Changes Back At The Grass Castle

Ian Whan

 

The Kidman Production Model in Retrospect

In his prime, Sir Sidney Kidman was the best known Australian on the planet.  To the outside world, his fame derived from the vastness of his cattle empire.  At the time of his death in 1935, Kidman owned 68 properties covering about 260,000 square kilometres.  Within the local cattle industry itself, Kidman’s fame stemmed from his particular production system.  The crux of this system was a string of properties running north south through the outback that spanned the entire continent.  This land bridge allowed Kidman to breed cattle at low cost in the north and drove them south to rail-heads or slaughter markets, in the days when road transport was not an option.  In this way Kidman overcame the limitations that would normally be imposed by operating in a confined environment.  Thus he bred and then grew cattle to slaughter weights using spatial diversity to minimise production costs and avoid dependence on a single region – reducing drought risk in the process.  Given the sheer size of his operation, there is also the possibility that Kidman intended to dominate the supply of cattle being offered to particular markets and thereby force up prices.

The Kidman concept of moving cattle across huge expanses to exploit each region’s competitive advantage, and in the process managing drought risk and production costs, is still relevant today but just about everything else in the original ‘model’ has changed.  Identifying and analysing these changes is important to our understanding of beef production and marketing, 100 years after Kidman started amassing a huge slice of the Australian outback. 

Changes in consumer preferences

In Kidman’s day, beef was beef and any household that could put it on the table felt well-off.  These days, the average Australian consumer has much more disposable income and is bombarded by choice and convenience and this has put him / her in a powerful position.  Now, the consensus preference of Australian consumers is for relatively ‘young’ beef that is tender but still flavoursome.  These preferences have to be delivered through compliance with strict ‘quality standards’ while branding has assisted consumers to find a particular product in the meat display.

By meeting the consumer’s expectations, it is possible to attract prices at the top end of the range but average beef prices are still governed by competition from other meats and competition for the ‘food dollar’ in general.  It would certainly not be possible to produce acceptable beef cuts today using the ‘Kidman production system’, that might have walked the cattle for thousands of kilometres to find a market. 

Another dimension of today’s greater affluence is a demand for socially acceptable production practices.  This demand applies to such things as food safety, environmental management systems (aimed at ensuring sustainability of natural resources), minimum standards of animal welfare and safe work practices.  These impositions add to the cost of production but cannot be fully recovered by the producer – so they must be viewed as a pre-condition of gaining access to mainstream markets.

Refinement of the market

The market place, that facilitates the exchange of cattle between sellers and buyers, has become increasingly sophisticated through time.  The key aspect of this sophistication is a common language that facilitates communication regarding the relationship between price and expected quality.  This common language starts with the national livestock reporting service (NLRS) and extends through to individual meat products.  NLRS keeps producers informed about prices paid for particular descriptions in particular places.  Armed with this information, a producer can decide which market specification to target (a decision about the long term) and whether to sell immediately to later (a decision about the short term).  A contemporary goal held dear by Australia and several other exporter nations is for an international beef trading language, based on palatability.  In Kidman’s day, relatively little of the variation in price was due to differences in product quality.  Changes in cattle prices were a dominant reflection of changes in the supply/demand relationship at a local level and may have been a poor reflection of the national situation. 

Moving cattle from A to B

The development of a comprehensive road network and the introduction of road trains has made it possible to move cattle vast distances in next to no-time.  It is no longer necessary to walk cattle to rail-heads.  Nor is it necessary to have physical feed and water links between breeding and finishing locations is order to reap the benefits of specialised production regions.  Today, efficient transport allows integrated production operations to own land in areas that are the best for breeding, the best for growing and the best for finishing, without the need to own any land in-between. 

Efficient transport, combined with superior communications, has also enhanced the ability of producers to access markets based on perceived returns.  In Kidman’s day, the slower speed of transport and lower quality communications may have allowed large differentials to develop between markets.  Indeed part of the ‘Kidman Strategy’ may have been domination of the Adelaide beef market – made possible by the relative inability of other suppliers to gain ready access.  Thanks to substantial improvements in transport and communications, the notion of any cattle producer dominating a market is no longer tenable.  By today’s standards, therefore, the Kidman model would be judged as having too much land in the wrong places. 

Role of production efficiency

Due to agriculture suffering a sustained decline in its terms of trade, the profitability of cattle production is now more closely related to routine application of measures to raise productivity.  Certainly there is no scope for taking monopoly prices - due to highly competitive selling conditions - while many new costs have been forced on the sector by compliance and regulation.  Moreover, the cost of owning land has risen dramatically.  Despite his vast landholding, Kidman had a cattle herd of only 250,000 head, implying a stocking rate of worse than 100 hectares per head.  Clearly this land to cattle ratio would not be viable in today’s economic climate. 

Even so, it is no longer possible to focus strictly on cost considerations.  In the modern era it is imperative to put inferred consumer preferences first and plan the production system ‘backwards’ from this point.  The ‘state’ is also a de facto consumer and demands that cattle producers protect of the natural environment, give livestock production and employee safety assurances and satisfy nutritional standards.

Practical application of Integrated Beef Production

The cattle production model developed by the Australian Agricultural Company (AACo) over the past decade is a working model of vertical integration in the new century.  This model provides a useful guide of how integrated beef producers will re-structure hence forth to better meet customer demands.  The intricacies of this model are best illustrated by starting with the consumer / product interface and working backwards to the breeding operation.

Wholesaling

In April 2002, AACo acquired an interest in the meat wholesaling business Chefs Partner.  This business on-sells a comprehensive range of fresh meat products to restaurants, the foodservice sector and some retail outlets.  However, the true significance of this business lies in the interface it provides between AACo as a cattle producer and virtual consumers of meat products.  Thus it is possible for AACo to get constant feedback, through Chefs Partner, on the wants and needs of consumers and subsequently make adjustments to its entire supply chain.  AACo has also developed a premium brand aimed at the top end of the food service market.  This brand, 1824 (named after the year AACo established in Australia) bestows a mutual benefit: it allows customers to get repeat satisfaction by staying with a brand they have previously tried and liked, and it gives the supplier the incentive to invest in the defining qualities of the of the brand itself.

Feedlotting

Any large scale beef producer, serious about vertical integration and supplying product to the top end of the market, must include feedlotting as part of their production system.  For the domestic market, feedlotting allows fine tuning of consumer preferences in terms of tenderness, meat colour and cut size.  But feedlotting cannot make a silk purse out of a cow’s ear i.e., unless the entry cattle are inherently suitable for the target market, there is no prospect that feedlotting will achieve a transformation.  Thus feedlotting adds the finishing touches to an integrated production system that commences at birth and involves several stages. The practice of feedlotting also delivers huge efficiencies in terms of consistency within lots and consistency between lots despite seasonal fluctuations.  Feedlotting also delivers operational and marketing efficiencies where it allows accumulation of finished cattle relatively close to the processing sector.  Over the past 20 years, Australia’s processing sector has increasingly positioned itself close to the dominant meat eating populations (where superior labour supplies and infrastructure are also located) and transport hubs that quickly move product to overseas markets and around the nation.

Backgrounding

Backgrounding is a relatively intensive phase of the production cycle, requiring a lot of ‘working’ of the cattle to achieve high performing lots for the feedlot.  To ‘do the job’ the backgrounding property has be highly resourced in terms of quality feed, fencing, water, yards, workers and road access.  In terms of feeding, the phase is designed to add a further 70-80 kg with average daily gains (ADG) ranging from 0.5 - 0.6 kg.  Thus backgrounding achieves relatively rapid growth and prepares homogeneous lots that should stay together after entering the feedlot.  If the backgrounding activity is performed according to ‘best practice’ it will mean improved feedlot performance due to lower mortality rates, higher ADG, less time on feed to achieve carcass specifications and higher gradings.  The extent to which these outcomes are achieved in practice will depend on the quality of the backgrounding country (in terms of its feed and water and facilities) and its proximity and access to the feedlot.

Growing out

AACo weaners are trucked from the northern breeding depots to specialised growing out properties at about seven months of age and 180 kg.  To reap the benefits of early weaning it will be necessary to undertake the castration and de-horning operations on the growing out property, immediately after trucking from the breeding depot.  Cost effective weight gain is paramount at this stage but the actual gain has to be consistent and sustained so that age / weight targets can be constantly achieved.  Steers and heifers targeted at the domestic market leave the growing out properties at 14 months of age, weighing 250 kg, while steers targeted at the export market leave at about 23 months and 350 kg.  The growing out phase entails minimal drafting and handling to ensure that costs are kept low.

Breeding in the North

As in Kidman’s day, the Gulf country and Barkly Tablelands remain the most cost effective places for breeding cattle.  For AACo, however, breeding is not simply a matter of maximising the weaning rate and minimising the cost per kg of weaners trucked out.  Due to the importance of eating qualities, when the cattle are finally converted into beef, successful breeding means placing equal emphasis on inherent ability to produce high quality beef as well as cost effectiveness and matching product specifications to customer preferences.  For this reason, AACo have developed special purpose breeding herds with the progeny targeted at particular domestic and export markets.  On the Barkly in particular, AACo have developed composite breeders, which combine the superior eating qualities of the Bos taurus with the proven ability of the Bos indicus to handle tough conditions. 

Summary

Apart from selection of cattle according to inherent potential, successful application of integrated beef production relies on maintaining a balance between all phases of production.  Thus a shortage of one class of country relative all others will result in sub-optimal production practices and large opportunity losses.  In 2004, AACo has in place a strategy for adjusting and refining its production system to make it more integrated, for the purpose of satisfying consumer preferences and more balanced, for the purpose of maximising the company’s own efficiency. 

Integrated production is possible in the case of AACo because of its size – with a carefully selected combination of properties, each designed to fulfil a particular role and contribute to the overall objective.  For the larger industry, the ‘integration function’ relies on market forces to create linkages between independent businesses and bring about cattle movements from one phase of the production cycle to the next.  Whether or not market forces can integrate the different phases of production as effectively as happens within a vertically integrated corporate, such as AACo, is an open question that could well be researched.  If it were to be found that market forces are doing a relatively poor job of integrating the different, but complementary phases of production, there would be an ‘industry good’ argument for introducing measures to make the market work more efficiently.  The identification, development and delivery of appropriate measures (to make the open market work more efficiently) should be an integral part of such research.

Reference

Bowen, Jill (1987) Kidman: the Forgotten King  Angus & Robertson