Consolidation limits opportunities for competitive innovation.

Published 20170912

Chicken meat producers are facing further consolidation in their industry with the closure of Baiada’s processing plant in Ipswich. The sector is already one of the most consolidated in agriculture with over 70% of the chicken eaten by Australian consumers supplied by two companies; Baiada Poultry and Inghams Enterprises. The producers supplying these companies (and other processors) typically do so under contract growing arrangements.

Under supply contracts, growers own the farm and provide the management, shedding, equipment, labour, bedding and other inputs for the rearing of the chickens. The processing company owns the chickens at all times and provides the grower with feed, medication and technical advice. Prices are influenced by large contracts between processors and supermarkets or the food service industry. Margins are typically low per bird, requiring growers (farmers) to produce high volumes of birds.

This arrangement provides an interesting dynamic in terms of opportunities for technology adoption and the types of business models that will provide the sector (and indeed other highly vertically integrated and consolidated sectors) with new products and services.

One of the characteristics defining the explosion of digital technology in agriculture, as with the rest of the economy, is the emergence of the start-up community. Low barriers to entry combined with heightened expectations of the opportunities offered is resulting in many new and small companies building products and services for agriculture. While agriculture has not experienced the extent of disruption that some other areas of the economy have, the ingredients are there and anticipation is high.

A strong and vibrant start-up community requires several factors to be successful, including visibility of the problem to be solved and access to actors in the target market. Neither of these things exist in the chicken meat industry due to the contractual nature of the relationship between growers and processors.

This does not mean that the chicken meat sector is low tech, in fact it is one of the most advanced in terms of utilisation of digital technology. It does however mean that technology is typically delivered through proprietary, bespoke systems that are likely to be determined by the processors, rather than a competitive start-up sector driven by grower demand. It also highlights that the impact of different value chain structures between sectors goes far beyond grower-processor relationships, to impact on product and service delivery more generally.

Consolidation in value chains leads to less competition, not just in processing, but throughout the value chain. It leads to virtually all of the risk taken by the farmer being concentrated in one factor – the ability to negotiate an acceptable supply agreement with a processor. 

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