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Rural and Regional Affairs and Transport References Committee
Effect of market consolidation on the red-meat-marketing sector

CHAPPELL, Mr Gregory, Private capacity

SHEARER-SMITH, Mr Jason Anthony, Chief Executive Officer, Smithfield Cattle Company

CHAIR: I now welcome Mr Jason Shearer-Smith and Mr Greg Chappell. Do you have anything to say about the capacity in which you appear today?

Mr Chappell : I am independent, representing a seedstock operation in northern New South Wales.

CHAIR: Thank you. Mr Chappell, the committee has received your submission as submission No. 89. Would you like to make any amendments or additions to your submission?

Mr Chappell : No, thanks.

CHAIR: I am going to give you the opportunity to make a brief opening statement before I go to Mr Shearer-Smith.

Mr Chappell : I guess the issues that impact on the position that we are faced with today are pretty complex and convoluted because of the nature of our supply system. I am convinced that we already have the tools to deliver the outcomes that we need to solve some of these problems. Over my working life, I have been involved with the development of AUS-MEAT. I was one of the original people on the first group that ever did anything with AUS-MEAT. It is a wonderful facility. The problem, I think, that we face with AUS-MEAT today is the fact that it was designed as a tool to communicate consumer requirement for beef back through the processor to the producer and to provide an open channel of communication that also provided market signals as to what was happening domestically and internationally with beef. One of the problems that have happened is that that particular tool has not remained flexible. It has become a bureaucracy. It is now controlled.

Just to give you some background, the money that went into establishing AUS-MEAT was AMLC money, so that was all producer levies that produced the outcome. There were some research funds via MRC that developed things like the P8 site. That, of course, in itself is an outmoded measure, as we have heard this morning. We need to look at how we can make that measure more applicable, more accurate and a better system for trading value. I guess things like the butt shape need to be looked at in terms of what they were really designed to communicate, which was actually retail yield. They have not gone to the next stage of being able to do that.

I think that the actual ownership is another problem, because now we are in a situation, as has already been raised, that there is such a complex issue involved, if anything needs to be changed we just cannot administer change for the betterment of that communications system in an easy, functional manner. That is part of the problem. Whose responsibility is it at the moment? AMLC was a section 16 committee of the federal government and AUS-MEAT itself was a part of that organisation, and sadly the people who can benefit most from that open communication have now lost the ability to get that communication flow working properly, both in dollar terms and feedback on carcass.

The next innovation that came along that would solve a lot of these issues that we have talked about was MSA. At the beginning of AUS-MEAT, John Hall had the thought that we needed 'right meat' to be the extension of AUS-MEAT—right cut, right cook, right outcome. That did not ever get to fruition; there were trials done in Tasmania during the early nineties getting 'right meat' going, but it eventually got harpooned. It was not until MRC came up with the research dollars to establish the consumer based MSA system that we were able to get a methodology where we could actually describe beef to the consumer by cut, by cook. What happened to MSA was that we lost the game there again, because the independence of the grading became lost and the producers now grade those bodies in-house. I cannot see where that has any merit at all. We go to a rugby game, a rugby test or a cricket test and we never see an umpire from the same country, yet here we have companies who are determining the livelihoods of beef producers throughout Australia being graded by an in-house grader. We need to arrest that situation and somehow get back to having some independence, graded third-party independence. Those people need to be trained so that they can cope with disputes and conflict resolution. They need to be more than just someone that you grab off the street and put into a position of making a call on fat colour, fat depth or the ossification issue.

Then we look at the technological challenges that MSA brought about, the fact that we are now able to describe by the physiological age of that product rather than the chronological age—teeth verses ossification. The physiology of that muscle is what we need to measure in order to make a determination on the eating quality. Through the MSA system, we are able to do that, and it is unique. People around the world, like Declan Troys in Ireland and the Gary Smiths in the US—these fellows are all in awe of the system that is based on actual leading outcome. There is Rhonda Miller out at Texas A&M. These people believe in the fact that we have a state-of-the-art technology and that we should be able to implement it to our benefit a lot more readily than we have been able to.

I want to make one other comment. It frustrates me—I am probably old and bitter and twisted; I have been around in that sort of position since 1988. It just seems to me that, when we have a problem in the meat industry, instead of using the mindset of solving by outcome we revert to just looking at process. So we have these process dominated organisations now that do not take the outcome and find the path to the outcome. We bury ourselves in the process and think that we are going to get the outcome we want from manipulating process. It might be semantic but it is reality. We need to focus on the outcome. The outcome is the eating quality. We will never be able to change the structure of who owns what. Go back in history and look at the industry; look at the names that are no longer here: we have had Angliss, Borthwick, Tancred, Gilberton—the list goes on. We now, unfortunately, end up with three major players. We have to work our way through that. We are not going to change that, so we must be able to utilise our current technologies, update them and move on.

Mr Shearer-Smith : I was asked to come here by the Senate committee. I do not have a submission in front of you guys.

CHAIR: I have never met you. I would not know you if I fell over you. If your wallet were open I could be your best mate. So that is not really helping me out. Who invited you?

Mr Shearer-Smith : I got an email from Trish. I am not sure—

Senator CANAVAN: Tell us about yourself and your knowledge of the issues.

CHAIR: Okay, tell us why we chose you.

Mr Shearer-Smith : Okay. Smithfield Cattle Company—we have a 20,000-head cattle feedlot. We turn off about 70,000 or 75,000 head of cattle per year. We background cattle on grass. We do not do any breeding. We are one of the largest suppliers to Woolworths nationally—we were a Woolworth's Supplier of the Year in 2014— and we supply various other processing facilities in the south-east. We do some meat exporting ourselves, mostly into China, where we have other businesses as well.

Senator CANAVAN: Do you have a branded product of your own?

Mr Shearer-Smith : Yes.

Senator CANAVAN: What percentage of your throughput of the processing do you sell yourself?

Mr Shearer-Smith : Less than five per cent.

CHAIR: Mr Chappell, I want to come back to a couple of things you raised. Firstly, I was probably one of the biggest fans of the MSA because about nine or 10 years ago I invited the committee down to meet Rod Polkinghorne in south Melbourne to see the fine work that he was doing in a successful little business. Last time I saw Rod Polkinghorne he was with the Sheepmeat Council. He came to us down in Albury. I think it has, sadly, all turned to dust. Why? I do not mean Mr Polkinghorne's business.

Mr Chappell : I can also explain to you a similar situation. I was a partner in a company called Blue Stripe. We built a facility in Tamworth. We got to the point of setting up the plant so that we could deliver cook-ready portions already packed. I guess one of the problems we had was a lack of funds, but other than that—

Senator WILLIAMS: It is a common problem.

Mr Chappell : the major problem that we were confronted with was the fact that to break into supply chains and so generate sufficient volume to make the investment in a building that costs $6 million or $7 million, and all the machinery that went with it to be able to do the packaging—we got to the point where with the investment we had made in the film we could do individual steaks, individually wrapped, and AQIS had certified them for 70-day shelf life. So it is not impossible, through the available technology, to develop those things. But of course where we went wrong was that we probably spent too much time going too far in that direction and not enough in breaking into the marketplace.

CHAIR: Woolies adopt the MSA standards don't they? I should ask you, Mr Shearer-Smith—you are the biggest supplier. Is it correct that all Woolies is labelled MSA? Coles do not adopt the MSA standards?

Mr Chappell : Interestingly enough, though, the Coles plant would be the plant that had a lot of work done on it in the initial research, particularly with the pH decline work. I think you will find that in that plant Coles do quite a fair bit of the background MSA preparation.

CHAIR: In relation to AUS-MEAT—if I have taken this right—when AUS-MEAT was set up, it was set up with the best interests of all involved and, unfortunately, now it is not delivering the outcomes it was set up to deliver. I cannot remember what you said about making changes—but you have the tools; AUS-MEAT has the tools. I am asking: what are they?

Mr Chappell : AUS-MEAT as the authority has the position to do what needs to be done. I might have misled you there; I am sorry. We already have the wherewithal through the AUS-MEAT vehicle to deliver what it should be delivering. All we need to do is to make sure that it goes back to the base root of fulfilling those promises that were about delivering the communication flow and overseeing the preparation of product in line with specifications so that those specifications could be communicated down chain and back chain.

CHAIR: Sorry to cut in on you, but what has come through in today's hearing that I am picking up, and I think my colleagues will probably agree with me, is a need for independent graders within the meatworks. Are you suggesting that AUS-MEAT would not play that role, or that it should play that role?

Mr Chappell : AUS-MEAT can play that role provided that AUS-MEAT is then seen to be and actually is an independent authority on the uniform specification of Australian meat, which is what AUS-MEAT stood for.

CHAIR: Sure—and Mr Shearer-Smith please jump in and add your bit too—but I am not getting the sense that the majority of people who have been to us today would support that they are in that position to do that. There is a number of things—you are only as independent as who is paying you, and what has been picked up today is that they are working for the processors, so how are they going to come on your side and say, 'Hang on a minute, you have ripped off a mil of fat here and there.' As Senator Bullock said—Someone has to fund this; and I think Ms Angus said, 'We are funding it.' There is a very big, cloudy issue here. I am saying to you guys that you have the levers to Treasury, you are the boss, you are Mr Joyce—how the heck are we going to fix this? What does it need?

Mr Chappell : AUS-MEAT can be reworked. The original set-up of AUS-MEAT is not as it is today—that was my point. As a producer organisation that built AUS-MEAT, we have let control go and now it has become the vehicle of the processor to bash the producing community, if you like.

CHAIR: How do we fix it? And I am not suggesting that government interference is the thing that is needed, but something needs to be done because it is not working now.

Mr Chappell : How do you establish independence?

CHAIR: I know how you establish independence. You go out there and you put an ad in the paper and you say, 'We want people to come and work for us, and we will be this new body'—whether it is called the ABA, the CCA or whatever it may be. You say, 'We are going pay your wages.' Where are you going to get that money from? I am not trying to be a smart-arse. I am not setting you up and saying 'Ha, ha, got you!' You need to tell us how you think that will be fixed. Let's forget about the niceties. Let's go hardcore.

Mr Chappell : It needs to be funded through an independent source. The model perhaps needs to look something like the USDA.

CHAIR: 'An independent source'. You cannot go to the plumbers association and say, 'Can you fund it?' When you say 'an independent source', what is an independent source? Do you retract your money from AUS-MEAT? Is that what you do?

Mr Chappell : You have to set it up so that there is autonomy and there is independence. The reality is that AMLC, who were—as I understand it, MLA still is a section 16 committee of the federal government of Australia—

Senator BULLOCK: Could I make a suggestion? If the independent grader is providing a service to the processor, why wouldn't you charge the processor for the provision of that service and fund it in that way?

Mr Chappell : No reason.

Senator BULLOCK: There is a suggestion for you, Chair.

CHAIR: Thank you. Mr Chappell, seriously, we come to you because we want to hear exactly what you think might fix it—not just you but the whole community.

Mr Chappell : The reality is that the other models around the world would suggest that government oversees that. That USDA oversees it in the United States. We used to oversee it in the states. New South Wales had the Meat Industry Authority, Queensland had the Queensland Meat Authority. There were state affiliated bodies that performed those roles.

CHAIR: I do not want to rain on your parade, but the government has some fiscal challenges and we all know that a lot of them are real. They are not going to sit back. Senator Canavan would be the first to pounce if we were to say that the government needs to fund this and the government needs to take that role. I plead with my colleagues in terms of going back to recommendation 1 of our previous inquiry. That would go a long way to addressing a heck of a lot of problems that we are finding where you people get a return to the farm gate.

Senator O'SULLIVAN: The levy system, as I understand it, regarding grass-fed beef production, along with some others, produces about $54 million worth of revenue to the MLA. That sometimes has some matched funding on research and development. Do you accept that the bulk of that money has historically been spent on the development and promotion of the red meat industry? It comes from a livestock owner who sells a live animal. At the point of market they sell a live animal. They contribute $5 for each transaction and then their money is spent developing the red meat industry on the other side of the fence, on the principle that we can get volume up and we get pulled through. It just so happens that the industry was able to meet the volume without getting the premium. Why couldn't some of their own $54 million—which has been appropriated by government, so it has become a tax, for want of a better term—dollar for dollar, go back to the MLA via arrangements in the memorandum of understanding? Why can't some of that money be spent by these people in this process to protect their interests in the development of these inspections? The money exists.

Mr Chappell : Quite easily. That was the model that MSA was set up on. The graders were employed by MSA initially.

Senator O'SULLIVAN: Well, we do not have to invent any money, Chair. We have just found it!

CHAIR: Great. That is all I was looking for! Thank you.

Senator CANAVAN: More specific to Senator Sterle's line of questioning, given your history and knowledge of AUS-MEAT, you mentioned that it is unfortunate that the industry has lost control of it. Is it so lost that it cannot be recovered? How are you as an industry going to practically recover control of an organisation that is 50 per cent owned by processors now? What can government or industry do, practically, to return it to an independent standard-setting body?

Mr Chappell : That is obviously a difficult scenario, because recovering something that you have lost is always very difficult. The point is that we do not need to reinvent the wheel. We do not want to go and spend another—people talk about $200 million, but, whatever the amount is, we do not need to go and re-spend it. What we need to be able to do is use what we have been able to develop and make it more applicable to the 21st century. There are way too many ciphers. We need to simplify this language into something that is much more readily useable, both at the plant level and as a communication tool to the customer and the producer. At the moment, that is all convoluted. It is a bit like the divide and conquer; we just make this into such a mesh-pool that it gets very difficult. We can have ciphers for young, beaut eating cattle, and they get packed in a PR box. We go back to the law of the common denominator. That does not help our position in a world where we are major exporters, and where we need to be able to describe the product as accurately as we can to the end user consumer to extract the most dollars from that —

Senator CANAVAN: I am interested in those outcomes. I do not know exactly what the organisation is called. What I would really like to ask is: do you think that model of a uniform based set of standards across the industry is the one to continue with? I would be interested in getting your response. It does seem a little strange to me that we just set one set of rules across the entire industry. Others have suggested that maybe we move to a more code-of-conduct type model, where standards can be agreed to between producers and different processing companies under a broad framework and they can make adjustments. What would you say to that? Why do we need a uniform system? Why does every processing facility and every exporter have to have the same ciphers or the same product descriptions? You have practical experiences yourself, but feel free if you want to go first.

Mr Shearer-Smith : There is usually a standard so that your customers can actually talk to you in a format that both you and they understand. Someone might come to you saying, 'I want this,' but they actually mean, 'I want that.' The AUS-MEAT language, whether there is too many ciphers or not, is a standard language that can be used internationally so that people can communicate in a form where they both know what they are actually talking about.

Senator CANAVAN: I agree there would need to be a standard—I am being devil's advocate here; I do not really know—but what is the risk of having multiple standards, multiple different descriptions of how a beast is cut up or how it is packaged?

Mr Shearer-Smith : We have got that now.

Senator CANAVAN: Yes. They have the cipher—they have to have that—then they will have their own product descriptions anyway. Why have the uniform standard to begin with—I suppose that is what I am asking—if a lot of people are not using them to market their products?

Mr Shearer-Smith : Generally speaking there is a broad specification with regard to a certain cut. Then there are certain specifications requiring description. A rump might have eight different variations, so the customer needs to specify this, this and this, and if they do not specify them then there is room for confusion. A rump can be cut up in many different ways, but there needs to be that standard as to how it can be cut up.

Senator CANAVAN: Just explain to me why that cannot be worked out commercially. If it is in the industry's interests or commercial interests for it to coalesce around one standard, it would. But presumably not all our export markets are the same; customer demands are very different across them. Why wouldn't we have the flexibility to do different things at different times?

Mr Shearer-Smith : There is the flexibility to do different things, but it does not all have to be in the AUS-MEAT language. You can have a customer who wants you to do something slightly different to the AUS-MEAT language, but the AUS-MEAT language provides you with a large percentage of what you are going to do with that carcass. The specification and the language is actually provided by AUS-MEAT.

Senator CANAVAN: I am not the expert that you would be, Mr Shearer-Smith, we have heard today that the AUS-MEAT standards can be quite constraining in terms of how people are paid and specs are constructed. I am struggling to see. You are saying it is flexible and it can be adapted, but other evidence says that, no, it restricts people, that they have got to cut in certain ways because of it, so why wouldn't we move to a more flexible model that is not necessarily uniform?

Mr Shearer-Smith : The issue that I heard—and I was not here this morning; I apologise—was talk about the actual standard carcass, whereas what I was talking about just before was the meat cut going to the customers. Are there issues with P8 site? Are there issues with butt profiles being used as a standard? We supply to many different abattoirs and we know the differences between every single abattoir and we choose who we want to deal with. So I guess part of the reason for coming here today was to talk about the consolidation of the processing sector. That was what I thought I was here today to talk about. From our perspective, being predominantly a grain-fed beef producer, do we believe that we have enough of a mix of companies buying grain-fed beef in southern Queensland? Yes, we do. And we choose who we actually deal with.

Senator O'SULLIVAN: But you do not sell through the saleyards?

Mr Shearer-Smith : No.

Senator O'SULLIVAN: If you were a grass-fed producer, would your view be the same?

Mr Shearer-Smith : If I were a grass-fed producer, I would actually be doing things. With all due respect to the grass-fed producers here, if they genuinely believe that there has been consolidation in the processing sector, why not attempt to start to consolidate the grass-fed sector?

Senator CANAVAN: It is a perennial question for all agriculture. Various structures, in the past, have been tried as cooperatives in these things and they are difficult to enforce, obviously, and often fall down. I apologise; you were not here earlier, but I was concentrating on AUS-MEAT standards because we heard evidence that those standards and the restrictiveness of those standards can potentially limit the emergence of new abattoirs or new facilities. That is why I was concentrating on them being more flexible and dealing with consolidation issues. Just on that, you are saying you operate in the southern markets. Could you just list with us the options you have, in terms of facilities to use.

CHAIR: Bearing in mind that it is now 2.02. You have time.

Senator CANAVAN: I know you have to run. I will leave it at that, and then others can have a go and jump in.

Senator BULLOCK: I have a soft spot for collective bargaining given my background. I take it that you were just advocating collective bargaining for the grass-fed beef producers?

Mr Shearer-Smith : Pretty much.

Senator BULLOCK: Yes. Probably a good idea.

CHAIR: Wouldn't hurt yers!

Senator O'SULLIVAN: A dream never to be achieved, I'm afraid, Senator.

Senator WILLIAMS: Mr Chappell and Mr Shearer-Smith, we just did a Senate inquiry into the sugar industry. In the sugar industry, the canegrowers have what is called a grower economic interest. So not only do they sell the cane to the mill when it is cut but they have an interest in the cane when it goes off to the final sugar sale. How would that apply in the beef industry, given the blood in the calf taken from a pregnant cow is worth a fortune and the kidney stones are worth $30,000 a kilo? Would that be too complicated? What I am trying to do is to see how we get more money back to the farm gate. If you had a grower economic interest—and correct me, Senator Canavan, if I am wrong on the sugar industry—as to the final sale of the product, I suppose the processors would be very reluctant to consider negotiations on it.

Mr Shearer-Smith : We have had deals with processors before that are based off meat price sales. If we wanted to, today, there is a company that we could do business with where our returns would be based off the sale price of the meat. We can do those deals today. Are we doing them today? No, we are not.

Senator WILLIAMS: A second point I want to make is that there is a lot of complaint about the trim and how much is being costed to the producers. What if the abattoirs had scales and they sold them live weight before they dressed them? Would that be another solution? You get your live weight price. Then, of course, the thing is curfews. How long are they off the tucker? How full in the guts are they? Being an old shearer, I did not like to shear sheep full in the guts, I can tell you. These would be issues as well, I suppose.

Mr Chappell : I think that has always been a problem: where does ownership change, and what sort of measurement are we going to use to determine value? I certainly was not aware of any change to standard trim, but obviously in 2010 there was a change administered to standard trim.

Senator WILLIAMS: We are hearing a lot about it—the fat taken out of the brisket for the better cooling process et cetera. But it is still weight being trimmed off the final carcass weight, and when you are selling over the hooks that is what you are getting paid for.

Mr Chappell : Yes, and unfortunately, with that product, there is a couple of dollars a kilo for that fat into China, so there is a huge loss back to the producer.

Senator WILLIAMS: And another gain to the processor.

Mr Chappell : So I do not know how your sugar analogy can actually be made to work unless we can somehow revisit the terms of the standard carcass settlement. I hear what you are saying, but I think we have some problems with it. That was the point I was trying to make: we need to look at the machine that we have, which is AUS-MEAT, and identify now, given that we are in the 21st century, the changes that have happened. In 1988, China was not a country that we ever thought we might be exporting beef to when that language was established.

Senator WILLIAMS: I had a bloke come to me last week from China; he wants 200 tonnes a month. The orders are just flowing through left, right and centre, because they are getting wealthier, they like good food and they trust our food. There might be a little bit of red tape we have in this country, but at least we have a very good reputation for the clean, green food we produce, which hopefully now is showing benefits around the world market.

Mr Chappell : And we need the flexibility to be able to establish language to be able to trade with. That is where I think that we need to rejig AUS-MEAT so that we can establish that and to get that system back to having more of a third-party autonomous position.

Senator O'SULLIVAN: I want to continue with Mr Shearer-Smith on this question about the consolidation of markets, because it is one of the terms of reference that we have here. Where are your feedlotting operations located?

Mr Shearer-Smith : A place called Proston, which is 3½ hours north-west of Brisbane.

Senator O'SULLIVAN: What was it about Proston that you selected? Was it historically a farm family operation?

Mr Shearer-Smith : Yes, my grandfather bought our property in 1928 and set up a small slaughterhouse on the property. We had a range of different butcher shops in the area.

Senator O'SULLIVAN: Do you know of any feedlots up in the gulf—in Georgetown and across to Karumba and Normanton?

Mr Shearer-Smith : No.

Senator O'SULLIVAN: Would there be any reason why you would not put a feedlot up there? It is good country that is not expensive.

Mr Shearer-Smith : If you had the water and the market and you could grow the feed, potentially there might be some opportunity.

Senator O'SULLIVAN: Even if you had to put the stock on the truck for 24 hours to get it down to a meatworks, with all the implications of that? The point I am leading to is that we had the ACCC in our office and spoke to them about the Primo matter, and they looked at markets like this. They did not reflect on the fact that there are markets within markets. Indeed, in the saleyards today there are markets within markets within markets, influenced by the product, the geography and the buyers' intentions. There are just all these submarkets going, and the ACCC, when they look at consolidation, just factor in a couple of things: 'All right, so you lost a meatworks there, but there's one over there and there's one over there, and the same number of buyers are coming.' But isn't it fair to say that consolidation can impact on competition for an article sold through a saleyard or indeed someone who is selling on the grid?

Mr Shearer-Smith : Technically, consolidation can affect that, whether in southern Queensland or—you mentioned the Primo deal—in New South Wales. Strategically it is an abattoir in central eastern New South Wales that does take some competition out of the marketplace. To come back to your question about having an abattoir in Georgetown, you do not necessarily have to have an abattoir to have the benefit of a feedlot in that area. There is a lot of cattle sold as lightweights or they do not maximise the on-farm opportunity to put weight on the cattle that may go out to live export. I am not a super-big fan of live export, but just to answer your question with regard to having a feedlot in Georgetown—

Senator O'SULLIVAN: Mine was a sterile question. If you are going to fatten a beast for 90 or 100 days to absolute maximum output, you really want it to waddle across the road to where it is going to be processed. That just makes sense. You do not want to load that on a truck, you do not want it bruised and you do not want it to lose weight over 20 hours. That is the point I am making. Consolidation, I think, can deny people the opportunity to have a processing plant near them. For my money, there should be as many processing plants as the market can stand, because that is what will bring the competitive tension with buyers. They all need to compete with each other. They all need to get up every day and have to pay maximum price for the commodity that is produced, and that is when we will find real market. Would you not agree with that as a marketing principle? Forget about cattle; it could be anything.

Mr Shearer-Smith : As a marketing principle, I agree with you.

Senator CANAVAN: Mr Shearer-Smith, I presume you have been in the industry for some years. Is that right?

Mr Shearer-Smith : Yes.

Senator CANAVAN: I certainly am not an expert. I have not looked at it for that sort of time frame. The industry seems very cyclical to me, when I look back at the history. We have had periods of excess capacity in the processing sector, then tightness, then high profitability and then, perhaps, not so high profitability. I am interested in getting your opinion on what drives that cyclicality. Is it a function of the weather, human spirit in investment, competitive behaviour or positioning in the industry? What is your view on that?

Mr Shearer-Smith : It all comes back to supply and demand. That is, supply and demand of cattle and supply and demand of meat. What we have seen over the last two years is a higher Australian cattle population; we have had a massive drought that has led to a large turnoff of cattle at the same time; we have had depreciation in currency over the last 18 months; we have had a surge in grinding beef prices in the US; and China is demanding more product. So you have demand from the meat side of things. If you go back five or 10 years, processing plants were a pretty difficult operation. If you go back five years, who wanted to own a feedlot?

Senator WILLIAMS: Exactly.

Mr Shearer-Smith : Who wants to own a feedlot today? Everyone. The reality is that five years ago lot-feeding was quite difficult and unprofitable. We have been lot-feeding cattle since 1986, so we have seen all the cycles. I mentioned earlier about whether we could do a deal today on the value of beef, and that is what we get back for our cattle. We are not doing those deals today because we have to think that the boot is going to be on the other foot. At some point in time, the cattle supply is going to be lower than demand from processors.

Senator O'SULLIVAN: No question about that.

Senator CANAVAN: On the issue of how the industry changes, I would not mind getting your views. We had a drought and there was an increase in the number of cattle killed. I look at the industry and think, 'Given the margins that seem to exist in processing, why didn't processing supply increase by more than it did to take advantage of those margins?' Feedlotting is another way, I suppose, of meeting the issue of too much cattle and not enough capacity. Why don't we see the feedlot industry and the processing industry perhaps expanding response to the higher margins as much as you might—

Mr Shearer-Smith : You have seen the processing sector expand. Almost every abattoir out there is talking about expansion and putting on—

Senator CANAVAN: But it has not happened. Some more shifts have been put on, such as Saturdays, but not a lot of plants have changed from two to three or one to two, and there has certainly only been one abattoir built in 20 or 30 years. It seems to me that a lot of rigidity is in the market. Is it something natural, is it economic or is it institutional or regulatory?

Mr Shearer-Smith : They have a certain level of capacity. I thought that the processing sector, historically, had killed, on the eastern seaboard, about 130,000 to 140,000 head of cattle. They have been killing 170,000 or 180,000.

Senator CANAVAN: And I said that it has increased; I just think there still seems to be spare capacity. There are plenty of abattoirs that could have more shifts per day. Why doesn't that happen? They could work seven days a week. They would be printing money; why wouldn't they do it?

Mr Shearer-Smith : I am not a processor. I have been calling this whole cattle market short for the last 12 months, so we have it completely wrong. The cattle flow just keeps coming. If a processor, for example, went out and put a second shift on and Queensland gets four inches of rain—let's hope it does—that second shift and half the first shift are gone.

Senator CANAVAN: Yes, the risk is an issue.

Mr Shearer-Smith : When you are in a stage of boom times, you are making a lot of money, you get bigger, you throw on extra shifts, you expand your feed yard and everything else. Maybe it is not the time to do it. Put some money in the bank and let's hope that we get back some of the $300 and $500 a head they have been making off us.

Senator CANAVAN: There is nothing in industrial relations laws or those things which stop that from happening? You think it is just too risky?

Mr Shearer-Smith : I think there is plenty in industrial relations laws that stops a lot of things happening in this country! I do not think we have time to talk about that.

CHAIR: We will leave it at that because, as Senator Bullock says, it is outside the terms of reference—not that that has ever worried this committee. I thank the witnesses.