University 2004, “Agricultural alternatives: small-flock turkey production”,

College of Agricultural Sciences Agricultural Research and Cooperative Extension Pinkerton F. 2006, “Factors affecting goat carcass yield and quality”, In the Meat Goat Production

Handbook, Clemson University, South Carolina Pla, M., Hernandez, P. and Blasco, A. 1996. “Carcass composition and meat characteristics of two

rabbit breeds of different degrees of maturity”, Meat Sci., 44: pp. 85–92 Porter M.E. 1985, “Competitive advantage creating and sustaining superior performance”, Macmillan,

NY. Poultry Online, Cessnock, Australia, http://www.poultryonline.com.au/contact.htm Productivity Commission 2005, “Australian pigmeat industry”, Productivity Commission Inquiry

Report No. 35, 18 March

167

Pratt, S. 2005, “Superfoods Rx”, http://www.superfoodsrx.com/ Queensland Department of Primary Industries, 1998, “Queensland value chain analysis series”,

Brisbane. Rao C.G.P., Seshagiri S.V., Ramesh C., Ibrahim B.K., Nagaraju H. and Chandrashekaraiah 2006,

“Evaluation of genetic potential of the polyvoltine silkworm (Bombyx mori) germplasm and identification of parents for breeding programmes”, Journal of Zhejiang University Science, 27 February

Ramesh C. 1997, “Dairy-based ingredients”, American Association of Cereal Chemists, Eagan Press Handbook

Ridge Partners 2004, “Dairy: now and then: The Australian dairy industry since deregulation”, NCC occasional series report prepared by Ridge Partners for the National Competition Council’s submission to the Productivity Commission Review of National Competition Policy Reforms

RIRDC 2000, “Thirty Australian champions: shaping the future for rural Australia”, RIRDC Canberra RIRDC 2001, R&D Plan for New Animal Products 2002–2005, RIRDC Canberra Robertson R. 2003, “Banksia beefs up prime exports to South-East Asia”, Australia Financial Review,

“Special report: new supply chain”, 13 March, p. 4. Rutten S. 2006 “Herd size comparison reveals differences”, University of Minnesota Rutten S. 2005, “Benchmarking indicates production improvement”, University of Minnesota Russell, J. 2003, “Suppliers and partners are the missing links”, Australia Financial Review, “Special

report: new supply chain”, 13 March, p. 6 Sahan N., Say D. and Kakar A. 2005, “Changes in chemical and mineral contents of Awassi ewes’

milk during lactation”, Turk J. Vet. Anim. Sci, 29 (2005) pp. 589–593 Schinkel A.P., Richert B.T. and Einstein M.E. 2000, “Initial evaluation of a model to describe the

compositional growth of pigs fed Paylean”, Purdue University Scottish Agricultural College 2003, “Cheese production”, Edinburgh Sheales T., Apted S. and Ashton D. 2004, “Economic assessment of the effects of pig meat imports on

the Australian industry”, Australian Bureau of Agricultural and Resource Economics eReport 04.15, Canberra

Schute, Badgery, Lumby, Bell 2006, pers. communication. Stender D. 2004, “Alternative swine cost of production project”, Annual report prepared for the

Leopold Centre for Sustainable Agriculture, Iowa State University Extension Services St-Gelais D., Baba Ali O. and Turcot S. 2003, “Composition of goat’s milk and processing

suitability”, Food Research and Development Centre, Saint-Hyacinthe, Quebec, Agriculture and Agri-Food Canada

Strassmann P.A. 2003, “Enterprise software’s end”, at http://www.computerworld.com/developmenttopics/development/webservices/story/0,10801,81145,00.html?

Stubbs A. and Abud G. 2002, “Dairy goat manual”, RIRDC Report Publication No. 02/025 Stuckey J.A. 1985, “Is the aluminium industry disintegrating?” ALUMINIUM Jahrg 61 Szendro, Z.S., I. Radnai, E. Biro-Nemeth, R. Romvari, G.Milisits, A. Kenessey, 1998. “The effect of

live weight on the carcass traits and the chemical composition of meat of Pennon White rabbits between 2.2 and 3.5 kg”, World Rabbit Sci., 6: pp. 243–249.

Target 10 2002, “Managing dairy farm costs: strategies for dairy farmers in irrigated Northern Victoria”, Prepared by John Moran, Kyabram Dairy centre, Kyabram, Victoria

Taylor G. and Roese G. 2006, “Pork: cost of production”, Primefact 66, 2nd edn, NSW DPI Texas Agricultural Extension Service 1993, “Ostrich meat industry development”, report for the

American Ostrich Association by Texas A&M University System Tolra L. 2006, “The big cheese blue”, The Age, 2 May United Nations Economic Commission for Europe 2005, “Draft UNECE Standard turkey meat:

carcass and parts”, Working Party on Agricultural Standards, UN, New York, Geneva United Nations Environmental Programme 2005, “Cleaner production assessment in dairy

processing”, Report produced by COWI Consulting Engineers and Planners, Denmark for UNEP Division of Technology, Industry and Economics

United States Department of Agriculture 2006, “Weights, measures and conversion factors for agricultural commodities and their products”, Agricultural Handbook no. 697, revised 2006

168

United States Department of Agriculture Foreign Agricultural Service 2006, “Poultry: 2006 forecast overview”, USDA, Washington

United States Department of Agriculture 2006, “Feed grains database: animal product/feed price ratios”, ERS, Washington

United States Department of Agriculture 1999, “State processing program handbook”, Food Distribution Service

United States Department of Agriculture Foreign Agricultural Service 2006, “Israel: poultry and products”, USDA, Washington

Van Dalen 1997, “Chain theory deployment: searching for productive chain knowledge”, Wageningen Agricultural University, August. Cited in Gooch 2002

Walters and Lancaster 2000, http://www.agrifood.info/ChainsNet/Indexes/supplychains.htm Wattiaux M.A. 2006, “Milk composition and nutritional value”, Babcock Institute for International

Dairy Research and Development, University of Wisconsin–Madison Whitehouse M.W. and Turner A.G. 1997, “Emu oil: a source of non-toxic transdermal anti-

inflamatory agents in Aboriginal medicine” Dept. of Medicine, University of Queensland Wisconsin Centre for Dairy Research 2001, “Dairy proteins”, report by the Wisconsin Centre for

Dairy Research and the Wisconsin Milk Marketing Board Wondu Holdings 2001, “Benchmarks for new animal products: alpaca, buffalo and rabbit production and duck processing”, RIRDC Publication No. 01/113, p. 40 Wondu Holdings 2000, “Benchmarks for new animal products: emu and ostrich production”, RIRDC

Publication No. 00/136, Canberra Wondu Holdings 2002, “Benchmarks for new animal products: crocodile, squab and yabby”, RIRDC

Publication No. 02/113, p. 57 Woolworths 2006, Annual Report,

www.woolworthslimited.com.au/resources/full+year+results+fy05.pdf Woodhead B. 2003, “Reliable data helps capture key to success”, Australia Financial Review, “Special

report: new supply chain”, 13 March, p. 8. Yong-wu Lee 1999, “Silk reeling and testing manual”, FAO Corporate Document Repository, ISBN

92-5-104293–4 Zemtsove A., Gaddis M. and Montalvo-Lugo V. 1994, “Moisturising and cosmetic properties of emu

oil: a double blind study”, Ball Memorial Medical Research Hospital, Muncie