Paper 97 - 2013

Muscle Score Premiums and Discounts in Wholesale Beef Carcases

G.R. Griffith, S.W. Mounter and R.A. Villano

There is an increasing emphasis in Australian beef industry R&D on finding ways to improve retail beef yield. Currently, there is no way to commercially measure retail yield but there is evidence of a strong link between muscle score of the live animal and subsequent meat yield measurements.A relevant question is whether there is a credible value for muscle score in live cattle and carcase markets, and does it reflect the implied value of increased retail yield?

In this paper, estimates are made of the premiums and discounts for muscle score class at the Sydney wholesale market level. The results suggest premiums of 21 to 80c/kg for improvements from muscle score C/D to B. This can be compared with premiums of 18 to 45c/kg for improvements in one muscle score available in the Wagga Wagga saleyard market, and a premium of 16 c/kg for improvement in the assumed equivalent of one muscle score at the retail level. While there may be some debate about which is the “best” estimate, and the fact that the wholesale data ranges over more than one muscle score, it seems evident that premiums and discounts for muscle score evident in cattle saleyard prices and wholesale carcase prices appear to be over-estimates of the eventual increase in retail value.

Paper 96 - 2013

Structuring Exotic Options Contracts on Water to Improve the Efficiency of Resource Allocation in the Australian Water Market

Euan Fleming, Renato Villano and Brendon Williamson

The potential economic benefits that options contracts bring to the Murray Valley water market in Australia are assessed. Exotic call option prices are estimated using Black-Scholes and skewness-and-kurtosis-amended Black-Scholes option closed-form pricing methods that are based on mean weekly water prices between 2004 and 2008. While options would result in significant economic benefits through more efficient trade of water on the open market for lower-value crops, there were mixed results from attempts to price them. Results show that use of the standard Black-Scholes formula is likely to undervalue option prices considerably at all but improbably low levels of volatility in water prices. Water option prices are high relative to the net present value of option benefits for recent levels of volatility, which is likely to discourage the development of a water options market. Alternatives to reduce the option prices are discussed. Other potential constraints to the implementation of a water options trading system are outlined.

Paper 95 - 2013

Meeting the demand for fresh produce from the PNG LNG market: opportunities and challenges

Hui-Shung (Christie) Chang, Robert Lutulele, Rebecca None, Zenaida Maia, and Paul Hape*

The US$15 billion investment in the PNG LNG project has been making headlines since its inception in 2006. The Project was forecast to generate significant export revenues and to generate much positive impact on the PNG economy for the coming 30 years. The demand for fresh produce was forecast to increase significantly to feed the substantial labour force at the project sites as well as in other supporting sectors. The objectives of this study were to estimate the requirements of the LNG project for fresh produce and to determine the potential for PNG farmers and supply chain operators to supply the Project. In this study, we estimated that demand for fresh produce from the PNG LNG market to be in the order of 130 tonnes a week (or 20 tonnes a day) at the peak of the construction period from 2012-2013, valued at 500,000 kina (or A$250,000) per week to local communities if the LNG market for fresh produce could be captured completely by local supplies. However, during the construction phase, nearly 80% of this demand would most likely to be met by imports because of concerns over quality, variety and consistency in supply of local produce. In addition, after the initial construction phase and by 2014, demand for fresh produce from the PNG LNG market would be reduced to around 2 tonnes a week during the operational phase due to a significant reduction in labour force. This means the impact of the PNG LNG project on the local fresh produce industry is not only short-term but uncertain, depending on the ability of local suppliers to meet buyers’ requirements for quality, variety and consistency in supply, which, in turn, will depend on whether long-standing supply chain issues can be addressed adequately and quickly by government and industry. Failing to do that, local suppliers will miss the opportunity to supply to the huge LNG market in the same way they have missed supplying to higher value formal markets.