In search of the elusive SA premiums
The South Australian Greens have extended the moratorium on GM in their state and over the past few weeks the mob at Mecardo have been investigating the claim made by the Greens that the GM ban, and their clean, environmentally sustainable image, provides a price premium benefit to SA producers. There has not been any sign of a premium on Canola, nor in mutton and lamb. This time we try to find it in cattle.
In order to determine if a premium exists for SA producers we need to be able to compare markets that are interdependent and share a degree of correlation in price movement to ensure that we are measuring like for like. We have run a series of correlation analysis over historic cattle price movements contrasting SA to other states and a variety of cattle categories and have selected to compare SA to Victorian Trade Steers.
On an annual basis, the returns correlation between SA and Vic Trade Steers shows a very strong interdependence scoring an r2 of 0.9405 – Figure 1. This means that nearly all of the time the annual price movement in SA Trade Steers and Victorian Trade Steers follow each other.
Figure 2 highlights the average monthly price achieved by SA and Victorian Trade Steer producers at the saleyard according to the weekly MLA reported statistics. A cursory glance at the chart illustrates two fairly obvious characteristics of the two price patterns; namely, that the prices of SA and Vic Trade Steers share a close interdependence and that SA prices usually run at a discount to Victorian prices.
An overview of the historic percentage spread between SA and Victorian Trade Steer monthly average prices from 1998 to 2017, as outlined in Figure 3, demonstrates how few times SA producers have enjoyed a premium over their Victorian counterparts. Indeed, there have only been four brief periods over the last two decades when SA Trade Steers achieved a premium over Victorian Trade Steers on a monthly basis – as identified by the blue circles.
Analysis of the monthly spread data shows that Victorian Trade Steers have posted a long run average premium of 8.3% over SA Trade Steers (black dotted line) and the orange spread trendline shows that over the last two decades the premium spread in favour of Victoria has actually been expanding, as denoted by the upward slope to the trendline.
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Key points:
- Correlation analysis shows that SA Trade Steer and Victorian Trade Steer markets share a strong degree of price interdependence on an annual basis
- Average monthly price data confirms the strength of the relationship between Victorian and SA Trade steer prices and also shows that SA Trade Steer prices run at a discount to Victoria
- Percentage spread analysis demonstrates that Victorian Trade Steer average monthly prices have achieved a long-term average premium in excess of 8% over their SA counterparts and the spread has widened in recent times.
What does this mean?
The Mecardo team have undertaken analysis across a variety of crop and livestock prices comparing the historic spread of the SA prices to comparable markets in other states and we have yet to find any evidence in support of the SA Greens claims that the moratorium on GM provides a significant price premium for their producers compared to producers from outside of SA.
Indeed, the evidence for cattle suggests otherwise. The long-term average spread for Victorian to SA Trade Steers from 198 to 2017 sits at 8.3% premium. However, measuring the average spread from 2008 to 2017, which encapsulates the period that the GM moratorium has been in effect, shows that the premium spread has widened to 9.1% in favour of Victorian producers.
