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ECONOMICS LEGISLATION COMMITTEE
06/08/2009
Renewable Energy (Electricity) Amendment Bill 2009

CHAIR —Welcome, Mr Poole. Would you like to make an opening statement?

Mr Poole —Thank you. Good morning, Senators. I wish I was there with you and apologise for not being so. I guess the key issue for us in terms of the renewable energy target bill is fundamentally the linkages back to CPRS and the way assistance is provided in CPRS and the fact that our understanding is that those mechanisms will be carried across into this renewable energy target legislation.

The background of dairy processing is that we are quite high energy users in dairy processing but unfortunately we are not intensive enough in terms of our assessment to be considered emissions intensive trade exposed, so we find ourselves in this no man’s land within CPRS where we are very heavily trade exposed and in fact trying to export products into the world’s most distorted markets. We are very trade exposed and we are price takers in the market, but we are not emissions intensive enough to get any assistance under CPRS. For my company, Murray Goulburn, we are going to be exposed to about $30 million worth of CPRS costs at $40 a tonne for carbon. When we have done the figures and the estimates on the renewable energy target, in 2010 under a certain set of assumptions that adds a further $1 million to Murray Goulburn and by 2020 we are estimating that would be about $2 million, all else being equal. So there are a lot of costs coming towards us under CPRS even though we are trade exposed. We have got no choice but to pass those costs through to our owners, our farmers. We are a co-operative, so anything that happens to Murray Goulburn as a processor is passed through the chain to farmers. Farming families are the ones who are going to have to pay these costs, and that is going to be around $10,000 per family.

We have taken a position as a company that we actually support the architecture of CPRS. We are certainly not arguing against renewable energy, although I do find it a little bit unusual that we need this legislation given that CPRS was designed to encourage this. But our view as a company is that the architecture can be established but that would mean supporting trade exposed organisations or trade exposed industries like dairy at least for the first 10 years of the scheme, at which time we hope the rest of the world has come on board, our major competitors are starting to also have CPRSs and renewable energy targets, or at the very least we have been able to take action through research and development that means that we can generate our own renewables and/or reduce our energy consumption. We are very determined to act on all this but we feel we are being treated very unfairly under CPRS and through the impacts of RET. We are starting to feel very concerned about what this is going to do to the dairy industry and other food-based sectors in terms of employment and family farming businesses. We are continuing to talk with government. We want to work with government but we are very fearful of what is coming at us with CPRS.

ACTING CHAIR —Thank you, Mr Poole. Senator Boswell has some questions.

Senator BOSWELL —You have said the cost to Murray Goulburn as a result of RET will be $2 million by 2020 and about $1 million by 2014. Is that correct?

Mr Poole —You can only estimate going forward, this is all else being equal: 2010 we have estimated about a $900,000 cost of RET. That is because of the pooling factor in terms of what impacts on our electricity cost. By 2020 our estimate is about $2 million a year. That is assuming that our consumption stays the same.

Senator BOSWELL —You have worked out that your CPRS is around $30 million.

Mr Poole —At $40 a tonne. We have got a carbon footprint of about 700,000 tonnes as a company, so at $40 a tonne that would be $28 million, to be exact. We are the largest dairy company but other dairy companies are facing similar costs.

Senator BOSWELL —We are racing the clock here, so please answer these questions precisely.

ACTING CHAIR —We do have a tight time limit, Mr Poole.

Senator BOSWELL —If these costs go through unabated, what implication does this have for both dairy farmers supplying milk to your dry milk powder processing and other Australian dairy farmers supplying the fresh milk supply?

Mr Poole —Murray Goulburn as the co-op sets the price, so if we drop our price then other companies can follow suit. Notwithstanding that, other companies that are doing major processing are going to have the costs anyway, so they will need to follow suit because, like us, they will be incurring costs. So at $40 a tonne you are looking at taking about $10,000 worth of profit out of the average dairy farm business, and at the moment they do not make really any profit at all in the main. As you know, Senator, we are working in markets at the moment where subsidies have been reintroduced at a major level. We are feeling the totally impacts of the global financial crisis. Probably of all the sectors it is dairy that is feeling the brunt of protectionism. We have lived with that and I think have done pretty well in world markets over the last 20 years, but we did not expect the next distortion in the marketplace to come from our own government. That is essentially like a $10,000 tax on dairy farming. That might not destroy the industry but it is the last thing we can take at this stage.

Senator BOSWELL —The RET partial exemptions are tied to the CPRS definitions of ITE industries. Where does that leave agricultural processors such as Murray Goulburn?

Mr Poole —That is really the point of our submission that we put in through the Australian Dairy Industry Council, that we feel we have been very unfairly treated in the CPRS. If you therefore carry the emissions-intensive trade-exposure tests, which we think are just too harsh in terms of their treatments and cut-offs, you simply carry that unfairness across to RET. That is just a double whammy for us, I guess is the way to describe it. We are going to get hit under the way that we have been dealt with in CPRS and now we are going to get hit again without any capacity to pass any of these costs on.

Senator BOSWELL —What was the approach taken to the agriculture processing by the previous New Zealand Labour government?

Mr Poole —What we are asking for in terms of our policy position as an industry is some sort of parity and particularly with New Zealand. The previous Labour government in New Zealand had a system where food processors that were trade exposed could opt into the scheme and get 90 per cent free permits. The biggest dairy company and exporter in the world is Fonterra just across the Tasman, obviously operating out of New Zealand, where we have had common economic relations and total free trade with them now for 20-plus years. Under their system they would get 90 per cent free permits, essentially minimising the cost of their emissions trading scheme. You come across the Tasman to Australia and Murray Goulburn, as the second-biggest exporter of dairy products in the world, would be fully exposed. So it was just a straight comparative disadvantage.

Of course, the kicker of all of that is that the demand for dairy products does not change so, if our industry gets smaller and the New Zealand or the South American dairy industries get bigger, there is not even any benefit to the environment. The emissions just go offshore. If there were some environmental benefit from it then may be we could understand it. The frustration for us is that the tax on dairy farming families in Australia will do nothing for the environment.

Senator BOSWELL —Senator Cameron supported getting you on this program. I thank him for that. Does the government’s assistance formulation take any consideration of the degree of trade exposure different industries face?

Mr Poole —In fairness, trade exposure is sometimes a hard thing to quantify at the margins; it is certainly not hard to quantify for dairy. In Murray Goulburn’s case, or as an industry even, about half of our products are exported. The majority of dairy products sold in Australia are open to import competition. About 25 per cent of the cheese market in Australia is already imports. The only product that may not be trade exposed is fresh liquid milk, because that is not easily imported.

We would easily pass any trade exposure test that you can see around the world. Really where we have been caught is on the emissions intensity test because our most intensive products—powders—are about 600 to 700 tonnes of carbon per $1 million of revenue. We fall a fair way short on an emission intensity test. Because of the way that the dairy industry is structured, the costs go back to the farmer. There are about 8,000 dairy farmers in Australia now and they are going to pay all of the costs. It is a very narrow focus in terms of where all the costs ultimately lie.

Senator BOSWELL —What do you see as the—

Mr Poole —Solution?

ACTING CHAIR —No, let Senator Boswell—

Senator CAMERON —You are not coaching the senator in his questioning, are you?

Senator BOSWELL —No.

Senator CAMERON —I hope not.

ACTING CHAIR —Senator Cameron!

Mr Poole —The policy position of the industry has been in place now for six months or so and we have made submissions, Senator Cameron—

Senator BOSWELL —No, but what is the outcome—loss of jobs for the blue-collar workers in your dairy cooperatives? Have you worked out any loss of jobs?

Mr Poole —That is very hard to work out. The outcome is that $40 a tonne is going to cost the average farming family about $10,000. Even in a good year for the industry, average net cash incomes for dairy farming families might be $50,000 or $60,000, so it is like taking 20 or 25 per cent of their income away.

Senator CAMERON —I have been having a look at your website trying to very quickly come to grips with the make up of the company, and I am sure I will not be able to do that effectively. I see you have a $2.6 billion turnover.

Mr Poole —That was the turnover in 2006-07. Essentially, our company is 2,600 farmers. The scale of the company really needs to be looked at in terms of what those individuals then turn over. The average dairy farmer is going to be turning over gross between $400,000 and $1 million as a business.

Senator CAMERON —I will have to try and keep you tight on these responses because I only have a couple of minutes. I am happy with that response. The impost that you have indicated through CPRS and RET by 2020 is $2 million.

Mr Poole —That is just for RET. The CPRS would be another $9 million or $10 million, depending on the carbon price.

Senator CAMERON —There are opportunities to pass costs on. That is a price signal that everyone in the community has, isn’t it?

Mr Poole —There is no opportunity for Murray Goulburn to pass costs on. We are basically fully trade exposed, so the price of dairy product is established by what those products trade for on the world market.

Senator CAMERON —You say you are fully trade exposed, but, according to your website, under half of your product goes overseas.

Mr Poole —Over half goes overseas, but of those products we sell in Australia—powders, cheeses, butters—all are freely imported. For example, from New Zealand there are no import restrictions, so the price of cheese in Australia is still established by, essentially, a world market price. We cannot just price cheese however we would want to; otherwise, we would lose market share to the New Zealanders and anyone else who wanted to bring cheese into Australia—the US, for example.

Senator CAMERON —That is no different from many other companies operating around the country. They are going to have to deal with the market realities, not just the CPRS.

Mr Poole —Yes, and we have done that for many, many years. We have tried to be a profitable and successful business, which we have been for many years, but we are already fighting a lot of distortions, as you know, Senator, with subsidies around the world and lack of market access. For example, we cannot get access, generally speaking, to Europe at all. European dairy products at least have some capacity to pass costs through because they are not exposed to imports. We support a government policy where there is free trade. But it does not operate like that around a lot of the world still.

Senator CAMERON —I have been saying that for a long time. I notice that you have put a report in about your carbon footprint and it is 700,000 tonnes per annum.

Mr Poole —Yes.

Senator CAMERON —You have looked at some abatement. I notice that what you are putting to us in terms of these costs is what the worst-case scenario would be if you did not undertake any abatement. Is that correct?

Mr Poole —Yes, it is.

Senator CAMERON —Why are you not factoring abatement into this figure? Why are you running up the worst-case scenario and not factoring in any abatement?

Mr Poole —Certainly those costs would be true in the first few years. As a company operating in Victoria, we have been exposed for quite a few years to legislation that compels us to undertake any project that has a three-year or better payback that reduces emissions or waste or increases water use efficiency. We already have a lot of the low-hanging fruit. We are now undertaking a very substantial R&D program. We are determined to get better at what we do over time. But what we are really saying is that we would like the government to help us with the transition. As I said in my introduction, we support the infrastructure of the CPRS and we believe—

Senator CAMERON —Mr Poole, I do not want you repeating what you have already told me, because I am really on a tight time scale here.

Mr Poole —I understand.

Senator CAMERON —I am sorry to do this to you.

Mr Poole —The answer to your question is that we are seeking support in the transition to the scheme.

Senator CAMERON —So the figure that you have given in evidence this morning of a $2 million cost by 2020 for RET could be reduced through abatement. Is that correct?

Mr Poole —Absolutely. We want the opportunity to do that. The more costs we have initially from something like CPRS, the less chance we have to invest in projects that could lead to abatement. We would like the opportunity to keep some of that money that we are going to be handing over for permits and increased energy costs so that we can invest in our R&D program.

Senator CAMERON —I just want to come to the very important issue of jobs. Senator Boswell has become the prosecutor-in-chief of job losses in Australia connected to carbon pollution.

ACTING CHAIR —It is a legitimate concern.

Senator CAMERON —He was continuing that with your company this morning. You have no plans to put people off at this stage because of the CPRS, have you?

ACTING CHAIR —That is leading the witness.

Senator CAMERON —You’re a doctor, not a lawyer.

Mr Poole —It has not started yet, but inevitably under the CPRS as it is proposed the dairy industry in Australia, and food processing and agriculture generally in Australia, would become less competitive. As it is designed that is inevitable. How many jobs that costs is hard to say, but inevitably what the CPRS is going to do is make food processing and agriculture less competitive.

Senator CAMERON —You said you were continuing to talk to government. Are those talks continuing now?

Mr Poole —We are trying. We have written to Minister Wong many times, but at this stage we have not had any response. We would really like a meeting with Minister Wong, and we would really like to meet with Minister Combet as well.

Senator CAMERON —You have indicated that you would want some assistance. Have you done any analysis of what the cost to government would be for your company if assistance were provided to Murray Goulburn because you do not meet the trade-exposed area and what the cost would be in the community generally if we expanded that?

Mr Poole —Food processing, as a total number of permits, is very low. It would be less than a few per cent, and so the cost is just the equivalent of free permits. If you look at dairy processing, there is about 1½ million tonnes of carbon in dairy processing. So it is a very small proportion of total emissions. In the case of dairy, we have no choice—we have to process here—so it is a unique business in the sense that it is perishable. Those jobs are mainly in rural Australia. The products have to be processed here—we do not have a choice of moving our facilities—so we are not going to be one of these companies that can move. We have to stay here. Therefore the costs of the CPRS are inevitable for us.

Senator CAMERON —In your annual report, what advice have you given to the cooperative in terms of the CPRS and alerting people to what you claim to be the worst-case scenario? You have now conceded the worst-case scenario; what have you said about that?

Mr Poole —We have been quoting the range. In fairness to us, we have been quoting to our members that the cost from the impact just on the processing side of their business is $5,000 to $10,000 in the coming years if there is no assistance. So, even if we were able to reduce our emissions by half, for example, if the cost is at $40 a tonne then that still means $5,000 per farming family. So I think our range is a more than reasonable expectation for the cost.

Senator CAMERON —But that is not what Senator Boswell put to you and that is not what you put this morning. You did not put a range; you put the worst-case scenario.

Mr Poole —I said it was $10,000 at $40 a tonne. If you then look at what we have said in public and in our submissions, you will see that we have said that it is $5,000 to $10,000, because the opening price might be closer to $20 a tonne, so therefore you have a range of $5,000 to $10,000. You have to understand that the price of carbon is going to change, so therefore putting an exact figure is impossible. As you quite rightly point out, we might be able to change our carbon footprint as well, but my evidence is clear: the big projects that we are undertaking to do that are going to take many, many years to bed down if they are successful.

Senator CAMERON —But you do accept that the government has a responsibility to try and deal with the issue of carbon pollution.

Mr Poole —Yes, we do. My personal view, which I certainly put forward in the company, is that our view is of a soft start and a hard finish. So you give, particularly, trade-exposed businesses as much support as you can in the first 10 years, and then you give them clear market signals that they then have to run very hard through to the likes of 2020 and other targets after that, because that allows us to make that transition.

The problem with the modelling is that it has not modelled that transition. We want to be here and to be a strong company creating jobs in Australia in 2020 so that we can actually help meet those targets, and we are confident we can. But the trouble is that damage could be done to us as an industry in that first period, so we are really, really looking for help from the federal government in that period.

Senator CAMERON —Well, I hope you can convince Senator Boswell and Senator Joyce about the reality of climate change, because at this stage we have completely failed in that project.

ACTING CHAIR —Mr Poole, I have one question for you. Do you support decoupling or separation of the RETs from the CPRS? Would that be of assistance to you?

Senator BOSWELL —It would not make any difference to them.

Senator CAMERON —Are you coaching again?

Mr Poole —As I read it, the support mechanisms, the emissions-intensive trade-exposed mechanisms, is what is being coupled, so decoupling it would only help trade-exposed companies if there was some other mechanism to support trade-exposed companies. It is the coupling of the support mechanisms which is the issue. We are out of any support measures in CPRS and we are therefore out of any support measures under renewable energy targets.

ACTING CHAIR —But your RETs are going to be higher, aren’t they, while the coupling exists?

Senator BOSWELL —No, they will be the same.

Mr Poole —They will be the same, but there is no support under either structure.

Senator BOSWELL —They do not get any exemptions.

ACTING CHAIR —All right. Thank you very much, Mr Poole.

Mr Poole —Thank you for the opportunity to address you this morning.

Senator BOSWELL —You can thank Senator Cameron, who was very magnanimous in allowing you to come in.

Mr Poole —I really do appreciate it, and I hope the dialogue can continue.

ACTING CHAIR —Thank you very much.

[10.47 am]