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Monday, 20 May 1985
Page: 2141


Senator GRIMES (Minister for Community Services)(4.02) —I move:

That the Bills be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard.

Leave granted.

The speeches read as follows-

DAIRY PRODUCE MARKET SUPPORT LEVY BILL 1985

The purpose of this Bill and the other related Bills is to establish new marketing arrangements for the Australian dairy industry.

The Australian dairy industry is once again faced with a serious financial crisis. This crisis affects the dairy industry in all States. However Victoria and Tasmania which produce a higher percentage of milk for manufacturing purposes are the worst hit. Victoria produces nearly 60 per cent of Australia's total milk production of which 87 per cent goes into manufactured products much of which is exported.

While new marketing arrangements are not a panacea for the industry's present troubles, they are nevertheless essential if a proper basis for a return to long term industry profitability is to be established.

It should be remembered by honourable senators that the Commonwealth's involvement in the dairy industry is essentially limited to the manufacturing sector. Market milk, for largely historical reasons, has been the responsibility of individual State Governments. The division of the industry along State lines and between market and manufacturing milk sectors makes the development of sensible policies for a national dairy industry extremely difficult. It has also led to the situation where there are two broad classes of dairy farmers-those with access to the more lucrative market milk sector and those supplying the manufacturing sector where returns are heavily influenced by developments in the international market. One result of this division is that some farmers are receiving farm gate returns of around 11c/litre while others receive over 30c/litre for producing effectively the same product.

Let me outline for honourable senators, very briefly, some key facts which illustrate the genesis and dimension of the problem facing the industry today. Export prices for Australia's major dairy export items have plummeted-butter, for example, by over 30 per cent in just the last two years. The basic cause of this collapse in world trade prices has been the irresponsible production and export subsidy practices of a number of major dairy producing countries, particularly the EC. Unfortunately, despite strenuous efforts, there is little that Australia can do to change these practices in a fundamental sense.

However the Australian industry's position would not have been nearly as serious if it had not been for the corresponding, rapid increase in our own milk production in recent years. From 5.2 billion litres in 1980-81, Australia's milk production is expected to reach six billion litres in the current production year.

But why should such an increase have been occurring while world trade prices were collapsing? There are two basic reasons.

First, in a somewhat irresponsible and cynical exercise the previous Government increased the minimum support level (known as 'domestic value for levy purposes' or DVLP) for butter by around 40 per cent in the two year period from July 1980 to July 1982. Other dairy products also received similarly large increases. This would have been sufficient in itself to stimulate our own 'milk lake', remembering that there is a production lag of at least two years before supply responds to changed market signals.

The second reason is that even when world prices began to decline present marketing arrangements continued to encourage production increases. I will expand on this point in my second reading speech on the Dairy Legislation Amendment Bill. In the meantime honourable senators may care to contemplate the insanity of a marketing arrangement which rewards individual manufacturers for continuing to produce for export, when these exported products in some cases return less than half the cost of production of the milk used in their manufacture.

This situation also was not helped by State governments, particularly the previous Victorian Liberal Government, which effectively encouraged increased milk production by such measures as freely granting licences to new entrants into the industry. This was despite the harsh lessons of the mid-1970s and the realities of the market.

That the present arrangements introduced in 1977 are inequitable and inefficient is generally accepted. In essence these arrangements stimulate over-production, while discouraging domestic consumption; the correct product mix for both the domestic and export market is made difficult to achieve; exports to the worst possible markets receive the greatest assistance; imports are encouraged and the industry is constrained by the heavy hand of regulation.

It is sometimes claimed that as the present arrangements cost the Government very little, why all the fuss? Well, in the past two years the Government will have committed in direct budgetary contributions around $18 million to the dairy industry. This is on any basis a very significant outlay.

But this is only the tip of the iceberg. The real cost of the present arrangements is far greater. Australian consumers, in effect, support the dairy industry through paying higher prices for their dairy products than would be the case in the absence of the marketing arrangements. I hasten to add that given that world market prices are grossly corrupt, this Government accepts that it is both reasonable and appropriate for the dairy industry to receive a measure of assistance in the form of higher domestic prices. However, in the present situation of a growing exportable surplus much of the assistance provided by consumers is wasted. In effect, Australian consumers are, through low priced exports, simply subsidising foreign consumers. This makes no sense either for the industry or for the unwitting Australian consumer.

The cost of the present arrangements extends even beyond these readily quantifiable factors. In a speech to the National Agricultural Outlook Conference in Canberra earlier this year, Sir Roderick Carnegie, Chairman of CRA, expressed his concern at the tendency in Australia for economic gain to be sought through essentially political processes-'playing the system'-rather than true entrepreneurship. As the Industries Assistance Commission (IAC) and others have highlighted, the truly numbing complexity and the web of regulation which characterises present dairy marketing arrangements encourage, within the industry, precisely the type of activity of concern to Sir Roderick.

In its November 1983 Report on the Dairy Industry, the IAC pointed to many of these defects in the present arrangements and put forward recommendations for fundamental changes to the industry's marketing arrangements. The industry considered these, for various reasons, to be unacceptable and developed an alternative approach centred on an entitlements scheme.

Given the considerable role and powers of the States in this industry, the issue of new marketing arrangements during 1984 and 1985 was the subject of extensive debate within the Australian Agricultural Council (AAC). Despite four formal meetings AAC was unable to reach agreement on new arrangements.

While regrettable, this should not surprise anyone familiar with the political history of dairying in Australia. AAC was not even able to agree on the present arrangement introduced in 1977. In fact there is a history of vigorous disputation between States on dairying going back 50 years or more. The aim of the Government's new arrangements is to lead to a more truly national dairy industry.

This Government accepted its responsibilities and has made the hard decisions, commensurate with its powers. Not to have done so would have condemned the industry to a future of recurring crises with increasing dependence upon Government assistance for its survival.

In taking its decision on the new arrangements, the Government's basic objective was the development of a more efficient and profitable industry, able to respond as quickly as possible to changing market conditions and technology. The Government seeks to achieve this through reducing the burden of regulation, while maintaining a level of support for domestic prices.

In contrast, proposed marketing arrangements put forward by the industry sought to achieve reform by imposing further Government regulation on an already heavily regulated industry. This would have added to the industry's cost structure, increased its rigidity and seriously reduced its ability to compete against fair imports and in the export market.

The new arrangements, the key features of which are incorporated in the Bills I am placing before the Senate, will replace, from 1 July 1985, present stabilisation and equalisation arrangements with a system of market support for the dairy industry funded by a levy on all milk and a levy on certain dairy products.

A number of other significant changes to present arrangements are also being made, including the termination of export pooling, and the system of allowances to manufacturers; repeal of the unproclaimed Dairy Industry Assistance Act 1977 and Dairy Industry Assistance Levy Act 1977; upgrading of the financial and operational capabilities of the ADC; and a reduction in other unnecessary regulation which constrains the dairy industry. The Government's marketing arrangements have a 'sunset' provision set at 30 June 1991, with a major review being held within four years of commencement of the arrangement.

Arrangements contained in the four Bills are augmented by two other measures agreed to by the Government.

The Government has decided to continue underwriting arrangements but, as recommended by the IAC, in respect of export returns only. Average export returns in each year will be underwritten at a level of 90 per cent of a three year average of export returns. This is expected to lead to a similar level of assistance as under present underwriting arrangements.

Importantly, the Government recognises that the Dairy Industry is yet again going through changes. As an integral feature of new dairy marketing arrangements the Government commits itself to helping individual farmers and factories adjust to this change.

It needs to be recognised by honourable senators that structural adjustment in the industry is inevitable, no matter what form of marketing arrangements is adopted, given the present level of domestic production and the depressed international market.

The Government accepts its responsibilities in this area, and is willing to work closely with State Governments and industry to ensure that adjustment occurs in a fair and efficient manner.

When Mr Kerin announced the new dairy marketing arrangements on 22 March, he indicated that the Commonwealth was willing to participate with the States in an adjustment assistance program for the industry of up to $40 million. This is in addition to adjustment assistance already available to the industry under continuing Rural Adjustment Scheme measures.

The Government has also recognised that pressures will be felt at the factory level, as adjustment to lower production levels and new product mixes takes place. The Commonwealth has made it clear that the adjustment assistance program will not be limited to farmers. Rather, we are quite prepared to extend adjustment assistance to factories.

There is widespread acceptance in the dairy industry that production must come down (incidentally, despite reports suggesting that the Government's plan has a specific production target this is not the case-rather we are putting in place arrangements under which production will be free to adjust to profitable market opportunities).

In recent weeks different sections of the industry have expressed interest not only in the Government's proposed adjustment assistance program but in pursuing their own totally industry-funded adjustment programs. These programs are directed at easing and speeding the process of adjustment at the farm level, but more work needs to be done to fully develop these ideas.

The Government is certainly willing to listen to such ideas and indeed, will facilitate their development if requested.

The Minister for Primary Industry has already sought the views of State Governments on the form of the structural adjustment program. Consultations between Victorian and Commonwealth officials have commenced and the Government is prepared to initiate similar consultations with other State Governments, their industries and unions.

The industry has expressed concern over imports of subsidised and dumped cheese. The Government's position on this is clear-we will not allow dumped or subsidised cheese to damage the Australian industry and if existing arrangements do not work satisfactorily other measures will be considered.

While on the subject of imports a great deal of nonsense has been spread over alleged secret deals with New Zealand. There is simply no truth in this. The Government's arrangements do not interfere with the existing arrangements negotiated under the previous Government with respect to trade in dairy products between New Zealand and Australia.

Before turning to the particulars of the Dairy Produce Market Support Levy Bill 1985 I would like to make some further comments on recent developments in regard to the arrangements.

The announcement of the Government's new marketing arrangements for the dairy industry on March 22 was met with howls of protest and instant rejection by most, but not all, of the industry and State Governments. Yet, just 8 weeks later there has been a very real reversal with virtually all segments of the industry now supporting the basic thrust and essential elements of the Government's arrangements. Importantly, the industry appears now to have recognised the need for change, as proposed by the Government.

The initial reaction of the industry was not altogether unexpected given that the Government's legislation represents the most significant change to the industry's marketing arrangements in 50 years, and is based on a reduction in regulation with greater exposure to market forces. While accepting the thrust and essential elements of the Government's plan, a number of amendments have nevertheless been proposed by industry.

These amendments reflect the industry's concern with the impact of the transition from the present heavily regulated arrangements to the new market orientated system. The Government is sympathetic to this concern and has taken appropriate action, as I will outline shortly. But the Government does not believe that the proposal by sections of the industry for a temporary retention of export pooling is an appropriate mechanism for dealing with any transitional difficulties. I will return to this matter shortly.

The Government had already accepted that transitional arrangements were necessary, and consequently included as an integral element of the new arrangements supplementary market support payments, funded by a levy on a limited number of dairy products. The phase out of the levy and hence the supplementary payments is by means of a formula. This formula is designed to abate the rate of phase out if adjustment is occurring rapidly in the industry.

Following a re-examination of the elements of the formula, the Government decided to make a minor, but significant, change to the formula. By increasing the constant of 0.4 in the formula to 0.5 the rate of phase out of the dairy products levy will be reduced, thereby providing the industry with a higher support level for domestic prices for a longer time period.

The industry has also sought amendments to delay the cessation of export pooling. Following an extensive review of this point, the Government is very firm in its view that export pooling should cease on 1 July 1985. It just makes no sense at all to persist, even on a temporary basis, with a mechanism which has the debilitating effects of export pooling-to do so would simply create further adjustment difficulties a year or two down the track.

The Government is however aware of concern at the impact the termination of export pooling may have, indirectly, on manufacturers' financing arrangements and the cash flow situation of farmers. In essence, underwriting, in combination with export pooling, has over the years enabled the Australian Dairy Corporation (ADC) to provide manufacturers with interim stabilisation payments and loans to assist stockholding at a higher level than would otherwise have been the case. Under the new arrangements there will be no stabilisation payments.

While the ADC's financial powers are significantly expanded under the new arrangements, the transition to a more commercially oriented system could lead, in the first instance, to loan levels by the ADC to manufacturers being significantly lower than the combined stabilisation payments and loans that would have applied under the current system. This could possibly lead to a lowering of opening prices to farmers.

Therefore the Government agreed to two further measures to alleviate this transitional, financing difficulty.

First, the Government will guarantee up to $10 million, to enable the ADC to lend at a higher level to manufacturers and hence raise opening prices.

Second, an amendment has been made to enable the collection of the levy on all milk (i.e. the market support levy used to make market support payments) to be delayed. A delay in the time for collection of the levy would improve the cash flow position of manufacturers in the early part of the forthcoming season and enable the payment of higher opening prices to farmers. Although the receipt of the levy by the ADC would be delayed as a result, this should not cause difficulties given that demand for funds for the purpose of making market support payments will be small in the early months of the season.

I believe the measures I have outlined, and which have been adopted by the Government, address the key concerns of industry while preserving intact the thrust and key elements of the new arrangements. As I have said earlier, industry's concerns are essentially with the transition from the old to the new arrangements and the Government has adopted a considered and eminently reasonable approach to this matter.

Now let me turn to the Dairy Produce Market Support Levy Bill 1985. This Bill provides for the imposition of a levy on the milk fat content of relevant dairy produce (whole milk and whole milk products). The maximum levy rate is 45 cents per kilogram of milk fat, with the operative rate being established by regulation following a recommendation by the ADC. The levy is payable by the producer of the dairy produce.

The use of a levy on all milk to provide funds for supporting domestic prices of dairy products is more equitable and efficient than the present system's sole reliance on levies on a limited number of dairy products. Such a levy was recommended by the IAC and is supported by AAC and the industry generally.

There are no direct financial implications for the Commonwealth. Costs associated with administration of the market support levy are to be met from levy receipts.

I commend the Bill to honourable senators.

DAIRY LEGISLATION AMENDMENT BILL 1985

This Bill contains amendments to the Dairy Produce Act 1924 and the Dairy Produce Sales Promotion Act 1958.

The most significant provision is that which discontinues export pooling for production on or after 1 July 1985. Since existing export pools will continue until finalised, appropriate savings provisions have been provided in the Bill.

Given the long history of export pooling I can understand the concerns of sections of the industry at the prospect of its abolition. I briefly mentioned the problems stemming from export pooling in my speech on the Dairy Produce Market Support Levy Bill 1985. However it is difficult to overemphasise the distorting and debilitating effect of export pooling on the industry. Its termination is the only means to ensure that manufacturers

produce only for those markets which are seen as profitable

seek to maximize prices from individual sales and actively seek new, profitable markets and

seek to produce the best product mix.

Any system which allows a manufacturer to export at well below the cost of production of the milk he uses in manufacturing a dairy product, and yet still end up with a profit on the sale must generate overproduction and other distortions.

Under export pooling, we have been continuing to produce butter and cheese for export for a return, in some cases, of only around 5c/litre for the milk used. This is clearly absurd from the industry's viewpoint but in fact quite rational from an individual manufacturer's viewpoint.

I must say that I find it difficult to understand how some honourable senators who claim to believe in the virtues of private enterprise and individual initiative can support the continuation of an arrangement whereby the benefits of an individual exporter's efforts in finding and developing a profitable market are, in effect, appropriated and spread equally across all dairy exporters.

Exports will continue under the Government's plan. Indeed by removing the existing distortions in support levels provided to dairy products, and with presently non-prescribed products now being eligible for market support payments (and supplementary market support payments) a very concrete encouragement is given for the development of new products and new export markets. This will, of course, not happen overnight and our heavy dependence on exports of traditional bulk dairy products will continue for some time.

The present system of allowances to manufacturers whereby the industry as a whole bears certain costs (eg interest, storage charges) incurred by individual manufacturers also creates serious distortions and is to be terminated from 1 July 1985. For example, with the aid of a freight subsidy paid for by industry moneys, some Victorian manufacturers have been able to sell butter in Queensland cheaper than in Victoria.

A number of amendments have been made to the Dairy Produce Act 1924 designed to increase the commercial and operational flexibility of the Australian Dairy Corporation (ADC). These include:

expansion of the means by which the ADC can raise money to include a wider range of contemporary financial instruments

a specific provision to enable the ADC to engage in futures trading within appropriate guidelines

a provision to enable the ADC to invest money which is temporarily surplus in the short term money market as appropriate

empowering the ADC, subject to certain conditions and with Ministerial approval, to borrow from internal sources (i.e. from Funds which it administers) rather than externally

a specific power for the ADC to act as an agent for manufacturers in respect of export sales

an ability for the ADC to sell, with Ministerial approval, on the domestic market

a clarification of the power of the ADC to lend money to manufacturers of dairy products; and

a clarification and upgrading of existing provisions relating to the ADC's power to purchase and dispose of assets.

As well, and in accordance with the Government's general approach of reducing wherever possible the burden of regulation on industry, a number of other regulatory restraints have been repealed. These include

the licensing of exporters, although I should stress that the need for exporters to obtain an export permit under the Export Control Act 1982 remains

the ADC's powers to establish conditions relating to contracts for shipment of dairy products (this has not been exercised in recent years)

the power of the ADC to control exports for the purpose of ensuring adequate domestic supplies (this is not consistent with the broader aim of encouraging manufacturers to develop a firm commitment to exporting).

Finally, a provision is included which requires the ADC to credit any surplus and debit any deficit, stemming from sales it makes in its own right, to the Market Support Fund.

The ADC is funded by a levy on milk production. There are no direct financial implications from this Bill for the Commonwealth.

I commend the Bill to honourable senators.

DAIRY PRODUCE MARKET SUPPORT BILL 1985

This Bill contains many of the essential features of the new marketing arrangements. The Bill provides for collection and administrative arrangements for the market support levy imposed under the Dairy Produce Market Support Levy Bill 1985 and the dairy products levy imposed under the Dairy Industry Stabilisation Levy Amendment Bill 1985; the establishment of a Market Support Fund and the payment of market support payments; and the establishment of a Supplementary Fund and the payment of supplementary market support payments.

As I mentioned in my second reading speech on the Dairy Produce Market Support Levy Bill 1985, the Government has made an amendment to this Bill which will enable a longer period of time to be allowed before the market support levy has to be paid during the initial months of operation of the new arrangements. This amendment is designed to help ease the transition from the old arrangements to the new.

Under the new arrangements market support payments will be used to increase export returns to an export target figure, thereby increasing the domestic price at which a manufacturer would be indifferent between an export sale and a domestic sale. Consequently market support payments provide, as do existing arrangements, a measure of domestic price support. When combined with supplementary market support payments, which I will discuss shortly, the level of support provided to domestic prices of major dairy products in 1985/86 will be of the same order as it is now.

The rate of market support payment is, for dairy produce prescribed for this purpose, the difference between the export target price and the estimated average export price for that produce in the current year.

The export target price is calculated as 130 per cent of the average export price for the relevant dairy produce in the past 2 years and the year in which the target price is to apply. Market support payments for non-prescribed dairy produce are to be determined by the Australian Dairy Corporation (ADC) having regard to the rates of market support payments applicable to prescribed dairy products. The market support payments will be paid from a Market Support Fund established by legislation principally to receive funds collected from the market support levy.

The system of market support payments proposed under which the assistance to each type of dairy product is approximately uniform, and the funds for this purpose are raised on a broader basis, are widely accepted as being both more equitable and less distorting than present arrangements.

All the dairy products which are exported will benefit directly, and a base level of support is provided for the industry as a whole. At the same time the funds for this support are sourced from all milk produced, rather than through a levy on a limited number of major dairy products as is presently the case.

The Government's mechanism is, honourable senators will be interested, essentially as recommended by the Industries Assistance Commission (IAC) and adopted by the Australian Dairy Industry Conference for their recommended marketing arrangements.

However the Government is proposing a number of changes to the IAC's recommendations, including a higher level of market support (30 per cent against 20 per cent), for support to be slightly countercyclical as a result of the use of a three year average rather than the current year only (this means the industry will get more support when it is most needed) and additional support for a transitional period.

Provisions to enable the ADC to establish special market support payments in particular circumstances are included, along with provision for the ADC to guarantee a rate of market support payment in advance of actual export. This latter provision recognises practical commercial features of trade in dairy products.

As I have already mentioned, supplementary market support payments will, as a transitional measure, be paid to manufacturers to raise export returns above the export target price level (or its equivalent for non-prescribed products). This will provide further support for domestic prices of dairy products. These supplementary market support payments will be funded by the proceeds of the dairy products levy with a new Supplementary Fund being established to receive the proceeds of this levy. Supplementary market support payments will be determined as a percentage of the export target price and consequently are paid in line with international prices relativities for dairy products.

A number of provisions relating to the administration of the arrangements are included (e.g. access to premises, provision for returns and information to be supplied). Penalty provisions are also necessary and have been included in respect of both non-payment of levy and offences in relation to applications for payment and in relation to returns.

One point to note is a provision for a court to be able to order that any payment falsely obtained be repaid, as well as imposing a penalty. Procedures for the consideration and review of decisions directly affecting the right of an individual are also incorporated.

The funds for the making of market support payments and supplementary market support payments will come from industry sources and hence there are no direct financial implications for the Commonwealth. Any underwriting contributions by the Commonwealth will be paid into the Market Support Fund. Underwriting arrangements agreed to by the Government are however not provided for in legislation. Any payments required as a result of underwriting will be by means of an appropriation from Consolidated Revenue. As honourable senators will appreciate the amount of underwriting contributions, if any, cannot be determined in advance as they will relate to the actual market circumstances arising from time to time.

As I noted in my speech on the Dairy Industry Stabilization Levy Amendment Bill, this Bill also provides for the repeal of the Dairy Industry Assistance Act 1977 and the Dairy Industry Assistance Levy Act 1977.

I commend the Bill to honourable senators.

DAIRY INDUSTRY STABILIZATION LEVY AMENDMENT BILL 1985

This Bill amends the Dairy Industry Stabilization Levy Act 1977 and is an integral element in the overall package of marketing arrangements. The Bill imposes a levy on certain dairy products produced at a factory, with butter, butteroil and cheddar cheeses likely to be the only products to, in practice, attract a significant levy. The rate of the levy will be determined by regulation in the first year and for subsequent years by a formula which is detailed in the legislation. As I mentioned in my second reading speech on the Dairy Produce Market Support Levy Bill 1985 the Government has amended this formula in such a way as to further reduce the rate at which the levy will be phased out in order to ease the transitional burdens on the industry resulting from the introduction of the new arrangements.

Funds from the levy will be used to provide further support for domestic prices of dairy products in addition to that funded by the levy on all milk under the Dairy Produce Market Support Levy Bill 1985.

Levies imposed under this Bill form a part of a transitional arrangement designed to ease the movement over time to a lower level of support for domestic prices of dairy products. The levies will be phased out under the formula, with the speed of the phase-out being affected by the extent to which production and/or market milk prices fall. The aim of the formula is to abate the rate of decline in levies and hence support for domestic prices, if milk production or market milk prices fall rapidly.

A rise in either market milk prices or production would, incidentally, under the formula have the same effect as no change in these factors. This is necessary to ensure that support for domestic prices of manufactured dairy products is not adversely affected by the actions of one or more State Governments in increasing market milk prices.

Honourable senators will be aware that the regulation of the market milk sector of the industry has been and remains the responsibility of State Governments. However the Government, in the Dairy Produce Market Support Bill 1985, provides for the repeal of the Dairy Industry Assistance Act 1977 and the Dairy Industry Assistance Levy Act 1977. These Acts which were passed in 1977 but never proclaimed have been seen by the dairy industry as inhibiting inter-State trade in market milk. In the view of the Government it is inappropriate for the Commonwealth to impose artificial impediments to rational sourcing of milk, whether it be market milk or manufacturing milk.

The only direct financial implication for the Commonwealth is the cost associated with collection of the dairy products levy which will be in the vicinity of $120,000 per annum. Given that the Commonwealth in the past has met the cost of levies imposed under the Dairy Industry Stabilization Levy Act 1977 and the imposition of the levy under this Bill is for a limited time period, it was not considered appropriate for collection charges to be met from levy receipts.

I commend the Bill to honourable senators.

Debate (on motion by Senator Kilgariff) adjourned.