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Industries Assistance Commission - Reports - Orange and tangerine juices, 30 June 1982


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INDUSTRIES ASSISTANCE COMMISSION REPORT

O R A N G E A N D T A N G E R I N E J U I C E S

30 JUNE 1982

No. 304

INDUSTRIES ASSISTANCE COMMISSION REPORT

ORANGE AND TANGERINE JUICES

30 JUNE 1982

AUSTRALIAN GOVERNMENT PUBLISHING SERVICE

CANBERRA 1982

© Commonwealth of Australia 1982

Printed by C.J. THOMPSON, Commonwealth Government Printer, Canberra

INDUSTRIES ASSISTANCE COMMISSION REPORT ORANGE AND TANGERINE JUICES

THE HONOURABLE THE MINISTER FOR ADMINISTRATIVE SERVICES

I forward the Commission's report on "Orange and Tangerine Juices" made in accordance with the reference of 13 February 1981 under Section 23 of the Industries Assistance Commission Act 1973.

K.B. Mourant Secretary

8 July 1982

For the purpose of the inquiry and report on this matter, in accordance with Section 19 of the Industries Assistance Commission Act 1973, the powers of the Commission have been exercised by:

G.F. JOHNSON ........... ................................. Commissioner

C. DYSON ..................................... Associate Commissioner

ORANGE AND TANGERI NE JUI CES

Contents

Page

SUMMARY

1 . I NTRODUCTI ON 1

1 .1 Origin And Scope Of The Reference 1

1 . 2 The Public Inquiry 1

1. 3 Previous Reports And Recent Tariff History 2

1 . 4 Outline Of The Report 4

2. I NDUSTRY S TRUCTURE AND MARKETS 5

2. 1 Domestic Production And Imports 5

2. 2 Growing Sector 8

2. 2. 1 Production and end uses for oranges 8

2. 2. 2 Farm characteristics 11

2. 2. 3 Payment to growers for oranges 18

2. 3 Processing Sector 19

2. 4 Converting Sector 23

2. 5 Domestic Market 24

3. FORMS AND LEVELS OF AS SI STANCE 26

3. 1 The Variable Tariff Arrangement 26

3. 2 Sales Tax Exemption 29

3. 3 Minimum Pricing And Marketing Arrangements 30

3. 4 Levels Of Assistance 32

4. REQUESTS AND SUP PORTI NG ARGUMENTS 38

4. 1 The Variable Tariff Arrangement 38

4. 1. 1 Supporting arguments and discussion 40

4. 2 Sales Tax Exemption 48

4. 3 Fruit Industry Sugar Concession Committee 50

5. LONGER TERM AS SI S TANCE ARRANGEMENTS 54

5. 1 Industry Policy Considerations 54

5. 2 Review Of The Variable Tariff Arrangement 56

5. 3 The Commission' s Proposals 58

5. 3*1 Tariff assistance 58

5. 3. 2 Non-tariff involvement 65

6. STATUTORY REP ORTI NG REQUI REMENTS 70

7. RECOMMENDATI ONS 76

APP ENDI CES

Page

1 . COPY OF MI NI STER' S LETTER AND TERMS OF REFERENCE 77

2. TARI FF P ROVI SI ONS AND CONCENTRATES ORDER 79

3. LI S T OF WI TNESS ES 80

4. REQUES TS AND SUGGES TI ONS 83

5. STATI S TI CS 91

6. EXTRACT OF SECTI ON 8, S UB- SECTI ON ( 1) AND ( 2) , OF THE 98

CUSTOMS TARI FF ACT, 1966

7. S OME P OTENTI AL EFFECTS OF THE LOCAL CONTENT PROVI SI ON 99

AS S OCI ATED WI TH THE SALES TAX EXEMP TI ON AP PLYI NG TO ORANGE AND TANGERI NE JUI CES

8. DUMPI NG P ROCEDURES 104

ABBREVIATIONS USED IN THE REPORT

ABS Australian Bureau of Statistics

ACOF Australian Citrus Growers Federation ACIC Australian Citrus Industry Council

AGPS Australian Government Publishing Service BAE Bureau of Agricultural Economics

FAO Food and Agricultural Organisation

FISCC Fruit Industry Sugar Concession Committee fob Free on board

FPUA Food Preservers Union of Australia

kg Kilogram

ldp Landed duty paid

MIA Murrumbidgee Irrigation Area

NSWDA New South Wales Department of Agriculture RAS Rural Adjustment Scheme

SADA South Australian Department of Agriculture TAA Temporary Assistance Authority

TSS Total Soluble Solids

USDA United States Department of Agriculture vfd Value for duty

CONVERSION FACTORS USED IN THE REPORT

1 tonne of 65° Brix concentrate contains 650 kgs TSS 1 kg TSS is equivalent to 9-6 litres of single strength juice 1 tonne of processed oranges yields 455 litres of single strength juice

SUMMARY

Tariff assistance provided for the production of orange and tangerine juices increased appreciably during the 1970s. Currently, the effective rate of assistance is estimated to be about five times the average afforded to manufacturing industries. The Commission estimates that the net subsidy equivalent of this assistance amounted to about $25 million in 1980-81. It appears that the benefits of this assistance have been largely received by

the growing sector of the industry comprising some 1900 commercial growers.

Under the existing variable tariff arrangement a 1 threshold price' for imports of $2.40 per kg Total Soluble Solids (TSS) has been established (equivalent to about 25 cents per litre single strength). The effect of this arrangement has been to underwrite a landed duty paid ex-store

(capital city) price of approximately $2.88 per kg TSS (equivalent to about 30 cents per litre single strength), when freight and other importing costs are taken into account. Since the price at which orange juice is

traded internationally has not exceeded the 'threshold price' , the effect of this arrangement has been to shield the industry totally from fluctuations and trends in import prices for juice.

In response to the very high assistance afforded the industry by this arrangement, the number of orange trees planted by growers has increased significantly over the past two years. There have also been increases in processing capacity.

Many farms growing oranges produce other fruit and vegetable products. These alternative products receive levels of assistance much lower than that for oranges. These disparities in assistance have encouraged resources to flow into orange growing from other farm activities as well as

encouraging other resources into orange juice production. Another effect of the higher returns for oranges made possible by this high assistance has been to contribute to increases in the capital value of farms growing

oranges.

Most witnesses requested retention of the variable tariff arrangement at existing or higher levels. Witnesses advanced two broad arguments in support of this request, namely that the industry has special characteristics and that it should be shielded from the adverse effects of a number of features of its economic and trading environment.

After examining these arguments, the Commission concluded that they did not justify the continued preferential treatment of the industry through the maintenance of the variable tariff arrangement. In recognition that a sudden and substantial change to the level and form of assistance could

result in undue disruption for those growing and processing oranges the Commission proposed in its draft report a composite duty arrangement consisting of an ad valorem tariff component and a specific tariff component which would be progressively reduced. The proposed form of

assistance would have provided the industry with a buffer against significant falls in import prices while increasingly exposing it to the effects of price changes on the world market.

i

At the draft report hearing, witnesses representing the industry indicated that the form of tariff assistance proposed by the Commission would expose the industry to severe disruption if there was a temporary fall in world prices to very low levels such as occurred in December 1980. While the Commission considers that there is no case for a floor price mechanism as a longer term form of assistance, it will recommend such a mechanism for the next five years.

Given that the industry appears to have expanded under the high level of assistance provided by the existing variable tariff, the Commission will recommend that the industry initially be assisted by a composite duty with an ad valorem equivalent slightly less than the ad valorem equivalent of the variable tariff (estimated to be about 70 per cent). It will recommend that the composite duty be a 10 per cent ad valorem duty (equivalent to that applying to most other fruit juices) plus a specific duty rate of $0.75 per kg TSS. It will also recommend that the specific rate be reduced by $0.05 per annum over a five year period and that the industry be reviewed before the end of this period. The main purpose of this review would be to consider the longer term assistance structure for the industry and to ensure that this structure is consistent with any decision taken by Government on the Commission's report on General Reductions in Protection.

In addition to the above, the Commission will recommend that a floor price mechanism apply during the five year period. This will take the form of a duty equal to the amount by which the value for duty of imports is less than $1.00 per kg TSS. The proposed mechanism differs in a fundamental sense from the existing variable tariff arrangement in that it is not intended to provide a high ongoing level of assistance but rather is expected to operate only occasionally when import prices fall to relatively low levels.

The recommended change to the tariff structure would represent some reduction in the present level of assistance over the five year period. However, at the end of the period the industry would still be receiving assistance, in effective rate terms, about three times that currently afforded manufacturing industry and almost double that afforded the industry in the mid 1970s.

The recommended form of tariff assistance would also largely remove the incentive currently existing for importers to engage in practices designed to reduce their liability for duty. The Commission was specifically

requested to report on whether there was any evidence of duty evasion under the variable tariff arrangement. While it found no evidence of duty evasion there was evidence to suggest that duty avoidance had occurred. The Commission estimates that this amounted to some $6 million in 1979-80 and $3 million in 1980-81.

Apart from assistance against imports, the Commission has considered the effects of other existing forms of intervention. It believes that the minimum pricing arrangements operated by the Fruit Industry Sugar Concession Committee (FISCC) and the discriminatory sales tax exemption may inhibit the development of a more efficient industry structure. It will recommend that FISCC pricing provisions no longer apply to oranges for processing. While the Commission is of the view that the local content provision associated with the sales tax exemption should be removed it

suggests that this might be more appropriately assessed as part of a wider examination of sales tax measures which discriminate between local and imported goods.

ii

The recommended reduction in assistance would have benefical effects for the community in general but adverse effects on some individuals and in some regions. Given the gradual nature of the recommended changes and the assistance available to the growing sector under the Rural Adjustment Scheme, the Commission considers that adjustments resulting from implementation of the recommended changes should not involve undue disruption.

iii

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1. INTRODUCTION 1.1 Origin And Scope Of The Reference

The current variable tariff arrangement for orange and tangerine juices came into effect on 13 April 1979· When announcing its introduction, the Ministers for Business and Consumer Affairs and Primary Industry indicated that the variable tariff arrangement would be monitored and reviewed after

12 months. They also announced that the Government would request the Commission to review the operation of the tariff after three yearsJ

On 13 February 1981, the Minister requested the Commission to review the operation of the variable tariff arrangement applying to orange and tangerine (including mandarin) juices. The Commission was requested to

report by 30 June 1982 as to whether the assistance arrangement should be varied and, if so, the nature and extent of any variations. In a letter accompanying the reference, the Minister also requested that if, during the course of its inquiry, the Commission found evidence of significant duty

evasion under the present assistance arrangement and considered that short term action should be taken to correct the situation, it provide the Government with an interim report. A copy of the Minister's letter and terms of reference are included in Appendix 1.

The reference covers orange and tangerine (including mandarin) juices and juices of substitutable hybrids of these fruits. Lemon, lime and grapefruit juices and fresh citrus fruits are not under reference. The tariff provisions relating to the goods under reference are set out in Appendix 2.

Given the interrelationship between the growing and processing of oranges into juice and the effect that assistance measures afforded to orange juice has on activity by convertors, the Commission has included these three sectors within the scope of the reference.

As well as the variable tariff arrangement, the Commission considers that assistance provided for these juices through the sales tax exemption applying to fruit juice products containing not less than 25 per cent of the juices of Australian fruits, the pricing determinations of the Fruit

Industry Sugar Concession Committee (FISCC) and the activities of Statutory Marketing Boards or Authorities are relevant to the inquiry.

1 .2 The Public Inquiry

A public hearing was held in Sydney on 14 July 1981 to inquire into the question of duty evasion. No evidence of duty evasion was produced at the hearing or subsequently. Consequently, an interim report on the matter was not provided to Government. There was, however, evidence to indicate that

duty avoidance was taking place. This matter is discussed more fully in Chapters 3 and 6.

1 Department of Business and Consumer Affairs, 1IAC Report - The Australian Citrus Industry', Media Release, 79/54, 29 March 1979, Canberra.

Further public hearings were held in Sydney on 3 November 1 981 and in Adelaide on 9 and 10 November 1981. A public hearing was held in Sydney on 25 May 1982 for the purpose of receiving evidence on the Commission's draft report issued in April 1982. During the course of the inquiry the Commission inspected growing and processing activities together with research projects associated with the production of oranges and orange juice.

Witnesses who appeared at the hearings included the Australian Citrus Industry Council (ACIC), representing growers, processors and convertors and the Australian Citrus Growers Federation (ACGF) representing the majority of growers. Other growers' organisations, individual growers and

processors also appeared. Importers and government departments were also represented. A complete listing of witnesses who appeared at the hearings is set out in Appendix 3, while their requests and suggestions are detailed in Appendix 4.

Subsequent to the public hearings in November 1981 the Commission sought, through the ACIC, information relating to changes in the physical and financial structure of the processing sector over the period 1977-78 to 1980-81. Supplementary evidence was also received from a number of other witnesses including the ACGF, New South Wales Department of Agriculture

(NSWDA), South Australian Department of Agriculture (SADA) and Bureau of Agricultural Economics (BAE).

1.3 Previous Reports And Recent Tariff History

Assistance for citrus fruits has been reported on by the Tariff Board, Temporary Assistance Authority (TAA) and Commission as follows:

1933 Citrus Fruits Tariff Board Report No. 580

1961 Citrus Pulp and Citrus Juices Tariff Board Report No. 1496

1965 Non-Spirituous Citrus Juices and Syrups Tariff Board Report No. 1747

1969 Citrus Fruit Juices Tariff Board Report No. 1863

1976 Orange Juice Temporary Assistance

Authority Report No. 22

1977 Interim Report on Orange Juice

Industries Assistance Commission Report No. 123

1978 The Australian Citrus Industry Industries Assistance Commission Report No. 171

Prior to the 1970s, the fresh market was the major outlet for oranges. During the early 1970s, domestic demand for orange juice increased rapidly and local production was unable to satisfy the demand. This, together with

the sharp rises in the prices of local oranges sent for processing after 1972-73, contributed to the importation of substantial quantities of orange juice concentrate from 1973-74.

2

A Citrus Industry Panel (consisting of growers, processors and distributors) was established late in 1974 in an attempt to restrict imports on a voluntary basis. The Panel had some success in limiting the growth of imports during 1974 and 1975· However, under the pressure of lower import prices and increasing prices to processors for local oranges,

the voluntary arrangement broke down early in 1976. A request by the ACGF for temporary assistance followed. In 1976, the TAA recommended that a tariff quota of 28.5 million litres of single strength orange juice be applied for 1976-77, with imports in excess of this level subject to a temporary duty of 12 cents per litre above the substantive rate of 4.1 cents per litre.^

On 28 July 1976, following Government acceptance of the recommendation by the TAA, the question of assistance to the citrus industry was referred to the Commission.^ In an interim report on orange juice in February 1977, the Commission recommended that the tariff quota arrangement applying to orange juice be terminated from 50 June 1977 and that an ad valorem tariff

of 45 per cent be introduced for a 12 month period.^" The Government accepted the recommendation that the tariff quota be terminated but implemented a 65 per cent ad valorem duty on orange juice for 1977-78.^ On 25 May 1978, the Commission recommended, by letter, and the Government accepted, that the temporary duty of 65 per cent be extended to 50

September 1978.

In its 1978 Report, the Commission recommended that the duty be reduced to 50 per cent from 1 October 1978 for the balance of 1978-79 and, in view of the substantial imports of tangerine and mandarin juice and the possibility of substituting such juice for orange juice, that the 50 per cent ad valorem duty also apply to these products. The Commission further recommended that from 1 July 1979, the duty on orange, mandarin and

tangerine juices be reduced to a long term rate of 20 per cent and subject to acceptance of its recommendations on rates of duty, that a three year reducing bounty be paid on locally produced orange juice. The bounty was designed to complement financial assistance available through sources such

as the Rural Adjustment Scheme (RAS) to enable growers to adjust to the recommended long term level of assistance.

On 29 March 1979, the Government announced that the ad valorem tariff arrangement was to be replaced by a variable tariff from 13 April 1979·^ The 'threshold price1 for purposes of determining the variable tariff, which has continued to operate since that time, was $2.40 per kilogram (kg)

of Total Soluble Solids (TSS). This corresponds approximately to 25 cents

2 TAA, Orange Juice, Report no. 22, AGPS, July 1976. 3 Department of Business and Consumer Affairs and the Department of Primary Industry, 'TAA on Orange Juice', Media Release, 76/59 27 July 1976, Canberra.

4 IAC, Interim Report: Orange Juice, Report no. 123, AGPS, February 1977. 5 Department of Business and Consumer Affairs and the Department of Primary Industry, 'Duties on Imports of Orange Juice', Media Release,

77/56, 21 May 1977, Canberra. 6 IAC, The Australian Citrus Industry, Report no. 171, AGPS, June 1978. 7 Department of Business and Consumer Affairs, 'IAC Report - Australian Citrus Industry', Media Release, 79/54, 29 March 1979, Canberra.

3

per litre single strength equivalent. For imports valued at $2.40 per kg TSS, or greater, no duty is payable other than the general revenue duty of 2 per cent.® However, if the value for duty (vfd) of imports falls below $2.40 per kg TSS, a duty is imposed to raise the value for duty of imports to the 'threshold price1 of $2.40 per kg TSS.

The juices of tangerines (including mandarins) and substitutable hybrid juices of these fruits are dutiable at the same rate and on the same basis as orange juice. Unsweetened lime juice is dutiable at the general rate of 2 per cent. All other citrus juice imports are dutiable at 4.1 cents per litre single strength equivalent.

1.4 Outline Of The Report

Changes which have taken place in the industry in recent years are outlined in Chapter 2 together with a brief description of the current structure of the industry. Existing assistance arrangements and the level of assistance provided by the variable tariff arrangement are examined in Chapter 3* Witnesses' requests and the Commission's assessment of these requests are discussed in Chapter 4· The Commission's assistance proposals are presented in Chapter 5. Reporting requirements are dealt with in Chapter 6 and the Commission's recommendations form Chapter 7.

8 Imports from developing countries are not subject to this revenue duty.

4

2. INDUSTRY STRUCTURE AND MARKETS

In this Chapter a brief outline of the existing structure of the industry is presented. Emphasis is placed on significant changes which have taken place in the industry's economic environment during the 1970s. Likely developments during the 1980s are also reviewed and the implications of these for the competitiveness of the local industry are examined.

There are three sectors within the orange juice industry, namely; growing, processing and converting. The production of oranges is usually associated with other crops and in most cases growers have the option of selling fruit on the fresh fruit market or to processors. Processors extract single

strength juice from fresh oranges which can be packed for direct retail sale or concentrated and sold to convertors. Convertors prepare orange juice for retail sale, (either as single strength juice or fruit juice drink), by reconstituting concentrate or using fresh juice. The reconstituted juice derived from the converting process may be a combination of locally produced and imported concentrate and is often blended with fresh juice.

There tends to be a considerable degree of overlapping between these sectors. In many cases processing and converting are carried out by the same establishment. A large proportion of growers belong to processing co-operatives.

As production of mandarin and tangerine juices in Australia is negligible, the term 'industry' is used to cover that part of the citrus industry concerned with the production and marketing of orange juice.

In contrast to many of the other major horticultural industries, the orange juice industry is import competing. The economic prospects for the industry are thereby determined by the competitiveness of locally produced juice relative to imports as well as by the growth of the domestic market for orange juice.

2.1 Domestic Production And Imports

From 1970-71 to 1980-81, local production of orange juice increased from about 51 million litres to almost 115 million litres single strength equivalent, while total apparent consumption is estimated to have increased from 52 million litres to 138 million litres. Domestic production for 1981-82 is estimated to be 97 million litres. Domestic production and imports of orange juice are presented in Table 2.1.

Imports of orange and tangerine juices cleared for home consumption tend to fluctuate from year to year and in some years, such as 1975-76 and 1979-80, have provided a large proportion of available juice. These fluctuations are influenced by the availability of locally produced juice and its price relative to the price of imported juice.

The main overseas suppliers of orange juice during the 1970s were Brazil, Mexico and the United States. In recent years Brazil has been the dominant supplier, accounting for up to 90 per cent of imports.

Relatively large imports of orange juice are a fairly recent development in Australia. A coincidence of three main factors contributed to this expansion in imports. The rapid growth in local demand for orange juice created a potential market for imports. Technical advances in juice

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TABLE 2.1 : DOMESTIC AND IMPORTED SUPPLIES OF ORANGE JUICE FOR DOMESTIC CONSUMPTION : 1970-71 TO 1981-82

1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82a

Million litres

Domestic 51 .5 29.8 74.2 51 .3 76.3 78.4 71 .2 88.6 88.7

Imports^ 0.1 0.1 0.1 6.6 21 .4 36.1 22.9 17.9 13-4

Total 51 .6 29-9 74.3 57-9 97.7 114-5 94.1 106.4 102.2

Proportion of total imported 0.2 0.3 0.1 11.4

Per cent

21 .9 31 -5 24.3 16.8 13-1

96.9

61 .9

154.9

40.0

a Estimated by BAE.

b Includes tangerine and mandarin juice imported as a substitute for orange juice, mainly in 1977-78.

NOTE: Assumes all processed fruit converted to juice @ 455 litres per tonne.

SOURCE: ABS and BAE.

114-7

23-5

1 3 8 . 2

17.0

97.4

30.0

127.4

23-5

production and storage gave rise to lower transport and handling charges for concentrated juice compared with fresh oranges thereby making such trade attractive to importers. Associated with these changes there was a significant expansion in orange production in low cost producing countries, such as Brazil, in response to the growing markets for orange juice in North America, Europe and Oceania. While world demand has been rising, it has not increased as rapidly as the growth in exportable

supplies. Consequently, there has been a tendency for downward pressures to be exerted on the world price of orange juice. Fluctuations occur from time to time in response to changing seasonal conditions such as the frosts which affected the Florida orange crop in 1981 and 1982.

Studies by the Food and Agricultural Organisation (FAO) and United States Department of Agriculture (USDA) suggest continuing increases in the production and processing of oranges in Brazil.^ The USDA has forecast

that production will be 25 to 50 per cent above 1980 levels by the mid 1980s due to higher yielding trees planted since 1975 coming into production as well as improved management practices.

The FAO and USDA have also projected a substantial increase in citrus production (predominantly oranges) by Cuba during the 1980s, building on the large increases which occurred there in the latter part of the 1970s. On the basis of these projections, Cuban production by 1985 will reach almost one-third that of Brazil. The FAO expects total citrus production from developing countries by 1985 to be 50 per cent higher than in the mid 1970s. World production by 1985 is expected to be some 53 to 59 per cent higher than in 1975. The FAO expects that this growth in production will outstrip the growth in market demand giving rise to downward pressure on world prices for citrus products.

Given these circumstances, the BAE suggested in its evidence, that there would tend to be downward pressure on orange juice prices in the medium term (up to 1985) with the possibility that prices may even fall in money terms.

In contrast to this assessment, the ACIC and ACGF expressed the view at the November hearing that prices were more likely to rise in the medium term. This outlook for prices was based on the anticipated effects of the recent frosts on the Florida orange crop on the world market for orange juice

concentrate and a slackening in the growth rate of the Brazilian industry. Nevertheless, both these witnesses agreed with the BAE assessment that the local industry was likely to face increasing competition from imports and attributed this to rising domestic costs of producing orange juice

concentrate relative to the likely landed duty paid (ldp) price of imports. At the draft report hearing, the ACIC indicated that in their opinion the price of Brazilian concentrate would decline to a level at which the ldp price would be 'much below its Australian equivalent'.

Witnesses generally agreed that the position beyond 1985 was somewhat uncertain. This was attributed to a number of factors. The more notable included the effects of recent changes in the Brazilian Government’s policy 1

1 See for example, FAO, 'FAO Agricultural Commodity Projections 1975-85’ Economic and Social Development Series, no. 15, Rome 1979 and USDA, 'Fresh and Processed Citrus Fruits', Foreign Agriculture Circular, Foreign Agricultural Service, Washington, D.C. various issues.

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directed at moderating the rate of growth of their orange growing industry, the improving competitiveness of sugarcane production relative to orange growing in Sao Paulo State which accounts for the hulk of the Brazilian orange crop and the uncertain nature of the production plans of other countries such as Cuba.

2.2 Growing Sector

The gross value of citrus production is estimated to have exceeded $118 million in 1980-81, accounting for some 18 per cent of the value of all fruit production and approximately 1 per cent of the value of agricultural production in that year. Orange production accounted for 74 per cent of

the gross value of citrus production in the same year.

The principal regions in which oranges are grown are: the Murrumbidgee Irrigation Area (MIA) and the Outer Sydney areas of the Central Coast, Hawkesbury and Hills Districts of New South Wales; the Sunraysia, Robinvale and Mid-Murray regions along the River Murray in New South Wales and Victoria; and the Riverland in South Australia.

As at 31 March 1981, there were 5-9 million orange trees in Australia. Half of these were located in New South Wales. A further 29 per cent were in South Australia, 14 per cent in Victoria and 4 per cent in each of Western Australia and Queensland. The predominant variety of orange grown is Valencia (64 per cent), with navels accounting for almost all the remainder.

Oranges are usually grown in conjunction with a number of other forms of horticultural production including other citrus fruits, deciduous canning fruits, wine grapes and multi-purpose grapes. Vegetable production and livestock activities may also be carried out on orange growing farms.

No official statistics are available relating to employment on citrus or orange growing farms. According to the ACGB, about 35 000 people (including property owners) have been employed in the growing sector in recent years. Of this, some 25 000 were estimated to have been employed directly by farms producing citrus products. A further 10 000 family and casual employees were engaged, largely on a part-time basis, during peak demand periods such as harvesting. These estimates do not make allowance for people engaged in industries servicing the citrus industry such as fertilizer and chemical suppliers. However, based on supplementary evidence submitted by the BAE, the Commission estimates that employment on commercial citrus farms during 1979-80 amounted to about 9000 full time equivalents. This figure includes property owners, family labour and hired

labour, both permanent and casual.

2.2.1 Production and end uses for oranges

As with many other fruit crops, production tends to exhibit a biennial yield pattern with high yields in one year being followed by low yields in the next. However, since the mid 1970s, this 'on' and 'off' year bearing pattern has been largely obscured by the 'smoothing effects' of a

run of favourable seasons.

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Production increased during the 1970s reflecting changes in both bearing tree numbers and yields per bearing tree. Orange and mandarin tree numbers are set out in Table 2.2. From 1971 to 1976, orange tree numbers declined from 5*5 million to 5.1 million. Since 1976, the number of trees, both bearing and non-bearing, has been rising. There are now more trees than in

1971. The proportion of non-bearing trees has increased from around 14 per cent in the mid 1970s to 20 per cent by 1981. The rate of increase in non­ bearing tree numbers has accelerated in recent years increasing by 330 000 in the two years to March 1981 compared with 101 000 in the two years to March 1979· This acceleration in plantings appears to be related to on-

farm adjustments with orange trees replacing deciduous fruit trees in the MIA and Riverland and an increase in the area planted to orange trees. In contrast, mandarin tree numbers have declined since 1979»

Although tending to fluctuate with changing seasonal conditions, there has been quite a marked increase in recorded orange yields per bearing tree since the early 1970s (see Appendix Table 5-1). The increase in yields per

bearing tree can be mainly attributed to changing technology and shifts in the relative importance of the higher yielding areas.

Changing technology has taken a variety of forms. These include the planting of higher yielding varieties, increases in planting densities, improved irrigation practices (which are often implemented at the time of new plantings), more effective pest and disease control practices and better application of water and fertilisers. Some of these adjustments to

the production technology employed on farms are closely interrelated. For example, adjustments designed to increase yields per hectare through higher density plantings often require complementary adjustments to irrigation systems.

A number of witnesses, including the NSWDA and SADA, indicated that most of these changes which contribute to cost containment or improved operating efficiency have been largely exploited by the industry. It was argued that further cost reductions would mainly depend on longer term adjustment strategies involving orchard re-development. Adjustments of this type tend to require large capital investments with long lead times to generate returns to cover investment outlays. The SADA provided figures relating to the cost of replanting orchards ($2600 per hectare) and upgrading irrigation systems ($1700 per hectare) to illustrate this aspect of farm adjustment. However, the Commission considers that continued improvements in technical efficiency are not entirely dependent on large scale investment and property redevelopment. Moreover, the restructuring of the industry in terms of the number and size of farms that this implies would itself yield improvements in economic efficiency. This aspect of adjustment is developed further in the next section and Chapter 4·

The increased yields per bearing tree have also been a response to changes in the relative importance of the different growing regions. Moreover, this trend seems likely to continue. The NSWDA indicated that within New

South Wales there had been considerable changes in the distribution of orange plantings by region. In the MIA, the area planted to Valencia orange trees increased from 2470 hectares in 1975 to 3455 hectares in 1980. However, areas planted to oranges in the vicinity of Gosford and Windsor, around Sydney, have declined considerably. As farms in the MIA

tend to generate above industry average yields, these changes would tend to contribute to increases in average industry yields during the 1980s.

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TABLE 2.2 : ORANGE AND MANDARIN : TREE NUMBERS : 1963-64 TO 1980-81 ( ' 0 0 0 )

Navel Oranges Valencia Oranges

Non- Non­

Bearing Bearing Bearing Bearing

Total Orangesa

Non­

Bearing Bearing

Mandarins

Non­

Bearing Bearing

1963-64 1 407 718 2 267 886 2 816 1 640

1964-65 1 467 748 2 334 890 3 928 1 675

1965-66 1 526 757 2 383 931 4 029 1 722

1966-67 1 594 711 2 411 848 4 133 1 585

1967-68 1 635 666 2 490 743 4 234 1 428

1968-69 1 734 543 2 660 574 4 505 1 134

1969-70 1 756 494 2 634 554 4 497 1 065

1970-71 1 837 382 2 741 419 4 686 815

1971-72 1 811 332 2 754 395 4 677 743

1972-73 1 824 292 2 756 365 4 676 675

1973-74 1 765 261 2 679 381 4 537 656

1974-75 1 680 233 2 609 456 4 374 702

1975-76 1 681 201 2 558 475 4 368 691

1976-77 1 665 179 2 614 562 4 372 754

1977-78 1 712 176 2 630 628 4 427 812

1978-79 1 667 192 2 697 651 4 444 855

1979-80 1 684 231 2 741 790 4 498 1 034

1 980-81 1 709 288 2 907 880 4 687 1 185

295 326 343

274 421 464 480

509 51 6 527 506 491 487 468

465 449 na 439

230 267 278 274

256 226 201 162

134 111 96 79

69 68

63

86 na 60

a Includes small numbers of varieties other than navels and Valencias, na Not available.

SOURCE: ABS and BAE evidence.

As a result of increasing tree numbers and yields there has been a considerable increase in orange production, from around 322 000 tonnes in 1970-71 to around 422 000 tonnes in 1980-81. Production in 1981-82 has been estimated by the BAE at 383 000 tonnes. From the high proportion of

immature trees, together with industry reports of intended plantings, the BAE estimated that orange production in the year 2000 could range from 480 000 tonnes to 640 000 tonnes. The BAE indicated that the level of assistance afforded to the industry against imports would be an important

factor affecting the level of orange production in the future.

In addition to the increase in orange production there has been a significant change in the end use of domestically produced oranges. Sales on the fresh fruit market have declined in absolute terms while the quantities made available for processing (principally for juice production) have increased considerably. In 1970-71, only 35 per cent of all oranges were processed. By 1980-81, this proportion had risen to almost 60 per cent. The dominant processing orange is the Valencia, with a production

season running from about October to April. Navel oranges have a production season spanning the months April to November. A high proportion are made available to the fresh fruit market. In general navel oranges are less suited to processing due to the bitterness of the juice

obtained from these oranges. However, the bitterness of the juice tends to decline as the harvesting season progresses. The juice obtained from navel oranges tends to be used in the manufacture of soft drinks and cordials although it is also blended with Valencia juice for the production of orange juice products. Details of orange production and end use for the period 1970-71 to 1980-81, are set out in Table 2.3·

The increasing proportion of oranges made available for processing has arisen in response to the increasing demand for orange juice. This development is discussed in section 2.5*

2.2.2 Farm characteristics

In 1979-80 there were some 4132 establishments recorded as growing oranges, although not necessarily commercially, in Australia by the Australian Bureau of Statistics (ABS), a decline of about 20 per cent from the number

in 1971-72.2 This decline has tended to be in the number of smaller holdings and has resulted in an increase in the average area per farm.

The increase in average farm area suggests that growers have sought to exploit available economies of size, either to reduce unit costs and thereby improve incomes, or to expand output while maintaining unit costs and thereby raising the income generating capacity of their farms. The BAE submitted that an individual grower could manage up to 20 hectares of citrus, employing additional labour for harvesting. The BAE suggested that a larger area may require hiring labour or changing some farm activities

such as irrigation systems from furrow to spray or drip. 2

2 An establishment is defined as a unit covering all operations carried out under the ownership of one enterprise at a single physical location with an estimated value of agricultural operations of not less than $1500. To be classified as an orange growing establishment

it is necessary for orange growing to be assessed as the predominant activity according to the estimated value of agricultural operations.

11

Information available from previous BAE surveys indicates that in excess of 40 per cent of farms growing citrus had total farm areas less than 20 hectares in the mid 1970s. Research by the BAE, based on 1974-75 horticultural survey information, indicated that substantial gains from

size economies could be achieved in the citrus growing industry up to an output of around $25 000 per farm. It appeared that these gains were largely exhausted at output levels of about $50 000.^ While these output levels would have changed since, it seems likely that unexploited size economies are still available for some growers.

Further information relating to physical as well as financial characteristics of farms in the growing sector was provided by the BAE and ACOF. The BAE has conducted a number of economic surveys of horticultural industries, including the citrus industry, since the early 1970s. The

latest survey results available relate to 1979-80 with estimates of some items available for later years. The BAE includes all the significant growing areas in its surveys and specifies a minimum area requirement for defining the eligible survey population.4 The defined population of almost 1900 orchards, in 1978-79, was considered to cover commercial citrus

orchards. The eligible population accounted for 90 per cent of total citrus production and a similar percentage in each of the surveyed regions. Because of financial constraints, the Outer Sydney and Mid-Murray regions were not included in the 1979-80 survey. ABS statistics cover a larger proportion of total citrus farms but include a large sub-commercial component which comprises part-time and hobby farms.

Information was also provided from a survey conducted by the ACGF of specialist citrus orchardists.^ While the results obtained from the ACGF survey were broadly comparable with those obtained by the BAE, the

Commission has based much of its farm analysis on the BAE Survey results as they tend to be more representative of the industry.

Financial information relating to the performance of citrus farms, presented by the BAE, indicate that total cash receipts averaged about $79 800 per farm in 1979-80. Receipts from the orange enterprise averaged about $51 600 per farm. For 1980-81 these items are expected to be $73 800 and $32 000 respectively.

The contribution to farm receipts from citrus growing varies considerably between regions. The size of the orchards also tends to vary significantly, with orchards tending to be larger in the inland irrigation districts than in the Outer Sydney area. The differences between regions

are apparent in Table 2.4·

3 Martin, W., 'Size Economies in Citrus Production: Some Preliminary Results' in BAE, Australian Citrus Industry, Industry Economics Monograph no. 18, AGPS, Canberra, 1977. 4 Farms included in the eligible population are grouped according to area

planted to citrus fruit. These groups termed strata vary between regions according to the size distribution of citrus plantings. The sample farms are obtained from an allocation designed to give reliable estimates of physical and economic variables at both a regional and national level. The farms included in the survey are selected at random within each stratum. 5 For inclusion in the ACGF survey panel, orchardists must have a citrus

producing component of at least 85 per cent of planted orchard area. Panel members are recognised as being representative of better managed farms with good farm records.

13

South Australia

Sunraysia/ --- ------ -—

Robinvale Riverland

19.1

All Regions

17.5

64 60 67

51 55 57

65 51 57

44 48 48

12.7 20.2 17.2

54 48 55

60 45 52

52 56 47

40 52 40

In 1979-80, receipts from the sale of oranges to the fresh market averaged about $20 100 while those from processing averaged about $11 500. Receipts from processed oranges generally represented a larger proportion of total receipts from oranges in the MIA, Mid- Murray and Riverland.

Receipts from oranges, on average, represented about half of total farm receipts in each of the growing regions in 1978-79 but were more variable in 1979-80 ranging from 32 per cent in Riverland to 58 per cent in New South Wales Sunraysia. The large proportion of receipts originating from other activities, including off-farm work, to some extent enables growers to withstand fluctuations in prices and seasonal conditions. It also enables growers to use labour as well as plant and machinery more fully and thereby spread overhead costs over a larger overall volume of production.

In 1979-80, cash costs averaged $52 700 per farm. The maj or categories of cash costs were hired labour and contracts, materials and services.

Farm cash operating surpluses in 1979-80 averaged $27 100 per farm. 6 However, there were significant variations about this industry average. Cash operating surplus averaged $14 400 in the Victorian Sunraysia and

Robinvale regions compared to $40 200 in the New South Wales Sunraysia region. Further, while about 21 per cent of all farms had operating surpluses of less than $5000 in 1978-79, the proportion in this income group exceeded 40 per cent in the Outer Sydney region and was about 36 per cent in the Sunraysia/Robinvale regions of Victoria. In the same year, about 25 per cent of farms generated cash operating surpluses which exceeded $25 000. In 1979-80 there were 27 per cent of all farms with a cash operating surplus less than $5000 but 40 per cent exceeded $25 000. A distribution of farms by cash operating surplus is provided in Appendix Table 5. 2. "

The BAE estimated that the average cash operating surplus of citrus farms in 1980-81 would have been of the order of $16 500. A comparison with other horticultural industries is provided in Appendix Table 5»3· On

average, citrus farms appear to have generated cash operating surpluses above those in the deciduous canning fruit, apple and pear and wine grape industries in 1979-80. In the following year, 1980-81, the average cash operating surplus in the citrus industry was above that in the apple and pear and multi-purpose grape industries but below that for the deciduous canning fruit and wine grape industries. Proj ections for 1981-82 indicate a cash operating surplus for the citrus industry below that for the wine grape industry but above that proj ected for the other three industries ( see Appendix Table 5-3) ·

The normal biennal bearing pattern for oranges has been absent in recent years ( such as 1979-80 and 1980-81) due to the combined influence of favourable seasons and rising yields per bearing tree. This feature should be taken into account in any consideration of recent income levels.

6 Farm cash operating surplus represents the cash surplus accruing to the farm business which is available for consumption, taxation and investment. It is measured as the difference between total cash receipts and total cash costs associated with the farm business.

15

The BAE also supplied information relating to rates of return to capital and management. Rates of return, at 3 per cent in 1977-78, 1 per cent in 1978-79 and 4 per cent in 1979-80, were low but typical of those achieved by horticultural industries. Overall, the BAE considered that the citrus growing industry was performing reasonably well compared with other horticultural industries. Further, although low rates of return to capital and management were recorded, capital gains had been substantial. When these gains were included, rates of return for citrus growing increased to an average of 13 to 14 per cent per farm in 1977-78 and 1978-79 and 20 per cent in 1979-80. Most of the imputed capital gains for citrus growing could be attributed to rising land values. The BAE indicated that a number of factors contributed to these rising land values including the capitalisation of assistance to orange growing, proximity to expanding urban areas, general levels of inflation and reasonable demand for the products produced on citrus growing farms. While rising land values appeared to be fairly common to all horticultural industries the extent of the increase tended to be greater for citrus farms.

Although, on average, citrus growers appear to have a financial performance better than most other forms of horticulture, many farms would have failed to cover fixed costs such as depreciation on plant and machinery and an allowance for management.

In order to assess some of the factors contributing to the apparent differences in cash operating surpluses between farms (see Appendix Table 5.2) the Commission requested supplementary evidence from the BAE relating to the citrus industry survey for 1979-80. Farms surveyed by the BAE were divided into four equally sized groups (ie quartiles) on the basis of their cash operating surplus during 1979-80. A selected number of physical and financial characteristics were then derived for each group to permit an inter-group comparison. Some of the information obtained, covering the first and fourth quartiles, is presented in Table 2.5· Analysis of the average results for each characteristic reported for these quartile groups enables inferences to be drawn relating to some of the factors contributing to the substantial cash operating surplus differences between these groups

(minus $1965 for the first quartile and $70 363 for the fourth quartile). A more detailed comparison covering a wider range of characteristics for each of the four groups together with an overall industry average is presented in Appendix Table 5-4.

Analysis of the information contained in Table 2.5 reveals that there are significant differences between farms in the first and fourth quartile groups in relation to virtually all of the selected farm characteristics reported, the only exception being for the proportion of total receipts obtained from oranges.

Farms included in the fourth quartile are, on average, significantly larger than those in the first quartile in terms of characteristics such as average area planted to oranges, harvested production of oranges, total capital value and labour employed per farm. While farms in the first

quartile account for some 10 per cent of total citrus production those in the fourth quartile contribute almost 50 per cent of production.

In addition to significant differences in the size of the average farms in these quartiles there are also signficant differences in various physical and financial performance variables. For example, farms in the fourth quartile have a considerably higher level of physical productivity in terms of oranges harvested per hectare. Labour productivity, as measured by

16

TABLE 2.5 : SELECTED CHARACTERISTICS OF CITRUS FARMS BY QUARTILE OF FARM CASH OPERATING SURPLUS : AUSTRALIA : 1979-80 (Average per farm)

Unit First Quartilea Fourth Quartile

b

Significantly Different0

Total orchard and vineyard area ha 12.5 (9)

Area planted to oranges Harvested production:

ha 7.2 (8)

- Navels tonnes 36 (23)

- Valencias tonnes 68 (21 )

Yield per harvested hectare tonnes/ha 17.5 (17)

Orange receipts $ 11 720 (21)

Total receipts $ 29 087 (13)

Proportion of total receipts from oranges % 40 (21 )

Cash costs $ 31 052 (14)

Cash operating surplus $ - 1 965 (37)

Total capital $ 127 181 (7)

Total labour units Total farm receipts/total cash costs man years 3-54(12)

0.94 (4)

Off-farm receipts $ 4 190 (40)

Total farm receipts/total labour units Total farm receipts/total capital including land

$ per man years 8 217 (14)

0.23(12)

34·.7 (10) 20,.0 (17)

184 (16)

290 (15)

31 . .0 (8) 69 379 (14)

183 308 (11) 38 (22)

111 945 (15) 70 363 (7)

325 057 (9)

8,.85(16) 1 . ,63 (4) 311 (28)

20 609 (6)

0 . 56 (6)

yes yes

yes yes yes yes yes no yes yes yes yes yes yes yes

yes

Figures in parentheses are relative standard errors expressed as percentages of the estimates.

a The 25 per cent of farms with the lowest farm cash operating surpluses. The cut off point between the first and second quartiles was $3115· b The 25 per cent of farms with the highest farm cash operating surpluses. The cut off point between the third and fourth quartiles was $38 441 · c Whether the first and fourth quartiles were significantly different at the 95 per cent level of confidence.

SOURCE: Derived from BAE evidence.

total farm receipts per labour unit employed, is approximately two and a half times higher than that of first quartile farms. The ratio of total farm receipts to total cash costs is some 75 per cent greater on fourth quartile farms.

The proportion of total receipts obtained from oranges does not appear to influence income performance to any great extent. On average, farms from both quartiles are similar in terms of their dependency on orange receipts. There may, however, be significant differences between these groups in terms of the contribution of enterprises other than orange growing to total farm receipts. Farms included in the first quartile are more dependent on off-farm receipts than those in the fourth quartile.

The results suggest that there is scope for improving the efficiency and income performance of the orange growing sector. That is, if the least efficient farms improved their efficiency or moved out of citrus production, the overall efficiency of the industry would improve considerably, and this improvement in efficiency would be achieved with a relatively small effect on total orange production.

However, the policy implications of these differences in terms of improved structure can only be indicative in the absence of a more detailed analysis. Other factors are likely to be important in explaining the income differences between the groups. For example, some of the farms in the first quartile may be included in this group for temporary reasons due to differences in the profitability of non-citrus enterprises in terms of their contribution to total farm receipts. Income differences are also likely to reflect other considerations such as variations in managerial ability, locational factors such as climate and soil types and institutional constraints on property size or water use.

2.2.3 Payment to growers for oranges

The prices growers receive for oranges are determined by the interaction of institutional arrangements and market forces. The institutional arrangements include the pricing determinations made by FISCC, the marketing activities of various State and regional Statutory Marketing

Boards and the protection provided to locally produced orange juice by the variable tariff arrangement.

The pricing determinations made by FISCC apply to oranges sent for processing (some 60 per cent of all oranges produced). The activities of FISCC also affect the quantities of oranges sold fresh and hence influence

fresh fruit market prices. This is because of the ready substitutability of oranges between the fresh and processed fruit markets. The activities of FISCC and its effects on the industry are discussed further in Chapters 3 and 4.

Statutory Marketing Boards influence orange prices by regulating the quantity and quality of oranges delivered to the fresh fruit market and the prices paid for fresh as well as processed fruit. The impact of these Boards on orange prices is examined in Chapter 3»

The variable tariff applying to imports of orange juice influences the prices paid for oranges by establishing a relatively high minimum price for imported juice. This enables local producers of orange juice to compete with imports to a greater extent than otherwise, and thereby increases the

demand for local oranges by processors. This, in turn, affects prices paid for oranges sold both to the processing and fresh fruit markets.

18

A development since the introduction of the variable tariff has been the payment of premiums above the minimum prices determined by FISCC for oranges sent for processing. At the time the variable tariff was

introduced, the minimum price set by PISCO for Valencia oranges delivered for processing was $94 per tonne for metropolitan factories. The minimum PISCC price for Valencia oranges in 1981-82 was $115 per tonne. The minimum prices determined by PISCC for the years 1978-79 to 1981-82 are set out in Table 2.6.

The ACGF submitted details of the premiums paid per tonne for specific periods of each season within the Sunraysia and Mid-Murry regions over the period 1978-79 to 1981-82. These premiums are based on payments above PISCC minimum prices and include payment by processors for freighting fruit from farm gate to the processing factory but exclude shorter payment terms for fruit relative to those specified by PISCC. The premiums are reproduced in Table 2.7.

In general, industry witnesses maintained that the existence of these premiums indicated that the pricing arrangements under PISCC have not resulted in prices for oranges above those that would have prevailed in the absence of PISCC. The ability of processors to pay these premiums was

attributed to a number of factors, including; the strong growth in market demand for orange juice products, competition between processors to satisfy this demand growth, the ability of local orange juice to command a quality

premium over imported juice and the effect of the sales tax exemption applying to local juice for products containing not less than 28 per cent Australian juice.

However, it was also acknowledged that by virtually removing competition from lower cost imports the 'threshold price' set under the variable tariff arrangement provided a basis for the rise in orange prices. The fundamental factor allowing processors the capacity to pay these premiums was acknowledged to be the 'threshold price' set under the variable tariff

arrangement. Hence, the prices paid for oranges were acknowledged to be determined in large measure by institutional arrangements rather than by the free interplay of market forces. To the extent that market forces

played any role (as for example in terms of competition between processors for available supplies of fruit) it can be argued that they have already been shaped by the assistance arrangements applying to the industry. Witnesses representing the industry considered that further increases in PISCC prices, or the maintenance of existing premiums, were dependent on an increase in the 'threshold price' under the variable tariff arrangement.

2.3 Processing Sector

Approximately 25 organisations process oranges into juice in Australia. The large processors tend to be located in the main orange growing regions. Processing is carried out by grower-owned co-operatives and by proprietary companies.

According to the ACIC, some 3000 people are employed in this sector of the industry together with associated industries such as fruit packing, carton and can manufacturing. Most of those employed are located in country towns, the principal ones being Berri, Mildura, Griffith and Leeton.

19

The average annual throughput of processing plants in recent years has been about 15 000 tonnes. Most processing plants have annual throughputs of between 5000 to 10 000 tonnes of citrus fruit. There are a small number of

plants with considerably larger throughputs, the largest being about 80 000 tonnes. The bulk of fruit processed by these plants are oranges.

Concentrated orange juice is the predominant product of the processing sector and the product which competes directly with imports. When frozen, the storage life of orange juice concentrate is extended. Orange juice in this form is readily tradeable because of lower transport and handling costs. It has been the growth in the demand for orange juice which has exposed the growing and processing sectors of the local industry to competition from imports of frozen concentrated orange juice. There are several factors influencing the competitiveness of the local processing industry relative to imports.

The minimum FISCC price set for Valencia oranges sold for processing in metropolitan areas in 1980-81 was $106 per tonne. Assuming an average juice yield of 455 litres per tonne (corresponding to the industry average)

for fresh oranges processed, this represents an effective price for oranges of 23.3 cents per litre of single strength juice or $2.24 per kg TSS. Taking into account the factory costs of processing oranges, (considered to average about $44 per tonne in 1980-81) the acquistion price for oranges represented in excess of 70 per cent of the total cost of producing concentrated orange juice ex-factory.^ This cost of acquiring the basic raw material is considerably higher than that paid in the United States or Brazil. The price which local processors pay for oranges is therefore a major determinant of their competitiveness.

The lower average yields obtained from Australian oranges relative to the United States, also contribute to higher processing costs in Australia. Lower juice yields influence processing costs in two ways. First, the quantity of oranges processed to obtain a given volume of juice increases with lower yields adding to the costs of the crushing operation and waste

disposal. Second, the costs of evaporating juice to produce concentrated juice rise as the TSS content of the juice falls. Thus, even if local processors were able to obtain oranges at a price equivalent to that in the United States, lower yields would result in higher processing costs in Australia, other things being equal. The Commission had insufficient data

to quantify the impact of these factors on the costs of processing oranges in Australia.

The structure of the processing sector in Australia differs in a number of important respects from that of the major overseas producers such as the United States and Brazil. Reflecting the smaller size of the domestic market for orange juice in Australia, the more geographically dispersed

7 The Commission sought supplementary information through the ACIC relating to the costs of processing oranges in recent seasons. The information obtained indicated that there tended to be sizeable variations in costs between processing plants. However, the limited nature of the information made available precluded an examination of

the sources of these variations and their implications for improving the competitiveness of the processing sector. 8 For example, the ACGF submitted evidence which suggested that the price paid by processors for oranges in Brazil during the 1981 season

was about $60 per tonne. In contrast, the average minimum FISCC price for oranges in Australia during the same season was $101 per tonne.

21

and less specialised nature of the growing sector, the throughput of individual plants is much smaller. As a result the cost structure of the local processing sector tends to be higher. While this is related in part to the small size of local plants and the limited degree of by-product activity, other factors appear to be of greater relevance.

The higher ex-factory costs of producing concentrated orange juice in Australia appear to be related mainly to the higher cost of local oranges, combined with the lower yields obtained from oranges made available for processing and to a lesser extent the small average tonnage per plant.

Evidence submitted by the ACGF and AGIO indicated that at the time the variable tariff was introduced, the average cost of processing oranges was about $40 per tonne. The average cost in 1981-82 was estimated to be about $47 per tonne. The main factors contributing to this 18 per cent increase in processing costs, have been the rising costs of fuel, increased interest rates and higher wage rates. The increasing price of fuel has increased the costs of concentrating the juice during the evaporative phase and also contributed to higher transport costs. Higher interest rates have increased costs of financing the purchase of processing oranges, especially stockholding costs. Processors have been able to offset some of these rising costs.

The large increase in plant throughput, amounting to some 30 per cent on average between 1978-79 and 1980-81, has enabled processors to spread overhead costs over a larger volume of production. Responses to the

Commission's survey and supplementary evidence from the ACIC revealed that additional cost savings have been achieved by making adjustments to plant capacity and by greater integration of operations. For example, a number of processors have altered their evaporative units from using oil to coal to achieve reductions in fuel costs. Others have installed more efficient evaporative units to achieve economies in the evaporative operation. Other adjustments include improvements to packaging operations, input and product handling techniques and investment in plant to remove constraints on capacity in either the crushing or evaporative operations. These adjustments have also increased the flexibility of some processors, enabling them to accept a larger volume of oranges at times in the harvesting season when juice yields are high.

A number of firms have transferred their operations from city to country areas. These locational changes have been directed at reducing freight and waste disposal costs.

Although witnesses were unable to quantify the effects of these adjustments on processing costs, the ACIC maintained that extensions to capacity and improvements in plant and overall operating efficiency had enabled processors to reduce their direct processing costs in real terms. Evidence provided by processors in response to a questionnaire circulated by the Commission, together with information from the Commission's annual manufacturing industry survey, indicated that, on average, the profitability of this sector tended to improve between 1977-78 and 1979-80. Further, in terms of net return on funds employed, the profitability of the processing sector was above average and improved relative to that of the food processing sector over the same period. The ACIC maintained that profitability had deteriorated since 1979-80 but the Commission did not receive sufficient data to substantiate this claim.

22

2.4 Converting Sector

Convertors prepare orange juice for retail sale either as single strength juice or fruit juice drink by reconstituting orange juice concentrate or using fresh juice or a blend of both. The concentrate used by convertors may be locally produced or imported. Most convertors are located in metropolitan areas and have no financial links with processors. However,

a number are involved in the crushing of fresh oranges and the processing of juice into concentrate. Orange juice is often mixed with other fruit juices such as pineapple, apricot, passionfruit, mango and grapefruit to produce mixed fruit juice products.

Concentrate is used by convertors to manufacture five main juice products, namely:

(i) fruit drink - containing a minimum of 5 per cent single strength (ss) juice;

(ii) fruit juice cordial - containing a minimum of 25 per cent ss juice;

(iii) fruit juice drink - containing a minimum of 35 per cent ss juice;

(iv) fresh fruit drink - containing a minimum of 50 per cent ss juice; and

(v) fruit juice - containing 100 per cent ss juice.

Statistics on the relative importance of these product groups were not available to the Commission. However, evidence suggests that the more significant juice products are in categories (iii) and (v). The AGIO indicated that a one to one relationship currently existed between

consumption of orange fruit juice and orange fruit juice drink.

Because converting is mainly concerned with the reconstituting of concentrated juice, the level of activity in this sector is not greatly affected by changes in the proportion of orange juice concentrate supplied by local processors. However, to the extent that the variable tariff enables a higher domestic price to be maintained for orange juice than otherwise would apply, consumer demand is diminished, thereby affecting the size of this sector. A further influence on the converting sector arises from a limitation that applies to the exemption of fruit juices from sales tax. This limitation arises as a condition associated with the exemption and specifies that the exemption applies to juice beverages that contain 25 per cent by volume of locally produced juice. Thus, the sales tax exemption has the potential effect of constraining the level of imports and increasing the proportion of locally produced concentrate used by this sector. The various forms of assistance and their effects on the industry are discussed in more detail in Chapter 3·

According to evidence submitted by the AGIO and ACGF, approximately 1000 people are employed is this sector of the citrus juice industry.

23

2.5 Domestic Market

The most significant change in the economic environment of the industry- in recent years has been the considerable change in the importance of the juice market relative to the fresh fruit market for oranges. The BAE estimated that the market for orange juice grew in excess of 12 per cent per annum during the 1970s. This contrasts with a decline of almost 2 per cent per annum in the market for fresh oranges.

The apparent quantity of orange juice consumed in Australia over the period 1970-71 to 1980-81 is presented in Table 2.8.

From the table it appears that there are wide fluctuations between years in consumption. As the data are derived from the intake of oranges by processors and do not account for changes in juice yields and stocks, it is likely that the fluctuations reflect these factors rather than fluctuations in demand.

The BAE attributed the increase in demand for orange juice to a number of factors:

". natural fruit juices, particularly orange juice, are being substituted for alternative beverages, such as carbonated soft drinks and milk;

. demand for orange juice has been stimulated by a change in breakfast eating habits towards consumption of vitamin C enriched juices;

. the convenience aspect of orange juice associated with new packaging and marketing techniques combined with these factors has acted to stimulate demand; and

. increased real consumer incomes have intensified this move toward convenience products."

Consumption of orange juice is expected to continue to increase over the medium term. The BAE presented figures suggesting that per caput consumption of orange juice may be in the range 16 to 20 litres (single strength equivalent) by the year 2000. The extent to which demand

continues to rise will in part be affected by the level of assistance afforded to the local industry.

24

TABLE 2.8 : APPARENT CONSUMPTION OF ORANGE JUICE, AUSTRALIA : 1970-71 TO 1980-81 (million litres)

Quantity Per Caput3

1970-71 51 .6 4.0

1971-72 29-9 2.3

1972-73 74.3 5.6

1973-74 64.5 4.8

1974-75 103.6 7.6

1975-76 114.5 8.3

1976-77 94.1 6.7

1977-78 106.4 7*5

1978-79 102.2 7.2

1979-80 154.9 10.7

1980-81 138.2 9.4

a Based on mean population for financial year.

SOURCE: ABS and BAE.

25

3 · FORMS AND LEVELS OF ASSISTANCE

The forms of assistance provided through government intervention and estimates of the levels of assistance received by the industry are outlined in this Chapter.

Locally produced orange juice and juices of tangerines and other substitutable hybrids of these juices sold on the domestic market are protected from import competition by a tariff which varies to ensure that the value of imports, after duty, is at least $2.40 per kg TSS. Locally produced juice receives additional assistance from a discriminatory sales tax exemption and a domestic sugar rebate arrangement. The distribution of the assistance between the various sectors comprising the industry is affected by other forms of intervention including minimum pricing arrangements and statutory marketing arrangements which influence the prices paid for oranges delivered for processing. The ultimate distribution of assistance between the various sectors is also determined by the market situation and the competitive position of these sectors.

Since these factors are likely to vary between years, the distribution of assistance between the growing and non-growing sectors of the industry is likely to change over time.

Assistance is also provided to the industry through a number of general measures available to most rural industries. Examples include; taxation concessions, fertilizer bounties and subsidies, concessional rates of interest and finance for research and extension. Offsetting these are the additional costs incurred as a result of protection afforded to industries which provide inputs for orange growing and processing. The net effect of

these general measures on orange growing and processing is probably small.

3.1 The Variable Tariff Arrangement

Figure 3.1, provides an indication of the ad valorem tariff equivalent of the variable tariff at different vfd given a 1 threshold price' of $2.40 per kg TSS. Clearly, the level of assistance provided to the local product against imported orange juice increases as the vfd of imported juice falls relative to the 'threshold price'.

The variable tariff does not apply if the vfd of imports is $2.40 per kg TSS or greater. In these circumstances, a revenue duty of 2 per cent applies to imports from all sources except developing countries which are duty free. With the addition of freight and other importing charges the variable tariff arrangement effectively underwrites a Idp ex-store (capital city) price of approximately $2.88 per kg TSS. This is equivalent to about 30 cents per litre of single strength juice. However, the competitiveness of locally produced juice relative to imports is also affected by other factors including the protection provided by the discriminatory sales tax exemption, the possibility of a taste premium for local juice and local advantage considerations such as the convenience and assuredness of local supplies. The Commission has not been able to quantify the influence of these factors.

Prior to April 1979, movements in the vfd of Brazilian imports corresponded more closely with those of the fob price for orange juice concentrate quoted by the Bank of Brazil. In the 12 months prior to the introduction of the variable tariff the average difference between these prices was 12

26

FIGURE 3·1 : AD VALOREM EQUIVALENTS OF THE VARIABLE TARIFF AT DIFFERENT VALUES FOR DUTY

ad valorem equivalent (per cent)

120 "

100 -

1 .2 0 2.20

Value for duty ($ per kg TSS)

FIGURE 3-2 : COMPARISON OF VALUE FOR DUTY OF AUSTRALIAN IMPORTS FROM BRAZIL WITH BRAZILIAN EXPORT PRICES (CACEX)

$ per kg TSS 13 April 1979

3.5 -T-

3.0---

-'Recorded vfd - imports 'from Brazil6

2.5---

2.0-

lusted vfd - 'imports from Brazil0

1.5 - -

fob exports from Brazil (CACEX) 1.0 - -

0.5---

YEARS

a The limited number of observations for the recorded vfd of Brazilian imports since December 10S0 precludes sraphing monthly prices. Prices for individual shipments have been weighted by quantity and are provided for the period 1 January 1981 to 30 December 1981. b Threshold price under the variable tariff arrangement (ie $2.40 per kg TSS) c The Commission has estimated an adjusted vfd series for imports since 13 April 197°. The estimated series has been

derived by inflating the fob export price for Brazil by a factor of 1.12 which corresponds to the average difference between the fob Brazilian and recorded vfd series in the twelve months prior to 13 April 1070. The adjusted vfd series is assumed to reflect movements in the vfd of Brazilian imports in the absence of duty avoidance.

SOURCE: Derived from The Department of Business and Consumer Affairs1 evidence and the Bank of Brazil (CACEX).

27

per cent. However, as evident from Figure 5.2, since the introduction of the variable tariff in April 1979 the disparity between the recorded vfd of imports from Brazil and the free on board (fob) export price from Brazil (ex the port of Santos) as published by the Bank of Brazil has widened appreciably. 1

The change in the relationship between the recorded vfd and fob price of Brazilian concentrate suggests that overseas suppliers have increased their prices to avoid payment of duty since the introduction of the variable tariff. This has enabled overseas suppliers to obtain higher profits on sales of orange juice to Australia at the expense of Australian Customs revenue. This notional loss in revenue would be borne by the Australian community either in the form of higher taxes to offset the revenue loss or diminished government expenditure. However, since the prices at which

imports have been sold in Australia have tended to correspond with a ldp ex­ store (capital city) price of about $2.88 per kg TSS since April 1979 it would appear that these practices have not diminished the protection provided

to the industry by the variable tariff.^ Bather, the effect of the rise in the vfd relative to the fob price of Brazilian concentrate has been to reduce the Customs revenue collected by the Australian Government on imports of concentrated orange juice.

A rise in the recorded vfd of imports relative to the world price (assumed here to be directly related to the fob Brazilian export price) is an expected outcome where imports are restricted by the operation of a variable tariff

arrangement. This arises because exporters of orange juice to Australia have no incentive to charge the Australian importer a price for orange juice below $2.40 per kg TSS as additional profits can be made without any disadvantage to the Australian importer. The Commission estimates that if exporters had not raised their prices in this way, the Government could have collected

additional Customs revenue of the order of $6.3 million in 1979-80 and $2.8 million in 1980-81.

In assessing the level of assistance provided by the variable tariff, it is important to distinguish between the real and apparent level of assistance provided by such an arrangement. The real level of assistance may be assumed to be the difference between the 'threshold price' and the vfd of imports which would have applied in the absence of duty avoidance (hereafter referred to as the adjusted vfd). The apparent level of assistance is the difference between the 1 threshold price' and the recorded vfd of imports. As the recorded vfd does not correspond with the adjusted vfd, determining the level of assistance by relating the variable duty to the recorded vfd produces an underestimate of the assistane provided by the variable tariff. Hence the extent to which the local industry is assisted by the variable tariff arrangement is more correctly determined by comparing the adjusted vfd with

the threshold price. 1 2

1 Brazilian prices for frozen concentrated orange juice are used in the following analysis because Brazil accounts for some 80 per cent of world trade in this product and some 90 per cent of Australian import supplies. 2 A review of the operation of the variable tariff arrangement for orange

juice conducted by the Department of Business and Consumer Affairs found that the arrangement had provided an adequate level of assistance to the industry over the first 12 months of its operation. See in relation to this, Minister for Business and Consumer Affairs, 'Tariff Arrangements for Imports of Orange Juice', Media Release, 80/151, 28 November 1980.

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Since April 1979, the adjusted vfd of orange juice concentrate has averaged about $1.40 per kg TSS ($A910 per metric tonne of 65° Brix concentrate), making the ad valorem equivalent of the variable tariff approximately 70 per

cent. This exceeds the 65 per cent ad valorem tariff provided as a temporary assistance measure to the local industry between July 1977 and April 1979·

This estimate of the ad valorem equivalent of the variable tariff is subject to the proviso that the adjusted vfd of imports reflects the actual market prices which would have applied in the absence of practices designed to avoid payment of duty. The Commission considers that the adjusted vfd of imports for Brazilian concentrate more accurately reflects actual market prices than alternative price series such as the recorded vfd for orange

juice concentrate or the fob Brazilian prices quoted by the Bank of Brazil. In the case of the latter, the Commission considers that because the quality of orange juice concentrate exported by Brazil tends to vary, prices quoted by the Bank of Brazil (CACEX) for this concentrate are unlikely to be representative of the market prices paid for concentrate imported by Australia. The BAE expressed similar reservations in relation to the CACEX price series. The adjusted vfd has been used by the Commission as the appropriate benchmark for determining the level of assistance available under the variable tariff arrangement. Witnesses

representing the industry at the public hearings did not dispute this approach.

The extent to which the local industry is insulated from movements in the world price of concentrated orange juice depends on the relationship between the ' threshold' and the adjusted vfd of imports. The latter value fluctuates in accordance with movements in the world price of orange juice

concentrate, as measured by the fob export price for Brazilian concentrate.

If the 'threshold price' is set well above the range of movement in world prices, then the industry is totally insulated from world market developments. Thus, in contrast to other forms of tariff assistance, a variable tariff may insulate an industry totally from changes in world prices.

5.2 Sales Tax Exemption

All goods produced in Australia or imported for domestic consumption are subject to a wholesale sales tax at a general rate of 17.5 per cent unless they are specifically exempted or required to bear the tax at a rate different from the general rate. Goods which are exempted or required to bear the tax at a different rate are set out within four schedules to the Sales Tax (Exemptions and Classifications) Act. Sales tax is levied on the

final wholesale price of a good and in general it applies equally to locally produced and imported goods. However, in some cases locally produced goods are exempt and sales tax applies only if the goods are imported. The Commission understands that under the Act, sales tax discrimination of this type against imports applies to beer, wine and fruit

juices. For beer and wine, all imports are subject to sales tax, and the discrimination is essentially equivalent to that of an additional tariff. However, imports of fruit juice products including concentrates, cordials and non-alcoholic beverages are not subject to tax if they are blended with

locally produced juices. An exemption applies where these products contain, by volume, a minimum amount of 25 per cent of the juices of Australian fruit. In the absence of the exemption, the applicable tax would be 17-5

per cent of the wholesale price.

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It is possible to distinguish two features of this exemption as it applies to fruit juice products. First, it lowers the price of fruit juice products (including orange juice) relative to non-exempt beverages such as aerated and soft carbonated drinks. This is likely to encourage the consumption of exempt beverages relative to non-exempt beverages. The extent of the advantage to local fruit juice producers depends on the degree to which non­ exempt beverages are substitutable in production and consumption and on the responsiveness of demand and supply of non-exempt beverages to changes in price induced by the differing tax treatment of beverages.

Second, by specifying a minimum amount of Australian fruit juice for inclusion in fruit juice beverages as a condition for exemption from sales tax, the exemption has the potential to provide assistance to local juice products against imports. In effect, provided that the ldp price of imports plus the sales tax exceeds the cost of producing juice domestically, the local fruit juice industry obtains an assured market for local juice comprising at least 25 per cent of the domestic market for fruit juice products. The assistance provided to the industry by this local content provision is likely to take the form of higher prices for processing fruit. Processors would also benefit from factors such as cost savings associated with higher capacity utilisation. In the case of pure fruit juice products

(containing 100 per cent single strength juice), the exemption encourages producers of these products to use a minimum of 25 per cent, by volume, of local juice. For fruit juice drinks and other diluted juice beverages (such as cordials) the proportion of local juice that must be used in the beverage

to avoid paying sales tax is much higher and, in general, increases as the juice content of the beverage declines. For example, the juice component of fruit juice drinks, which must contain at least 35 per cent pure juice, is at least 71 per cent (0.25/0.35) of locally produced juice thereby limiting

imports to 29 per cent (0.10/0.35) of the juice content of these products.

As discussed further in section 4.2 and Appendix 7, the assistance effects of the exemption are complex and may affect individual processors, convertors and regions differently.

The Commission sought evidence at the draft report hearing relating to the assistance effects of the exemption. In response to this request, the ACIC indicated that the current differential between the ldp price of imported juice and the selling price of local juice was about 5 to 6 cents per litre of single strength juice. It was noted that the assistance provided by the discrimination against imports inherent in the sales tax exemption was

likely to account for the major part of this price differential. However, the ACIC argued that it was difficult to accurately assess the value of the discriminatory exemption since other factors also influenced the size of the price differential which was also likely to vary between years. This issue is discussed further in section 5·3·2. Because of the limited availability of relevant data, the Commission has not attempted to quantify

the assistance currently derived through the sales tax exemption.

3*3 Minimum Pricing And Marketing Arrangements

Since the mid 1960s FISCC has determined minimum prices for a number of fruits including oranges purchased for processing. The activities of FISCC also extend to setting terms of payment for fruit purchased by processors.

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Prices are not set for mandarins as few of these are processed. Three prices are set for oranges under the minimum pricing arrangements operated by FISCC. The highest price applies to fruit purchased by processors based in metropolitan areas and the lowest applies in country areas. An

intermediate price is set for fruit supplied to processors operating between these areas. A higher price is set for Valencia than for navel oranges. According to the ACGF, this reflects the lower average juice yield from naval oranges, slightly higher processing costs as well as

storage and blending costs. These prices are payable on a gross weight ($ per tonne) basis provided that oranges contain a minimum 38 kg TSS per tonne of fruit.

Payment of FISCC minimum prices is not compulsory but is one of the prescribed conditions of eligibility for receiving a domestic sugar rebate amounting to $15 per tonne of sugar used in the manufacture of approved fruit products. In order to receive the rebate, processors must observe

these prices for all fruits (ie they can not selectively observe FISCC prices).

Sugar rebates on all products have totalled about $1 million annually in recent years, which is comparatively small in relation to the total costs of processing fruit products. The BAB indicated in evidence that the total rebate (including non-citrus) in 1979-80 for all fruit juices was

$109 834 or 52 cents per tonne of oranges processed and was negligible in terms of total processing costs. Despite this, there has been widespread compliance by processors with the minimum prices set by FISCC. In the case of citrus products, sugar accounts for only a small proportion of processing costs. Hence, the incentive to observe FISCC prices to capture

the rebate alone would not be large. Factors other than the rebate have probably encouraged processors to observe FISCC prices. These factors might include the production of products with a higher input of sugar. For processors only involved in processing low sugar using products, the ability to compete with other processors for available supplies of oranges would tend to encourage compliance. Grower involvement in processor co­ operatives may also tend to encourage compliance.

The minimum price determinations by FISCC have two potential effects. They may influence the distribution of assistance made available by the variable tariff, the sales tax exemption and the domestic sugar rebate arrangement

between the growing and processing sectors of the industry. Second, depending on the level of these prices, they may influence the ability of processors to compete against imports. These effects are discussed further in Chapter 4.

While FISCC prices apply to processed fruit they also influence fresh fruit prices since most fruit may be sold on the fresh market or for processing. As a consequence, there is an incentive for growers to allocate oranges between these two markets on the basis of their respective returns. Accordingly, there is a tendency for returns (net of marketing costs) from

these markets to equalise over time. Thus, within the limits imposed by demand for fresh and processing oranges, a high price for processing oranges tends to be reflected in higher prices for fresh oranges.

In addition to these minimum pricing arrangements, the markets for fresh and processed fruit are influenced by statutory marketing boards or authorities which operate in South Australia, Victoria and New South Wales. These boards make recommendations relating to minimum prices for processing fruit which may equal or exceed those set by FISCC. The prices recommended are usually adopted by grower co-operative processors and, in order to compete for the available fruit, by most other processors.

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The boards also attempt to regulate the quantity of oranges supplied to the fresh fruit market. They set standards relating to fruit quality and conditions regarding quantities delivered as well as requirements as to where fruit shall be sent for packing. While such controls are directed at

the 1 orderly marketing' of fruit they may limit the flexibility of individual growers and processors with respect to marketing decisions and impose unnecessary costs on consumers in the form of higher prices for oranges attributable to increased fruit handling practices associated with

these arrangements.

3.4 levels Of Assistance

In assessing levels of assistance, the Commission relies upon estimates of nominal and effective rates of assistance.

The nominal rate of assistance is the percentage by which assistance allows gross returns per unit of output of an industry to increase relative to the (hypothetical) situation of no assistance. The nominal rate therefore measures the extent to which consumers pay higher prices for domestically produced outputs or imports and taxpayers pay subsidies and bounties in support of local output.

The effective rate of assistance measures the net assistance to an industry's value adding activities afforded by the assistance structure. It takes account not only of the change in gross returns per unit of output due to assistance to that industry, but also of input subsidies and offsetting increases in input prices due to assistance to industries supplying inputs to that industry. It may be defined as the difference between value added per unit measured in assisted and unassisted prices, expressed as a percentage of value added per unit measured in unassisted prices.

A comparison of estimates of the effective rate of assistance for different industries provides an indication of the extent to which a particular industry has been advantaged or disadvantaged relative to other industries by government assistance. Industries with relatively high effective rates

of assistance may be able to attract or hold more resources at the expense of industries afforded lower effective rates of assistance.

The total dollar equivalent of assistance to an industry is determined by its size as well as the rate of assistance. This can be expressed in terms of the amount of money which would need to be provided by way of an annual subsidy through the budget to provide assistance equal to an industry's nominal or effective rate. These subsidies are termed the gross and net subsidy equivalents respectively.

The gross subsidy equivalent of assistance afforded an industry is the amount of money necessary to provide the same amount of assistance as provided by the nominal rate of assistance. When assistance is provided by way of tariffs (whether specific, ad valorem or variable) domestic

producers of comparable products may price up to the ldp price of the imported equivalent. Consumers pay the subsidy equivalent through higher prices on local production. The net subsidy equivalent is the subsidy required to provide an industry with assistance equivalent to its effective rate.

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As noted in section 3*1» where variable tariffs are imposed, the recorded vfd of imports is unlikely to provide an accurate indication of notional duty free prices (ie world prices) due to incentives created for exporters to engage in practices designed to avoid duty. The emergence of a marked

disparity between the recorded vfd and fob export price from Brazil since April 1979 suggests that duty avoidance has taken place. Thus, in assessing assistance provided to the orange juice industry, the Commission compared its adjusted vfd series for imports cleared into Australia with

the 'threshold price' established under the variable tariff arrangement. To the extent that actual market prices for orange juice imports entering Australia exceed this estimated price, the assistance estimates for the industry are likely to be overstated.

The BAE adopted an alternative approach to that of the Commission in estimating the level of assistance afforded to the industry. This approach involved comparing the recorded vfd series with an estimate of the domestic cost of producing single strength orange juice. The domestic cost of producing juice was calculated on the basis of the minimum prices determined by FISCC, premiums paid for oranges above these prices and an assessment of the average physical costs of processing oranges into juice. The Bureau acknowledged that this approach was likely to understate the level of assistance provided to the industry since the recorded vfd series was not representative of world prices for imports of orange juice.

The Commission did not adopt this approach for three reasons. First, the use of a recorded vfd series cannot be justified given the available information relating to practices designed to avoid duty. In the presence of such information an approach which attempts to estimate notional duty

free import prices in the absence of avoidance is preferable. Second, the information relating to processing costs indicates that these tend to be highly variable between processors. In consequence, the use of an average processing figure can be quite misleading. Finally, the size of the differential between the recorded vfd and the assessed domestic cost of producing orange juice is affected by factors other than the variable

tariff and sales tax exemption such as quality and local advantage considerations.

The overall level of assistance provided to the industry (ie. growing and non-growing sectors) is determined in large measure by the variable tariff arrangement and sales tax exemption. However, due to the limited data relating to the sales tax exemption (referred to in section 3.2), it has not been possible to determine the assistance provided to the industry by

the exemption. While the Commission has been able to derive an estimate of the level of assistance provided by the variable tariff arrangement, the actual distribution of assistance under this arrangement to the three sectors comprising the industry, is difficult to assess.

As noted earlier, the distribution of assistance is determined by a number of factors including the activities of FISCC, statutory marketing boards and the market situation in terms of influences such as the size of the orange crop in relation to processor demand. Since the relative strength

of these factors is likely to vary over time it is also likely that the distribution of assistance between the three sectors varies between years.

However, the ACGF suggested that, "taking into account the flow on benefits ... it can be assumed that the maximum benefit of assistance has accrued to growers, bearing in mind that the degree of this benefit has varied between growers and between regions".

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Accordingly, for the purposes of deriving an estimate of assistance, the Commission has, in the absence of more information, adopted the simplifying assumption that all the assistance provided by the variable tariff accrues to growers in the form of higher prices paid for oranges sent for processing. While this assumption is likely to overstate the level of

assistance accorded to the growing sector, it is considered that the extent of overstatement is probably small particularly in recent years. This assessment seems to be supported by the increases which have occurred in

the prices paid to growers for processing oranges since' the variable tariff was introduced. The relationship between these prices and the variable tariff was discussed in Chapter 2 (see section 2.2.3)·

The full extent of assistance provided to the growing sector is also influenced by the degree to which the higher prices paid for processing oranges affect the prices growers receive for oranges sold to the fresh market. As noted in section 3.3, the net returns received by growers for oranges sold in the two markets could be expected to equalise over time. This assessment by the Commission was supported by the BAE and ACGF. It seems probable therefore that the assistance provided by the variable tariff has affected the prices received by growers for fresh as well as processed oranges. While the degree to which fresh orange prices have been affected is uncertain it is nevertheless likely that the extent of flow on to the fresh market is considerable. For the purposes of assistance evaluation, the Commission has adopted the further simplifying assumption that assistance by way of the variable tariff is fully reflected in the prices paid for oranges supplied to the fresh market. The effect of relaxing this assumption on the assistance estimates is examined later.

On the basis of these assumptions, the Commission has derived estimates of the level of assistance provided to orange growing for the period 1971-72 to 1980-81. These estimates are provided in Table 3·1·

The Commission's estimates indicate that orange growing was afforded assistance equivalent to a nominal rate of 53 per cent in 1979-80 and 62 per cent in 1980-81 . The estimated effective rates of assistance were even higher, being in excess of 95 per cent for these years.

The estimates in Table 3.1 indicate that the assistance afforded to orange growing has risen significantly during the 1970s. The average nominal rate of assistance has increased from around 26 per cent to more than 60 per cent by 1980-81. The effective rate of assistance increased from about 40 per cent to in excess of 100 per cent over the same period. The significant increases in assistance combined with the growth of production, resulted in a sixfold increase in the subsidy equivalents of assistance. Assistance through consumer transfer has increased from about $4 million to $24 million per year over the period 1971-72 to 1980-81. The net subsidy equivalent of assistance provided to orange growing in 1980-81 was approximately $25 million. This corresponds to a subsidy of about $59 per

tonne of oranges produced or around $11 800 per farm included in the BAE citrus industry survey. This level of assistance per farm is particularly significant in relation to the cash operating surplus of the average citrus farm. Assistance available under the variable tariff represented about 70 per cent of the estimated cash operating surplus per farm of $16 500 for

3 The ad valorem equivalent of the variable tariff for these years was 66 per cent and 83 per cent respectively.

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1971-72 1972-73 1973-74 1974-75 1975-76 1976-77® 1977-78 1978-79 1979-80 1980-81

36.3

18.6 6.8

45·1 50.5 54.0

19.1 18.7

63-4

19.8 24.6

Less than $0.05 million. a The level of assistance during 1976-77 when a tariff quota operated has been calculated on the lower 4.1c per litre rate rather than the penalty rate of 12c per litre and thus represents the lower bound of assistance available to the industry in that year.

1980-81. Even if it ia assumed that assistance only affected the prices received for processing oranges, the average subsidy remains high at around $7100 per farm. While the strength of the relationship between the fresh

and processed markets remains uncertain, it seems probable that the subsidy per farm is closer to the upper estimate of $11 800.

The estimates in Table $.2 indicate that the assistance afforded to orange growing in recent years has been very high in relation to that provided to other activities undertaken on farms producing oranges. For example, while orange growing is estimated to have had an average effective rate of assistance in excess of 100 per cent for the four years 1977-78 to 1980-81

inclusive, the average effective rates for other activities undertaken on orange growing farms were considerably lower, being negative for dried vine fruit and 28 per cent for wine grapes. The average for all rural activities over this period was 4 per cent and for manufacturing activities 24 per cent.

The estimates in Tables 5.1 and $.2 make no allowance for the assistance accorded to orange growing by means of the sales tax exemption. Even so, orange growing is clearly a highly assisted activity and one for which levels of assistance have recently increased appreciably.

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TABLE 3.2 : EFFECTIVE RATE OF ASSISTANCE AFFORDED SELECTED RURAL ACTIVITIES 1971-72 TO 1980-81 (per cent)

Orange Growing

Citrus Fruit

Drive Vine Fruit Wine Grapes

Apples and Pears

1971-72 39 43 37 93 16

1972-73 42 42 51 87 13

1973-74 48 45 2 102 18

1974-75 44 39 10 89 23

1975-76 40 37 56 60 15

1976-77 37 33 41 48 13

1977-78 94 65 0 25 4

1978-79 102 74 7 28 2

1979-80 98 72 -3 30 8

1980-81a 124 84 -5 28 3

a Preliminary

SOURCE: IAC, estimates.

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4. REQUESTS AMD SUPPORTING ARGUMENTS

The requests for assistance made by witnesses' and the Commission's assessment of these requests are discussed in this Chapter.

As noted in the previous Chapter, assistance to the industry is provided by way of a variable tariff and more general measures such as a sales tax exemption on fruit juices and a domestic sugar rebate administered by PISCC. The variable tariff provides most of the assistance available to the industry. The minimum pricing determinations made by FISCC and intervention by a number of statutory marketing boards affect the distribution of assistance between the growing and non-growing sectors of

the industry as well as industry structure and the competitiveness of locally produced juice relative to imports.

4.1 The Variable Tariff Arrangement

With the exception of the BAE and the Food Preservers Union of Australia (FPUA), witnesses attending the November 1981 hearings requested that the existing variable tariff arrangement be continued. However, witnesses differed as to the manner in which the variable tariff should be operated in the future. In the main these differences related to factors that should be considered in determining and adjusting the 'threshold price' to apply under the variable tariff. Most witnesses sought a 'cost plus' basis for determining the 'threshold price'.

The ACGF argued that the longer term level of assistance for orange juice should be determined so as to overcome the cost disability faced by processors and growers when competing with imports from countries with low cost structures. Such assistance was considered necessary to maintain a

stable, viable and efficient industry. The ACGF argued that assistance available under the variable tariff had been eroded by increases in domestic production costs. It considered that the industry should be provided with 'cost plus' protection against imports and therefore requested regular adjustment of the 'threshold price' so as to maintain assistance to the industry.

The ACGF considered a 'threshold price' of approximately $3.50 per kg TSS would need to be determined in June 1982 to provide the industry with a level of assistance equivalent, in real terms, to that provided in April

1979 at $2.40 per kg TSS. This higher 'threshold price' was calculated to restore the local industry's relative competitive position and rate of return. Thereafter, it sought regular adjustment at two yearly intervals

to allow for the effects of domestic inflation and to ensure maintenance of the industry's relative competitive position. This was considered essential if further production were to be developed on an efficient basis to supply the expanding domestic market for orange juice.

The requests by the ACIC and Keith Harris and Co were essentially similar to those of ACGF. They sought an adjustment for inflation since April 1979 combined with an annual adjustment thereafter. According to the ACIC the actual adjustment required in June 1982 to ensure an equivalent level of assistance to that provided in April 1979 involved an increase in the

'threshold price' to about $3-17 per kg TSS.

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If the adjusted vfd of imports in June 1982 were to correspond to the average applying since the inception of the variable tariff, these requests would have increased the ad valorem equivalent of the variable tariff from

around 70 per cent to around 150 per cent for the ACGF request and to approximately 130 per cent in the case of the AGIO.

The South Australian Co-operative Packers' Association, NSWPA, Sew South Wales Free Growers' Citrus Council and the Hills, Hawkesbury, Camden Citrus Branch also requested retention of the variable tariff arrangement and

further that the 'threshold price' be adjusted for changes in industry costs by reference to a price index such as the consumer price index or movement in the prices determined by FISCC. The SADA also supported retention of the variable tariff and an annual adjustment to the variable

tariff. In contrast to other witnesses, it considered that the mechanism for determining the level of the 'threshold price' should be flexible, allowing for the possibility of a decline if circumstances were appropriate. However, the administrative framework suggested for

determining the variable tariff, amounting to an industry committee, seemed likely to produce a movement in the 'threshold price' similar to that requested by other witnesses. AU Services did not make a specific request but observed that if the variable tariff were to continue, it could be maintained at its existing level for a period of five years and then made subject to a further IAC review.

Host witnesses seeking the retention of the variable tariff arrangement also requested that the basis of valuation be changed from the present concept of vfd to fob price as defined in Section 8 of the Customs Tariff Act 1966. A copy of this section of the Customs Tariff Act is provided in Appendix 6. This request appears to have been directed at reducing the scope which exists under the existing arrangement for manipulation of the unit value of imports by importers. Such manipulation would be directed at reducing an importers' liability for duty on imports of orange juice.

This request would in effect provide the Minister for Industry and Commerce with the discretion to declare an fob value for imports of orange juice in certain circumstances. These circumstances would apply where the Minister was of the opinion that the value declared for duty purposes had been fixed

with a view to reducing the amount of duty payable in respect of imports.

The requests by the FPUA and BAE differed from those outlined above. The FPUA suggested that imports should be regulated by an industry determined restriction, designed to limit imports to the difference between domestic

production of orange juice and demand. However, the practical difficulties of such an arrangement, such as estimating domestic demand and production so as to determine the appropriate restriction on imports and the basis for

allocating the restricted imports to marketing agents, were not addressed by the FPUA.

The BAE stated that there did not appear to be any economic case for continuation of the existing high level of assistance, although there may well be a case for welfare or adjustment support to low income farms. It suggested that assistance be gradually reduced to a level commensurate with

that received by other horticultural industries. Further, the BAE suggested that while any longer term assistance arrangement for the industry should be designed to ensure a degree of stability, such stability should not isolate the industry from longer term price trends in the world

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market. The BAE stated that the variable tariff arrangement, in its present form, was unsuitable and that it would therefore be necessary to consider alternatives including a modification of the existing form of assistance. It did not put forward any definite proposals.

At the draft report hearing, ACGF while continuing to support the retention of the variable tariff arrangement indicated that they had considered alternative forms of assistance if the Commission maintained its view that the variable tariff was inappropriate. The alternatives

suggested by the ACGF were a modified variable tariff arrangement and sliding scale duty arrangement. In the case of the former the ACGF proposed a specific tariff of $0.95 per kg TSS plus 100 per cent of the amount by which the fob price is less than $1.60 per kg TSS. In the case of the latter, the ACGF proposed a specific tariff of $1.70 per kg TSS less 50 per cent of vfd. In both cases the ACGF indicated that provision should be made for a reduction in the specific tariff component of $0.05 per kg TSS per year over a five year period.

The Commission also received evidence from H.W. Cottee Pty Ltd and Hattah Orchards at the draft report hearing. H.W. Cottee requested that the industry receive protection for a further period of say 5 years during which time it should prepare itself to compete against low cost imports. H.W. Cottee indicated that during this period there should be a full review of all the assistance provided to the industry with the ultimate aim of arriving at a single basis of protection. Hattah Orchards did not make a specific request for the continuation of the variable tariff arrangement. They did indicate, however, that they agreed that some reduction in protection was justified from the viewpoint of the general community, but that any such reduction should be of a gradual nature.

4.1.1 Supporting arguments and discussion

Witnesses representing the industry generally argued that the variable tariff had created stability and confidence in the local industry and that in response both growers and processors had taken steps to improve efficiency. The ACGF argued that the variable tariff had been successful in meeting objectives of overcoming the average cost disabilities suffered by processors and growers in competing with imported orange juice

concentrate and provided a measure of stability during periods of volatile world prices. It was also claimed that the variable tariff had contributed to the 'orderly marketing* of orange juice by encouraging the development of new packaging techniques and marketing practices which had maintained

the strong market growth for orange juice products.

The ACGF stated that the domestic industry had expanded plantings of orange trees while factory prices for processing oranges had increased. Rising prices for processed oranges were evidenced by the increase in minimum metropolitan FISCC prices for valencias from $94 per tonne for the 1978-79 season to $113 per tonne for the 1981-82 season and by the price premiums paid by processors. Witnesses clearly recognised that these price rises for oranges and expansion in plantings were linked to the 'threshold price' set under the variable tariff.

In a discussion paper made available to witnesses prior to the public hearings, the Commission indicated that the assistance afforded to the industry was substantially greater than that provided to related activities and rural industries in general. Witnesses were invited to examine the justification, if any, for such highly preferential treatment.

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In supporting retention of the variable tariff at existing or higher levels, witnesses representing the industry argued that the industry has special characteristics which justify both a higher level and a more

protective form of assistance than that provided most industries in Australia. The special characteristics generally referred to were:

. the long gestation period from planting to bearing;

. the extended productive life of trees;

. the restricted range of alternative activities;

. an absence in the short term of any cost reducing strategies available to individual growers/processors;

. the small size of the local industry;

. the infant industry status of the local industry; and

. the socio-economic significance of the industry.

It was also argued that a high and protective form of assistance could be justified so as to shield the industry from the adverse effects of the following features of the trading environment in which the industry operates:

. imports from countries where labour costs are relatively low;

. low transport costs relative to the fob value of imported orange juice;

. government assistance to orange growing/processing in other countries;

. movements in exchange rates and general movements in prices; and

. sharp downward movements in the world price of orange juice.

In discussing its alternative tariff proposals the ACGF indicated that their proposals were broadly consistent with government pricing policy relating to agricultural products, namely that they protect producers against unexpected and sharp falls in returns without masking underlying longer term market trends. The Commission's comments on this proposition

are dealt with as part of its response to the argument that the industry should receive assistance against sharp downward movements in the world price of orange juice.

(a) Special characteristics of the industry

Several witnesses (ACGF, ACIC, Keith Harris and Co, NSW Free Growers' Citrus Council and the Hills, Hawkesbury, Camden Citrus Branch) made reference to the 'special' characteristics of the citrus industry and

argued that these characteristics justified the continuation of the variable tariff arrangement.

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The long period between initial investment and production and the extended productive life of trees are not features peculiar to orange growing. Many examples of industries with similar or longer gestation periods of investment and productive life can be cited for other rural, forestry, mining and manufacturing industries. Requests for assistance based on this particular characteristic imply either that expected returns without assistance are insufficient to attract resources into the industry or that risks associated with longer term investments should be underwritten by government.

Neither argument represents a justification for assistance. If expected returns without assistance are not sufficient to encourage investment in the industry then resources are likely to be better employed elsewhere. While the riskiness of activities influences the way resources are employed

this does not in itself imply a role for government. Strategies to reduce risk are comparable with many other business decisions and the prospective benefits and costs of different strategies should be included in any assessments of profitability and efficiency. Presumably, growers and processors consider the riskiness of orange growing and processing and accept this in taking decisions to enter, remain in or leave the industry.

A further consideration advanced in support of the variable tariff arrangement was the limited availability of profitable alternative on-farm activities to orange growing in the major producing areas, notably in the Riverland region of South Australia and the MIA in New South Wales. Witnesses claimed that the problems experienced by the canning fruit, wine grape and dried vine fruit industries limited the flexibility of orange growers.

The Commission questions the justification for maintaining a high level of assistance to orange growing simply because profitable alternatives appear to be limited. Orange growing represents only one of a number of activities (albeit the largest) on orange growing farms. The apparent

favourable profitability of orange growing relative to these alternatives is related to the level of assistance afforded to this activity. The viability of an activity should be judged by reference to its profitability and competitiveness in relation to real market conditions and not opportunities created by a high level of assistance. In view of the marked differences in assistance to activities undertaken on citrus farms the maintenance of the existing high assistance to orange growing would only provide continuing incentives for resources to be attracted into this high cost activity. A reduction in the assistance disparities between activities on farms growing citrus would tend to improve the allocation of resources on these farms and between the citrus industry and other industries.

A number of witnesses argued that adjustments undertaken by growers and processors in recent years had largely exhausted the scope existing, in the short term, for any further improvements in the efficiency of production in terms of reduced costs and increased productivity of existing farms and processing plants within the industry. Both the ACGF and AGIO argued that growers and processors had undertaken adjustments directed at improving the efficiency of the industry and that the industry had reached a position where it was fully utilising the assistance available under the variable

tariff arrangement. It was also argued that the potential cost savings available from adjustment strategies of a longer term nature such as higher density plantings and improved irrigation practices were limited in scope

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and that the ability of the industry to fundamentally improve its competitiveness against imports was correspondingly limited. On this basis, witnesses argued that assistance should be maintained or even increased. The Commission is unable to support this assessment for a number of reasons.

The BAE survey results discussed in Chapter 2, provide some indication of the adjustments that have occurred in the industry in recent years. It was noted that as the industry had expanded there had been adoption of improved planting and irrigation techniques, a substantial increase in yields per bearing tree and a decline in the number of small farms within the growing

sector. Further, the results reported in Table 2.5 indicated that considerable variability existed in a number of farm performance measures between farms (such as yields per harvested hectare and return to cost ratios). Reasons for this are likely to be diverse but include differences

in product mix, locational advantages in terms of climate and soil types, size of farm and managerial ability.

Even if there were only limited scope for improving the efficiency of individual farms this need not imply that there is no scope for adjustment which would improve the economic efficiency of the industry. Indeed the survey results indicate that considerable scope exists for raising

efficiency within this sector of the industry. As noted in Chapter 2, the limited nature of the data available for the processing sector limited the Commission's capacity to comment on the scope for improving the structure of this sector of the industry. However, the apparent differences in costs

of processing between processing plants are suggestive of further scope for improving efficiency in this sector.

The essential difference between this view and that adopted by industry witnesses relates to a difference in perception of the opportunities for improving the economic efficiency of the industry. Industry witnesses appeared to assess adjustment options for moving in the direction of a more efficient industry structure on the assumption that the existing size and

structure of the industry would remain largely unaltered, thereby significantly constraining the adjustment options available to the industry to improve its economic efficiency. This perception of the adjustment

process tended to focus on the efficiency with which production was undertaken in terms of say yields per bearing tree and output per farm. While many individual farms and processing plants may be efficient given their existing size and set of resources it is possible for the industry to be inefficiently organised. Hence, while a farm or processing plant may be

using its resources as productively as it can this does not mean that it is using the resources as efficiently as possible from the community's point of view. For example, the industry may be characterised by too many small farms. Further, an industry is relatively inefficient in an economic sense if it requires a relatively high level of assistance.

Given that the cost of oranges represents in excess of 70 per cent of the ex-factory price of orange juice concentrate an improvement in the efficiency of the growing sector is essential if the efficiency and thereby competitiveness of orange juice production is to improve.

It could be expected that a continuation of the existing very high level of assistance, or its increase, would lead to an expansion of high cost orange and orange juice production. However, while this may be profitable to the

individuals concerned, it is unlikely to be an efficient use of the

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national resources involved given the very high level of assistance required to achieve it. It appears that the size and structure of the orange growing sector in particular will need to change so that the overall competitiveness of orange juice production can be improved.

Another special characteristic identified by witnesses was the small size of the local industry in relation to the magnitude of world production and trade in orange juice. This characteristic is not peculiar to orange growing. It is a common feature of the operating environment of most import competing industries. The Australian markets for most products are small by comparison with those of many other countries, yet the majority of import competing industries operate profitably with far lower levels of assistance than that currently available to the orange juice industry.

The Commission considers that in discussing the small size of the industry in this relative sense, some witnesses were arguing that the industry may have an 'infant industry' status. The ACGF argued that the industry was still in a 'developmental phase' and further, given the long lead times for investment required to improve competitiveness, maintenance of the variable tariff was essential for the development of an efficient and viable local industry. Keith Harris and Co maintained that at its present stage of development the local industry had not yet reached an output level allowing it to benefit from economies of size. It was argued that an increase in assistance under the variable tariff would enable the industry to establish itself and achieve a level of production at which it would become more competitive. It was further argued that once this more 'competitive scale' had been realised the level of assistance could be reduced to a more moderate level. Ho indication of this more competitive scale was given.

The Commission questions the basis of these arguments. It is not clear why an increase from an already very high level of assistance against imports would contribute to the achievement of a more 'competitive scale'. Rather increases in assistance would create greater incentives for marginal producers to enter the industry or alternatively for existing producers to expand production which is inherently high cost. This would lead to the development of a more inefficient industry structure.

The cost disability between the local industry and import competition from Brazil and the United States appears to be related in large measure to the high cost of local oranges and the lower yields obtained from these oranges. Increases in assistance against imports are unlikely to assist the industry in reducing these cost disabilities. The Commission also observes an apparent inconsistency in the arguments presented by witnesses relating to the limited scope for fundamentally changing the competitiveness of the local industry relative to imports and the claim that the industry had an 'infant status'.

Witnesses' requests for retention of the variable tariff arrangement were also presented in terms of the socio-economic significance of the industry. The ACIC and ACGF argued that the industry was of vital importance to many towns and regions throughout Hew South Wales, Victoria, South Australia and Queensland. In support of this argument it was noted that a significant number of people were engaged in activities supplying inputs to the

industry and in distributing the industry's output to retail outlets and that these people depended, to varing degrees, on activity levels in the industry. The ACGF referred to an input-output study which revealed that for every person employed in the food producing industry in country towns

and regions, within South Australia, there were three other people employed in service industries who were in some way dependent on the food industry for their employment.^ These inter-industry linkages are common to all economic activity. Moreover, there was no indication that these linkages

were any greater than those for other food producing industries.

It was claimed that any contraction or decline in the economic activity of the citrus idustry which could occur in the absence of an 'appropriate level of tariff assistance' would have a serious effect on the economies of the towns and regions concerned. The possibility of underutilisation of public infrastructure such as irrigation works and water distribution systems was also identified as a cost of lower industry activity levels.

Clearly, reductions in assistance will give rise to costs associated with adjustment to a lower level of assistance. These costs will be experienced by individuals as they undertake adjustments and in some cases may be concentrated in certain regions. However, the ongoing costs to the

community of maintaining a high level of assistance to orange juice production would seem to outweigh the transitional costs of adjustment for the industry.

In making recommendations on assistance to industries the Commission is cognizant of the adjustment pressures which reductions in assistance may create. Reflecting this, the Commission has often recommended that reductions in assistance be phased in over a period of years and in some

instances that consideration be given to providing assistance to facilitate adjustment. However, where regional considerations are important, in the case of say decentralisation objectives, assistance of a locational or regionally specific nature, which does not discriminate between industries,

is likely to be more appropriate than industry specific assistance of the type provided by the variable tariff.

In general, the Commission considers that witnesses have not identified any special characteristics of the industry which alone or together would justify the maintenance of highly preferential treatment for this industry of the type provided by the variable tariff arrangment.

(b) Features of the trading environment

The features of the trading environment against which the industry wishes to be shielded face many industries in Australia.

Goods which are exported or compete successfully on the domestic market with similar products produced abroad are generally those which are well suited to Australia's economic and trading environment. The

competitiveness of industries is influenced by many factors. These include the availability and quality of resources and the relative prices of labour, capital and material inputs compared with those of our trading partners.

1 West, G.R., Wilkinson, J.T., and Jensen, R.C., Generation of Regional Input-Output Tables for the State and Regions of South Australia; GRIT II; Report to the Treasury Department, the Department of Urban an Regional Affairs and the Department of Trade and Industry of South Australia, Department of Economics, University of Queensland, St Lucia,

1979.

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In the case of orange juice, one factor affecting competitiveness is the technical efficiency with which Australia produces oranges for juicing. Evidence suggests that local juice yields are below those of some of our competitors. However, our high cost status can largely be attributed to

the relatively labour intensive nature of orange production, the limited opportunities existing under present technology to replace labour with capital and the significance of the price of oranges in determining competitiveness in juice production. As labour costs in Australia are high

relative to other inputs, countries with relatively low labour costs are likely to be more competitive in producing oranges and orange juice. The argument that assistance should be provided to orange growing and processing to offset cheap labour costs in exporting countries, such as Brazil and Mexico, is not a sound basis for an industry assistance policy. It would involve the provision of assistance on a needs basis and, if applied generally, would encourage production in our least efficient industries and discourage production in our more efficient industries. In general the higher the level of assistance required by an industry to compete with imports the less efficient it is likely to be in the sense of being unsuited to the domestic economic and trading environment.

Some witnesses argued that the low cost of transport relative to the fob value of imports justified retention of the assistance provided by the variable tariff. Goods which are traded between countries which have relatively low transport costs do not enjoy the same natural protection as goods with higher transport costs. This argument is essentially similar

to the previous one and represents a request for assistance to offset a cost disability.

In any event, the available evidence does not appear to support the contention of witnesses that transport costs are low. The transport costs of concentrated orange juice, as a proportion of the fob price of imports, are similar to those of manufacturing industries on average.

That production and processing is assisted in other countries does not generally represent a ground for affording assistance to a local industry. Government assistance to industries in other countries represents a feature of the trading environment in which the local industry must operate. If a local industry requires a high level of assistance to offset assistance provided in other countries and to enable it to compete at world prices the effect would again be to encourage production which is inefficient in relation to the existing trading environment. A possible exception to this could arise if government assistance to competing industries abroad was of a short term or variable nature.

Whilst the Commission acknowledges that exchange rate fluctuations and movements in the general level of prices between countries are largely outside the control of individual industries, these changes represent normal elements of the business environment and are not peculiar to the orange industry. They do not constitute a justification for selectively assisting an industry.

Reasons for exchange rate movements are complex. They usually arise in response to a combination of short term influences, such as variations in capital inflows (in response to say interest rate differentials between countries), as well as longer term influences, such as changes in the comparative advantage of industries participating in trade.

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If the nominal exchange rate moves simply to offset a divergence in inflation between Australia and our trading partners, then the competitiveness of local industries competing on world markets need not change. Hence, an examination of movements in the exchange rate and

inflation rate between countries in isolation from one another can be quite misleading.

However, movements in the real exchange rate (ie price of traded goods relative to non-traded goods) are significant in terms of industry competitiveness. If the Australian dollar appreciates in real terms this would indicate that, on average, our trading industries were becoming more

competitive on world markets. Since it is unlikely that all industries will be improving their competitiveness equally, different industries (exporting and import competing) will face differing changes in competitive pressures. The industries facing greatest increases in competitive

pressures are likely to be those which, with their present structure and size, are relatively less efficient at using Australia's resources. This is not a justification for increased assistance.

Increases in domestic inflation need not contribute to a decline in the competitiveness of the orange juice industry relative to imports. For example, if the rates of inflation experienced in countries competing with Australia exceed our domestic inflation rate the competitiveness of the local industry may improve. However, such a change in competitiveness may not persist since there may be offsetting adjustments to the exchange rate.

Further, the effects of inflation on industry competitiveness are likely to differ between industries reflecting differences in input mix (ie labour, capital and material inputs) and the nature of the markets for the industry's products. Import competing industries, including the orange

juice industry, tend to be constrained in obtaining higher prices to cover increased domestic costs. Increases in costs of production do not provide a ground for affording assistance to individual industries. Measures to contain inflation are likely to be more effective if applied on a general basis.

If an industry is adversely affected by any of the above factors it is in general, an indication that the industry must adjust in order to improve its competitiveness. These factors do not represent an argument either for providing assistance to an industry or for increasing assistance.

The argument for retaining the variable tariff at existing or higher levels to shield the industry against sharp downward movements in world prices is difficult to sustain. The existing variable tariff arrangement has tended to provide assistance which differs considerably from that normally provided by a stabilising arrangement. Rather than providing the industry with a buffer against significant falls in world prices the present arrangement has operated to insulate the domestic production of orange

juice completely from movements in world prices. As outlined in section 3.1, the domestic price of orange juice has been stable since the variable tariff was introduced and has been maintained at a level substantially

above and unrelated to that of competitive imports.

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The existing variable tariff arrangement differs fundamentally from the normal range of industry specific stabilising assistance measures which operate for rural industries to supplement more generally available measures. Measures of a general nature applicable to all rural industries

include income equalisation deposits, tax averaging provisions and, in instances where farm viability is in doubt, the provisions of the RAS. Other measures which are generally available, subject to certain pre­ conditions being satisfied, are anti-dumping provisions (see Appendix 8)

and the short term assistance which may be accorded to industries following a public inquiry by the TAA or IAC. In practice these latter measures tend to be afforded to import competing industries.

In addition to these measures, a number of industry specific measures have been applied, including price underwriting schemes for wheat, apples and pears and dried vine fruit. An important feature of these schemes is that

the industry receives protection against sharp falls in prices but assistance is provided for only a limited period and phases out if prices persist at low levels. In contrast, the present variable tariff and the modified version requested by the ACGF would provide total insulation from

the effects of a fall in world prices within the range which has been operative in recent years whether this arose in response to a short term change, such as a seasonally induced increase in available supplies of orange juice, or a longer term change to the pattern of overseas production and trade. While the sliding scale duty arrangement, referred to by the ACGF, would lessen the degree of insulation afforded to the industry it would continue to provide a high ongoing level of assistance to the

industry.

In summary, the Commission considers that arguments advanced by witnesses relating to the features of the industry's trading environment and the special characteristics of the industry, specifically and in general, do not, individually or in total, justify the continued preferential treatment of the industry via the maintenance of the variable tariff arrangement.

4.2 Sales Tax Exemption

As described in Chapter 3, domestically produced fruit juice products are exempt from sales tax. Imports of these products (including orange juice) are also exempt provided that they are blended with locally produced juices in accordance with a specified minimum local content requirement. Both the ACGF and ACIC maintained that the exemption provided valuable assistance to the industry by ensuring a continuing strong demand for local juice.

The minimum local content required to qualify for the exemption provides the industry with assistance against imports in addition to that available by way of the variable tariff. This was recognised by most witnesses commenting on the exemption. In the case of pure juice, there is an incentive for processors and convertors, in certain circumstances, to pay a premium for local juice above the Idp price of equivalent imported juice up to four times the sales tax that would be payable (on the minimum local juice component of the beverage) in order to avoid paying the sales tax. The effect of this is to increase demand for local juice and thus oranges for processing.

The extent to which the local content requirement provides assistance to orange juice production depends upon the proportion of the domestic market supplied by local production, the contribution to total sales of pure

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juice, fruit juice drinks etc and upon other factors such as juice quality. Throughout the 1970s local production has accounted for in excess of 60 per cent of the supplies available to the domestic orange juice market.

Provided the ldp price of imports plus the sales tax exceeds the cost of domestically produced juice, the effect of the exemption is to constrain the level of imports.

The size of the constraint imposed on imports depends on the juice content of final consumer products. The Commission was able to gain only a broad indication from evidence of the quantity of juice sold in various forms (pure juice, fruit juice drink, etc). The ACGP estimated that the ratio of

sales of orange juice drink to orange juice was currently about one to one. Given this, the overall ratio required by the industry to qualify for the exemption is about 1.7 parts of imported juice to one part of domestic

juice. However, imports have never approached this level (ie about 60 per cent) and in the past have not exceeded 40 per cent of total available supplies of juice. These figures suggest that in aggregate the effects of the discriminatory exemption have been small. However, the effects of the

exemption may be significant for individual processors or convertors.

As the level of tax which would otherwise apply is of such potential significance it could create incentives for convertors to alter their particular mix of juice products in order to qualify for the exemption. This would affect the type of products available to consumers. It may also have affected stock holding policies and production techniques and thereby influenced the cost of producing juice products in those regions where little or no orange juice is produced (for example, in Western Australia) or in those years when the availability of local juice in relation to market demand is low.

In its draft report, the Commission indicated that although available data precluded it from estimating the assistance effects of the existing sales tax exemption, such an exemption has the potential to provide considerable

additional assistance to the industry. Such a form of assistance is indirect and hidden in nature and the level of assistance may vary considerably with changes in the composition of fruit juice products in the total market for these products and changes in availability of locally produced juice.

The question of which groups of goods should be exempt from sales tax is clearly beyond the scope of this inquiry. The Commission's main concern for this inquiry, in relation to the sales tax exemption, is the different treatment of imported and locally produced orange juice. This could provide significant levels of assistance to the industry. Appendix 7 contains some hypothetical examples of the level of assistance that could be provided by the discriminatory nature of the exemption and the Commission invited witnesses to comment on the analysis at the draft report

hearing. Responses by witnesses to this request were very limited. In general the industry urged retention of the existing exemption claiming that its removal would have very serious effects. No arguments or data were provided by witnesses to substantiate this claim.

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At the draft report hearing, the ACGF and other witnesses argued that if the sales tax exemption on orange juice were removed, hut maintained for other exempt beverages, this would have a price distorting effect. Cottee's General Foods Ltd requested that the Commission should not make any recommendations which would in any way modify or prejudice the existing sales tax exemption applying to cordials containing 25 per cent Australian fruit juice. Cottee's General Foods Ltd argued 'certain sectors of the Australian fruit growing and fruit processing industry, particularly the citrus sector, would suffer injury if the sales tax exemption on fruit juice cordials was removed.' They were particularly concerned that if sales tax were imposed there would be a large reduction in the use of fruit juices in cordials due to reformulation using flavouring emulsions instead of fruit juices.

The responses of a number of witnesses at the draft report hearing indicated that some witnesses may have misunderstood the Commission's position in relation to the sales tax exemption. Rather than proposing that the sales tax exemption be removed in its entirety the Commission had

sought comment on the effects of removing the discrimination against imports inherent in the local content element of the exemption.

4.5 Fruit Industry Sugar Concession Committee

As outlined in section 3-5, FISCC pays a rebate on sugar used in the processing of orange juice and fruit juice drinks provided the processor meets certain requirements. One of these requirements is that at least minimum prices, as determined by FISCC, are paid for all specified fruit (including oranges) delivered for processing.

The ACGF did not consider that pricing arrangements under FISCC have resulted in prices for oranges above those which would have prevailed in the absence of FISCC. In support of this view, it presented evidence of premiums paid above FISCC prices. The ACGF and ACIC acknowledged that existing assistance arrangements directly influence these premiums.

Minimum pricing arrangements may be directed towards achieving a variety of objectives. One could be to alter the distribution of returns between growers and processors. In a situation where there are few processors and many growers, minimum pricing arrangements may be of benefit to growers who might otherwise have low bargaining power in negotiating prices. Evidence

presented by the ACGF of premiums paid above FISCC prices suggested that returns to growers may not be adversely affected in the absence of minimum pricing arrangements.

A second objective might be to increase total industry returns from the sale of oranges. Under certain market conditions, total revenue may be increased by selling a smaller quantity at a higher price for one purpose (eg processing) and the balance at a lower price for another (eg fresh).^ However, in the absence of increased assistance for the production of orange juice, competition from imports would preclude this objective from

being achieved. Hence, it is unlikely that FISCC pricing alone could be used to support this objective.

A further objective may be to reduce price uncertainty and thereby to make budgeting, marketing and access to finance easier for both growers and processors. The determination of minimum prices provides a known minimum

2 To enable returns to be increased through increasing the price for processing oranges would require that the demand for processing oranges be less elastic than demand for fresh oranges.

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return to growers and a known minimum cost to processors. However, this objective could he achieved in a variety of ways and does not require minimum pricing arrangements. For example, growers could negotiate forward contracts with processors involving the specification of conditions

regarding price, quantity, quality and delivery in a sales agreement some time before harvest.

Witnesses generally highlighted the 'stabilising influence' of minimum pricing arrangements. The ACGF and the South Australian Co-operative Packers Association both maintained that the industry benefitted from the stabilising influence of FISCC prices. Keith Harris and Co stated that the minimum price "... was a trusted threshold figure used for forward

planning, budgeting and juice price setting". The comments received from H.W. Cottee Pty Ltd at the draft report hearing endorsed this assessment.

The issues related to FISCC are basically twofold. First, minimum prices are linked to a rebate on sugar and determined by a committee which includes representatives from the sugar industry. Second, the level and form in which prices are fixed, together with other prescribed conditions, have the potential to influence the structure and competitiveness of the

industry.

The use of a domestic sugar rebate as a mechanism to achieve adherence for setting minimum prices for fruit delivered for processing was an outcome of sugar marketing arrangements introduced more than 50 years ago. The rationale presented in evidence for continuation of this arrangement was far from convincing. The ACGF suggested FISCC was not a price fixing body

but that minimum prices declared by FISCC facilitate administration of the Sugar Agreement by providing sugar rebates to manufacturers abiding by prescribed terms and conditions. The ACIC went further, suggesting that the domestic sugar rebate was more a form of assistance to the sugar industry than the citrus industry.

Apart from the rather peculiar situation of one industry - the sugar industry - being involved in setting minimum prices in another - the citrus industry - the existing minimum pricing arrangements are achieved through subsidising an input (ie sugar). Although the subsidy is small, generally less than 5 per cent of the current domestic sugar price, it nevertheless

provides an incentive to use a greater amount of sugar. Thus there may be a small incentive to use sugar to increase TSS or to 'stretch' orange juice where prepared for retail sale.

Another prescribed condition associated with the operation of the FISCC requires that, to be eligible for the rebate, convertors, must, unless otherwise approved by FISCC, use only locally produced juice. This juice must be purchased from a local processor that FISCC is satisfied is paying

at least minimum prices for all prescribed fruit. Such a requirement has the potential to provide assistance to the local industry in that there is an incentive to use local juice rather than imported juice. The extent of assistance provided by this requirement depends largely on the value a convertor places on the sugar rebate. Additionally, this provision provides an incentive for processors to abide by FISCC provisions to ensure

that they do not restrict the number of convertors to whom they may sell. This condition reinforces the assistance provided to the industry by the sales tax exemption.

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The Commission sees no reason why the sugar industry should not continue to offer sugar at different prices to different users if it judges this to he a rational pricing policy. However, there appears to be no justification for price differentials (associated with the sugar rebate) being tied to a requirement that manufacturers using sugar observe minimum prices for fruit and meet other conditions which would otherwise be determined commercially between growers and processors.

The second issue of current minimum pricing arrangements relates to the effects of minimum pricing. Keith Harris and Co stated that in times of over supply of fruit, lower prices cannot be paid and still comply with FISCC requirements. The ACGF, which supported continuation of FISCC minimum prices, stated that prices are common for a full 12 months and overcome State and regional differences which could result from local supply/demand situations.

An important desirable element of minimum prices is that they should be flexible enough (or enable flexibility in prices paid) to accommodate changes in market conditions. Further, they should be able to accommodate differences in quality of fruit, location of fruit growing and relative profitability of citrus production compared to alternative crops or activities.

The ACGF considered that minimum prices should be close to the market price for factory fruit, desirably covering all production and harvesting costs and that prices should also be uniform throughout Australia. If criteria such as this were used, processors would have little scope for varying prices paid to take account of changes in markets, qualities of fruit or location. If related to costs of production, it is probable that production would move out of line with market requirements.

Uniform minimum prices throughout Australia tend to distort the profitability of orange production relative to alternatives. For example, although region A may be able to produce fruit more suitable for processing than region B, profitability of alternative enterprises in region B may be

so low that growers in this region would be better off producing oranges even though they received lower prices for oranges than growers in region A. If minimum prices were set too high, processors may be forced to shift their operations away from the latter region to the detriment of growers in that region.

At the November hearings the ACGF stated that given the expanding production of oranges and the rising proportion being processed, there is an increasing need to review the present basis of payment. The AGIO stated that the industry would like to see payment on a solids basis but considered it imprudent under present circumstances. When premiums over FISCC prices have been paid, as noted by the ACGF, scope existed for

processors to vary prices according to seasonal yield variations but not yield variations between growers. The Commission noted in its draft report that the existing minimum pricing arrangements also tended to institutionalise the method of payment. Currently, minimum prices are set on the basis of dollars per tonne of fruit with a minimum TSS requirement. However, it is the amount of TSS extracted from the fruit which is

important for local juice processors.

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At the November hearing the ACGF observed that a sub-committee of FISCC found the single most important factor working against payment on the basis of TSS was the lack of an independent testing authority. It appears to the Commission that if growers are prepared to deliver fruit when paid on a tonnage basis without an independent authority, they should also be prepared to do so when paid on the basis of TSS. After all, changing the method of determining payment to individual growers need not alter total

payments to growers for fruit. It would, however, alter the distribution of payment to growers as payment would be made more in accord with the worth of oranges for processing. There may be transitional difficulties as processors develop expertise at, and growers confidence in, new measurement procedures for fruit payment. There is also the added delivery costs associated with implementing a more equitable basis of payment, which may be important for the delivery of small lots.

At the draft report hearing, the ACGF stated that the Federation had recently agreed in principle to proceed to alter the basis of payment from weight to TSS and further that in order to expedite the change, industry participants were focusing on administrative issues such as fruit testing and delivery of small consignments to processors.

Minimum prices can be of benefit to the industry in that financial management and marketing may be facilitated. By fixing price, however, uncertainty may only be transferred from the price that is paid to the quantity which a processor may be prepared to accept. There are

alternatives to FISCC which could reduce uncertainty. For example, the industry may estimate likely prices for fruit based on likely market conditions. Growers could also enter into contracts with processors through which price or quantity or both could be determined.

The current arrangements are complex and contain a number of undesirable elements. Through linkages with sugar used, they affect decisions by processors and convertors in the amount of sugar used. They also affect decisions by convertors relating to the source of their juice inputs. Further, the minimum prices determined under these arrangements are rather

inflexible in that they are set on an annual basis. There has also been a tendency for requests for assistance against imports to support FISCC prices rather than such assistance being one factor which must be taken into account when setting minimum prices.

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5. LONGER TERM ASSISTANCE ARRANGEMENTS

The current assistance arrangements for the orange juice industry, witnesses requests relating to these arrangements and the Commission's assessment of these requests, have been discussed in previous Chapters. The Commission's proposals for future assistance to the industry are

discussed in this Chapter.

5.1 Industry Policy Considerations

In developing its proposals, the Commission has considered the evidence submitted by witnesses in the context of the policy guidelines contained in Section 22(1) of the Industries Assistance Commission Act. These guidelines relate to the Government's objectives for industry assistance and draw attention to the Government's desire to: improve and promote the well being of the community; achieve sustained growth through balanced

industry development; improve the efficiency of resource use; faciliate adjustment to change while having due regard to the capacity of the economy to sustain change; recognise the interests of consumers; and to ensure consistency between industry assistance and other policies. Thus, in considering questions of assistance for particular industries, the Commission looks at both economic and social factors and takes a broad view of the development of industry generally.

Several of the guidelines relate to the objective of improving the efficiency of resource use. In this context 'economic' efficiency encompasses both the technical efficiency with which firms and industries

undertake production and, importantly the allocative efficiency with which resources are distributed within and among activities and industries in the economy. If the productive resources used in one activity or industry would yield more real wealth to the community as a whole if they were used in another activity or industry, then that second activity or industry is the more efficient user of the community's resources.

The more efficient users of the community's resources are generally activities which are well suited to Australia's resource endowment and trading environment, and can generally compete with products from other countries with little assistance. The provision of assistance such as tariffs and quantitative import restrictions results in higher cost industries being more profitable than they would otherwise be, thus enabling them to attract additional resources at the expense of other, more efficient, industries. Assistance to one activity also disadvantages other activities and consumers by increasing costs and the general price level. Thus, in general, disparities in levels of assistance divert resources away from lower cost more efficient industries which could contribute more to the real wealth and welfare of the community.

The Commission's general approach to improving resource use is to encourage the expansion of low cost industries by recommending the gradual reduction of levels of assistance which are relatively high. In this way resources are encouraged to locate in the more economically efficient industries.

As well as seeking to improve resource use efficiency through reduced levels of assistance, the Commission seeks to reduce large differences in assistance between similar production activities and similar consumption

goods. Disparities in effective assistance between production activities which use similar processes and compete closely for particular resources

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can channel production away from what, for the community as a whole, would be a more efficient allocation of scarce resources. Similarly, disparities in nominal assistance between products affect buyers' choices especially for products which are readily substitutable for one another. This leads

to losses in consumption efficiency. A more uniform assistance structure would provide a framework wherein producers' and consumers' decisions are determined more by market place prices and preferences than by the pattern of protection and thereby enhance community well-being.''

The policy guidelines contained in the TAG Act also require the Commission to ensure that industry assistance measures are integrated with national economic policy as a whole. In this regard, the Commission notes that the Government has stated that in the longer term the Australian community will be best served by a more competitive and efficient industry structure less reliant on government assistance. The Government has also stated that it seeks to establish a more stable and simple structure of assistance. The earlier emphasis given to self sufficiency and import replacement in

industry policy (which often required substantial on-going protection), changed during the 1970s. In the White Paper on Manufacturing Industry, in its response to the Report of the Study Group on Structural Adjustment and more recently in the terms of reference for the inquiry into Approaches to

General Reductions in Protection, the Government has made it clear that reductions in protection have a role to play in encouraging the development of more efficient and competitive industries in Australia.

The Government has also indicated that the necessary adjustments associated with changes in levels and forms of assistance, directed at achieving the longer term aims of industry policy should occur at a pace that does not cause undue economic and social disruption.

While many of the responses by Government in relation to industry policy in recent years have been formulated in the context of issues associated with the manufacturing sector, it seems clear that the principles referred to above are intended to apply economy-wide rather than to particular sectors of the economy in isolation from others. Support for this assessment can be found in changes evident in assistance arrangements for rural industries, especially in the area of discriminatory pricing arrangements and adaptation to economic change.

During the 1950s and 1960s, price support and stabilisation schemes were the general measures used to assist rural industries in a manner similar to the way 'made to measure' tariffs were used to assist manufacturing industries. During the 1970s, the emphasis in agricultural policy changed in the direction of promoting adjustment and productivity to a greater degree than previously. Pricing policy focussed increasingly on providing a measure of security against sudden and large falls in producer prices

without masking price signals provided by longer term market trends from industries. This change in emphasis is clearly evident in alterations to marketing arrangements for industries such as wheat, dairying, apples and pears and dried vine fruits made following reviews of these arrangements. 1

1 The approach of the Commission to industry assistance, outlined briefly above, has been explained in greater detail in its Annual Reports. See for example, IAC, Annual Report 1975-74, AGPS, Canberra, 1974.

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A further development related to the emergence of a wider range of measures to deal with specific objectives within the rural sector. Income equalisation deposits were introduced to complement tax averaging provisions thereby enabling producers to determine on an individual basis appropriate actions for stabilising their own incomes. Adjustment within the rural sector by low income producers and those facing short term viability problems was assisted by the evolution of rural reconstruction schemes and later by an expanded HAS.

An important question which arises in the context of this industry policy environment is whether the present level and forms of assistance for the orange juice industry can be regarded as consistent with the achievement of

the Government's industry policy objectives.

5.2 Review Of The Variable Tariff Arrangement

The first part of the terms of reference for the inquiry requests the Commission to review the operation of the variable tariff arrangement.

At the time the variable tariff arrangement was introduced the Government did not provide an explicit indication of the objective of the arrangement. It was expressed only in broad terms as contributing to the maintenance of a viable industry. The requests discussed in Chapter 4 indicate that industry representatives have imputed a series of objectives to the arrangement. According to the ACIC and ACGP the variable tariff arrangement is designed to contribute to the maintenance of a stable domestic pricing structure, provide a secure operating environment to facilitate adjustment, and maintain a minimum return to growers and processors.

The arrangement has certainly been effective in the narrow sense of contributing to the attainment of these objectives. However, it is in general inconsistent with the policy guidelines discussed in section 5·1 above and in the Commission's assessment has a number of adverse effects which outweigh the advantages associated with the arrangement.

The Commission considers that in large measure the adverse effects associated with the variable tariff arrangement can be attributed to the unusual nature of this arrangement by comparison with the forms of tariff assistance usually afforded to import competing industries.

The variable tariff arrangement has provided a highly protective form of assistance to the industry. Rather than providing the industry with a buffer against fluctuations in import prices, the arrangement has shielded the industry from such fluctuations. This has arisen because the

'threshold price' has been set at a level well above the normal range of movement in import prices for orange juice. In effect, the local industry has been totally shielded from changes to its competitiveness relative to imports. The assistance estimates presented in Chapter 3 indicate that the industry has been provided with a high level of assistance equivalent to an ad valorem tariff of about 70 per cent and an effective rate of assistance

2 Department of Business and Consumer Affairs, 'IAC Report - The Australian Citrus Industry', Media Release 79/54, 29 March 1979, Canberra.

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in excess of 95 per cent since the inception of the variable tariff in April 1979· The expansion of the industry, as evidenced by the increased rate of plantings of trees by growers and extensions to the productive capacity of a number of plants within the processing sector, referred to

in Chapter 2, appears to have been influenced to a significant extent by the higher prices for oranges and orange juice, made possible by the variable tariff. This expansion has been at considerable cost to the community both in terms of higher prices for orange juice to consumers and

the diversion of resources from lightly assisted activities on citrus farms and from outside citrus farms to orange growing.

The nature of the variable tariff also encourages practices designed to avoid duty. As noted in Chapter 3, the cost of the variable tariff to the community is increased because Customs revenue which would normally accrue to the Government (and thereby the community) as a result of restricting

imports, can be captured by exporters of orange juice to Australia. The loss of such revenue represents a real loss to the Australian community compared with an equivalent ad valorem tariff. The Commission has estimated that this loss amounted to $6.3 million in 1979-80 and $2.8 million in 1980-81.

As noted in Chapter 4, a number of witnesses requested that the basis of valuation for imports of orange juice be altered. The request for imports of orange juice to be valued under Section 8 of the Customs Tariff Act 1966 (see Appendix 6) for the purpose of duty collection was made on the

expectation that this would remove or reduce scope for duty avoidance under the variable tariff. In common with virtually all Australian imports, the present basis of valuation for orange juice imports is vfd under the Customs Act.

The basis on which goods are valued for the purpose of duty collection under Section 8 of the Customs Tariff Act differs in some respects from that of the Customs Act. The manner in which the fob price is calculated is set out in Section 8(1). Section 8(2), in general, allows the Minister

to determine the fob price if, in his opinion, there are reasonable grounds for believing that the price paid for the good or charges or costs were altered with a view to reduce or eliminate duty payable.

The provision of assistance by way of a variable tariff encourages practices designed to avoid duty. While the evidence received at the inquiry indicated that duty avoidance was occuring the Commission notes that the Minister requested the Commission to consider the issue of duty evasion. No evidence of duty evasion was forthcoming during the inquiry.

On the basis of information available to the Commission, it is not satisfied that calculating an fob price under Section 8 would result in reducing the incidence of avoidance of duty.

The variable tariff arrangement also appears to have contributed to the development of expectations within the industry that assistance should be provided to protect the industry from pressures for structural change, including increases in domestic costs of production and increases in import competition. The requests submitted by the industry reflect a belief that

it should be compensated for its cost disabilities rather than encouraged to adjust so as to improve its competitiveness.

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As noted in Chapter 4 (section 4.1.1), witnesses generally argued that the arrangement had contributed to industry stability and provided assistance to the local industry which offset its cost disability relative to imports. Those witnesses seeking retention of the variable tariff advanced two broad arguments in support of their request. One related to ' special characteristics' of the industry while the other covered features of its

trading environment. The Commission has discussed these arguments and concluded that they do not support the retention of the variable tariff arrangement.

The Commission will recommend that the present variable tariff arrangement be discontinued.

5.3 The Commission's Proposals

As presently structured, the industry represents one of Australia's more highly assisted industries. The recent history of assistance to the industry has been one of a progression from a moderate to very high level of assistance. Not only has the level of assistance increased appreciably

from an effective rate of about 45 per cent in the early 1970s to in excess of 95 per cent in the late 1970s, but changes to the form of assistance have seen the evolution of a highly protective form of assistance. The increase in assistance which followed the TAA inquiry in the mid 1970s has become entrenched and the industry has come to expect that assistance will be provided on a 'needs' or 'cost disability compensating' basis. This in

turn has encouraged the expectation that the industry is in some sense 'special' and thereby deserving of preferential treatment.

In considering appropriate longer term assistance arrangements for the industry, the Commission examined three broad issues.

First, it has considered the type of tariff assistance structure that should be achieved in the longer term. In this regard the Government's stated longer term objectives for industry assistance, referred to in section 5.1, are important.

Second, it has given consideration to the most appropriate means of moving from the existing structure of assistance towards more desirable longer term forms and levels of assistance.

Third, it examined factors other than the variable tariff that are likely to impede adjustment towards the development of a more efficiently structured industry. The Commission has adopted a broad view of impediments covering institutional as well as market based impediments.

5.3.1 Tariff assistance

While the various forms of non-tariff intervention discussed in section 5·3·2 may influence the structure and efficiency of the orange juice industry, the major influence is the level and form of tariff assistance.

Under the current variable tariff arrangement. the industry has been provided with a high level of assistance against imports. Rather than encouraging adaptation to economic change, this arrangement has shielded growers and processors from changes to the economic and trading environment. The high ' threshold price' established for determining the variable tariff has led to an expansion of this high cost activity and added to potential adjustment costs with a reduction in assistance to a more moderate level.

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Most witnesses representing the industry argued that 1 special characteristics' and/or features of the trading environment for the industry justify special treatment in the form of a high level and protective form of assistance. As the detailed investigation of the arguments in Chapter 4 shows, the Commission considers that no case has been established for such special treatment.

As a long term objective, the Commission considers that the industry should be accorded a similar level and form of assistance to that provided to other fruitgrowing industries and industry in general. Such an approach

would require a movement towards an assistance structure characterised by a lower and less protective form of tariff assistance than that currently provided to the industry. A lower and less protective form of assistance would encourage restructuring and the development of a more efficient (in an economic sense) industry by ensuring that market forces rather than the

structure of assistance determine the appropriate size of the industry.

A rapid rate of reduction in the level of assistance to the industry would place severe adjustment pressure on growers and processors alike. However, maintenance of the existing variable tariff arrangement is likely to result in higher levels of assistance to the industry in the medium term, an

outcome which would tend to discourage adjustments needed to improve the competitiveness of the local industry relative to imports.

As discussed in Chapter 2, it seems that the industry has responded to the high level of assistance provided by the variable tariff. Significant increases in prices to growers have been one factor encouraging increased

plantings of orange trees. Processors have also responded by expanding the productive capacity of their plants. Such adjustment, since it appears to have been initiated in response to a high level of assistance, has involved an inefficient use of resources and has thus been at considerable cost to

the community. A decrease in the level of assistance would tend to improve resource use by discouraging resource movements of this kind into the industry and by encouraging adjustment within the industry, particularly by the least efficient sections of the industry.

In view of these considerations, the Commission will recommend an alteration to the form and a staged reduction in the level of tariff assistance afforded the industry. Such an approach has been adopted by the Commission in a number of its inquiries into high cost industries where the

structure of assistance at the time of review differed appreciably from the structure identified as being appropriate in the longer term. This approach was also advocated by the BAE to enable and encourage the industry

to adjust by either reducing costs or raising productivity or by diverting resources to other enterprises, including off-farm activities.

In developing its draft report proposals the Commission sought a movement towards an assistance structure which would expose the industry to trends in world prices to a greater degree than the present arrangement.

One such approach, suggested by the BAE, was for the 'threshold price' to be adjusted to enable the ldp price of imports to move in accordance with the longer term trend in prices of orange juice on world markets. This could be achieved by setting the 'threshold price' on the basis of a moving

average of world prices for orange juice. This would accord the industry a degree of price stabilising assistance and avoid shielding the industry completely from movements in world prices. The extent of stability

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achieved under this alternative would be related to the length of the moving average and the nature of the relationship between the reference price (say the fob price of Brazilian concentrate) and the 'threshold price' used in the pricing formula.

Under this approach, the industry would receive a form of assistance fundamentally different from that provided to other import competing industries. Furthermore, it would not eliminate the scope for avoidance of duty. It would also tend to perpetuate the needs based approach evident in the evolution of assistance for this industry. Finally, any such modification to the existing form of assistance is likely to be

administratively cumbersome and complex.

In its draft report, the Commission proposed a composite duty arrangement, composed initially of a predominant specific rate component and a small but stable ad valorem tariff component. This form of assistance was proposed so as to provide some buffer against sudden falls in world prices (compared with say, an ad valorem tariff) while permitting ldp import prices to reflect changes, but more importantly trends in world prices.

In order to provide the industry with time to adapt to these changes, the Commission also proposed an initial transition period of five years, with a review before the end of the period to consider the question of longer term assistance to the industry and to ensure that assistance afforded the industry was consistent with any decision taken by Government

on the Commission's report on General Reductions in Protection.

As discussed in Chapter 3, since the inception of the variable tariff in April 1979 the Commission estimates that the average ad valorem equivalent of the tariff has been about 70 per cent. Given that the industry has been expanding and further that this may have been related to the high level of assistance afforded by the variable tariff, the Commission considered it appropriate that the initial ad valorem equivalent of the composite duty be somewhat lower than the average ad valorem equivalent of the variable tariff. Accordingly, the Commission proposed a composite duty, based on its adjusted vfd for 1980-81 , designed to provide in total an ad valorem equivalent initially of about 65 per cent.

The Commission proposed that the composite duty be initially a stable ad valorem duty component of 10 per cent (the rate applying to most other fruit juices) and a specific rate of $0.75 per kg TSS.

It was further proposed that the specific rate be reduced by $0.05 per year over a five year period - an overall reduction of $0.25 per kg TSS. After five years, this would have afforded the industry assistance equivalent in ad valorem terms to about 45 per cent (assuming that the projection by the BAB of little change in world prices of orange juice in money terms in the medium term was realised) and an effective rate of assistance of 70 per

cent. Even at this level it would be about three times that currently afforded, on average, to manufacturing industries and well above that currently available to other horticultural industries. At the end of this period the industry would still have received assistance almost double that afforded the industry in the mid 1970s.

The Commission considered that these proposed changes to the structure of tariff assistance for the industry would be manageable. The rate of change in tariff assistance was relatively small, provisions of the RAS are available to provide adjustment and welfare assistance, and in the event of significant falls in world prices the industry would have recourse to the TAA and anti-dumping provisions (see Appendix 8).

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At the draft report hearing, witnesses representing the industry considered that the form of assistance proposed would leave the industry exposed and vulnerable to changes in world prices. The ACGF suggested two variations to the Commissions proposal - a modified variable tariff and a sliding scale duty. The modified variable tariff arrangement involved a specific

tariff of $0.95 per kg TSS reducing by $0.05 per kg per year over five years and an additional duty equal to the amount by which the vfd of imports fell below $1.60 per kg TSS. This suggestion is equivalent to

increasing the existing variable tariff to $2.55 per kg TSS reducing to $2.30 per kg TSS after five years. The sliding scale duty suggested was $1.70 less 50 per cent vfd. In proposing a sliding scale duty the ACGF

referred to the sliding scale duty arrangement currently applying to dry ginger products. However, in this instance the duty operates only in the event of a significant fall in world prices and it was not intended, nor anticipated, that the duty would provide direct assistance to the industry in most years.^

In requesting these changes, the ACGF stated that existing arrangements for affording short term assistance such as by way of a TAA inquiry and anti­ dumping provisions were likely to be too slow to come into effect to moderate disruption that would arise as a result of downward movements in world prices. For this reason assistance by way of a floor price or underwriting arrangement was considered justified.

In their view such arrangements were consistent with government policies. However, this interpretation ignores two important elements. First, government has clearly indicated that industries are expected to adjust to longer term changes in their operating environment and further that all

industries should be required to absorb some fluctuations in their competitive environment without government assistance. Second, in discussing price underwriting arrangements for a variety of rural industries, most of which are 'low cost', the government has made it clear

that such arrangements are intended to protect producers against unexpected and sharp falls in returns without masking underlying longer term market trends. While the operation of such arrangements have varied between products it is clear that the government intends that they should not

provide high ongoing levels of assistance to the industries affected by them.4

Where floor price or underwriting arrangements apply to agricultural products they are substantially different in nature from that proposed by the ACGF. They are designed to operate only occasionally when prices fall to 'distress' levels and generally move in accordance with world prices so

that if low prices persist, assistance automatically declines. Further, the industries to which such underwriting arrangements apply generally have low levels of assistance relative to the orange juice industry.

3 IAC, Ginger and Ginger Products, Report no. 265, AGPS, Canberra, June 1981 . 4 See, for example; Department of Primary Industry, 'Stabilisation Scheme for Sultanas', Media Release, 81/138, 24 September 1981 and Speech by

the Minister for Primary Industry at the official opening of the Annual Conference of the Australian Canning Fruitgrowers Association, Renmark, South Australia, November 1981.

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An examination of the vfd plus duty associated with different vfd of imports over the range $0.80 per kg TSS to $2.00 per kg TSS, as depicted in Figure 5.1, reveals that the modified variable tariff arrangment suggested by ACOF would provide insulation from changes in the vfd of imports in a manner comparable to the existing variable tariff. While the sliding scale duty proposal would expose the industry to such changes the degree of buffering is clearly considerable. These features of the ACGF proposals are also apparent in Table 5-1 where estimated changes in grower returns

associated with changes in the vfd of imports are set out.

Weither of the proposals put forward by the ACGF has much in common with other underwriting arrangements. The proposed arrangements would afford the industry a high level of assistance, insultate the industry from price fluctuations and mask longer term price trends. The level of

1 underpinning' in the two requests would have operated continuously for price ranges experienced in recent years. A further weakness in the proposed arrangements is the failure to incorporate a 'price-tracking' variable such as the BAB suggested for the variable tariff. However, as discussed earlier, to develop such an underwriting arrangement would inevitably result in a complex and cumbersome tariff structure.

The Commission considers that evidence presented at the draft report hearing does not justify either the continuation of the present variable tariff arrangement or the introduction of the alternatives proposed by the ACGF. It considers that for the longer term there is no justification for a

floor price mechanism to be introduced for orange and tangerine juices. As noted above, the draft recommendations would result in a reduction in assistance but the level of assistance would still be high. The specific rate component would provide some buffering. However, the Commission recognises that a sudden and substantial fall in world prices could add considerably to the adjustment pressures implied by its draft report proposals and further, that such an outcome could involve undue disruption during the ensuing five year period.

The Commission will therefore propose a separate provision in the tariff for the next five years to operate as a safeguard at times when world prices are at 'distress' levels. It will recommend that in addition to the composite tariff, additional duty be payable, that duty being the amount by which the vfd of imports falls below $1.00 per kg TSS. This would provide the industry with a 'floor price' of about $650 per tonne of 65° brix concentrate which, with the composite duty would mean that ldp prices at the start of the period would be underpinned at about $2.50 per kg TSS.^ The proposed underpinning arrangement differs in a fundamental sense from the existing variable tariff in that it is only expected to operate when import prices fall to relatively low levels. It is not intended to insulate the industry from 'normal' price variations. The operation of this additional element is also intended to provide the industry with an environment within which adjustment can take place in a manageable way as the level of assistance is gradually reduced over the next five years.

As indicated in Figure 5.1, the recommended tariff structure would provide assistance of an underwriting type at world prices of $1.00 per kg TSS or less. In contrast, the other tariff structures provide a significant buffering element over the entire range in vfd of imports. This difference between the tariff structures is also reflected in Table 5.1. 5

5 The landed duty paid price of imports consists of the vfd of imports plus any duty applicable at that value together with freight and other importing costs.

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FIGURE 5.1 : THE RELATIONSHIP BETWEEN VALUE FOR DUTY OF IMPORTS AND VALUE FOR DUTY PLUS DUTY UNDER ALTERNATIVE TARIFF PROPOSALS . X

2 . 6 0 -

Value for duty plus duty-$ per kg TSS

Existing Variable Tariff

ACGF - Modified Variable Tariff

ACGF - Sliding Scale Duty

IAC - Composite Duty plus Variable Tariff

Start Rate

Review Rate

.80 1.00 1.20 1 . 4 0 1.60 1.80 2.00 1

Value for duty-$ per kg TSS

Average adjusted vfd since inception of variable tariff arrangement.

a These estimated changes in grower returns are suggestive only. Care should be exercised in interpreting their implications for actual grower returns, as they are based on the assumption that changes in the vfd of imports are fully reflected in grower returns (ie there are no implications for the returns for the processing and converting sectors). Further, they make no allowance for adjustment by growers to changes in orange returns. b Changes in grower returns were derived by adding to the vfd (expressed in $ per kg TSS) of imports,the duty associated with the relevant tariff proposal

together with an allowance for freight and landing charges of $0.48 per kg TSS. The resulting figure represented the ldp price of imports expressed as $ per kg TSS. This figure was then divided by 9.6 to change the units of the ldp price from $ per kg TSS to cents per litre single strength equivalent. The resulting ldp price was then multiplied by 455 (the average number of litres obtained from a locally processed tonne of oranges) to obtain the gross return equivalent in terms of a tonne of processed oranges. An amount of $47 was then subtracted to make allowance for the estimated average cost of

processing a tonne of oranges. The change in grower return was then derived by comparing this figure with that obtained under the existing variable tariff arrangement for the relevant vfd of imports, e Average adjusted vfd since inception of variable tariff arrangement. d Existing Variable Tariff - Duty equal to $2.40 per kg TSS less vfd where vfd is less than $2.40 per kg TSS. e Mod it ied Variable Tariff - Composite duty made up of $0.95 per kg TSS plus variable tariff equal to $1.00 per kg TSS less vfd where vfd is less than $1.60 per kg TSS t Modified Variable Tariff - As above, except that the specific rate is equal to $0.70 per kg TSS. g Sliding Scale Duty - Specific rate of $1.70 per kg TSS less 50 per cent of vfd.

h Sliding Scale Duty - As above, except that specific rate is equal to $1.45 per kg TSS. i Composite Duty plus Variable Tariff - Specific rate of $0.75 per kg TSS plus 10 per cent vfd and 100 per cent by which vfd is less than $1.00 per kg TSS. j Composite Duty plus Variable Tariff - As above, except that specific rate is equal to $0.50 per kg TSS. k Grower return equivalent to that applying under the variable tariff arrangement.

SOURCE: 1 AC estimates.

Currently, a small margin of preference is afforded imports from developing countries (which include Brazil) when the vfd is in excess of $2.40 per kg TSS. The objective of developing country preferences is to provide a competitive advantage to developing countries when competing against third

countries on the Australian market. As Brazil is the dominant supplier of imports, the Commission considers that affording a margin of preference to Brazil on the goods under reference is not justified.

5·3·2 Non-tariff involvement

There are a number of forms of intervention, other than tariff assistance, which influence the structure and efficiency of the orange juice industry. One of these, the sales tax exemption, has the potential to afford considerable assistance to the industry and influence marketing decisions as well as the structure of the processing/converting sector. The FISCC and statutory marketing boards tend to influence both prices received and

the quantity of oranges supplied to fresh and processing outlets, the distribution of returns between processors and growers and the distribution of returns among growers. Controls over various aspects of land use and

irrigation affect the adjustment options available to growers. Adjustment assistance available under the provisions of the BAS may enable marginal farms to improve their efficiency in orange production or alternatively to

shift to more profitable activities, including off-farm activities. Most of these forms of intervention were discussed in Chapters 3 and 4 ·

As the sales tax exemption applying to fruit juices discriminates against imports it is in effect a local content scheme. Thus it has the potential to provide considerable assistance to orange juice production. This form of assistance is indirect or hidden; and the level of assistance it affords and its effects are obscure. Other than assistance effects, it has the potential to influence decisions by processors and convertors,

with respect to stockholding policies and the form in which juice is sold (ie pure juice and fruit juice drinks).

The Commission recognises that the question of what products or group of products should be exempt from sales tax raises matters of wider concern than can be covered in this inquiry. However, the Commission considers that it is appropriate that any assistance against imports of the fruit juices under reference should be afforded directly through the tariff and not indirectly through discriminatory use of a sales tax exemption.

The assistance provided by the discriminatory exemption is inherently unstable as moderate changes to production, consumption or world prices could result in significant changes in the level of assistance provided to the industry (see Appendix 7). This is not conducive to efficient resource use in general and increases the uncertainty facing growers and processors

in making investment decisions or budgeting.

In its draft report, the Commission stated that it was of the view that the discriminatory nature (ie local content provision) of the exemption should be terminated. The Commission sought comment from witnesses relating to its assessment of the effects of this discriminatory element of the

exemption. Witnesses were also invited to indicate whether there were any reasons why the Commission should not recommend termination of this discriminatory element of the exemption for the fruit juice products under

reference.

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Evidence presented at the draft report hearing by the AGIO suggested that an assessment of the assistance provided by the discriminatory sales tax exemption could be undertaken using the difference between the Idp price and domestic selling price of orange juice as a reference point. According to the AGIO this difference was currently 5 to 6 cents per litre single strength of juice. It was acknowledged that the actual assistance provided

by the local content provision associated with the exemption would probably represent a major part of this difference although the actual extent of assistance would be influenced by other factors such as; quality and local advantage. The AGIO noted that the extent of assistance provided by the discrimination against imports would tend to vary between years.

The ACIC also suggested that removal of the discriminatory element of the sales tax exemption for orange juice and not other juices would discriminate against orange juice. The Commission noted this possibility in its draft report. However, an examination of levels of local consumption and imports for other fruit juices suggests that for most, if not all, other juices, the proportion of imports relative to local demand is such that the discriminatory exemption is most unlikely to be currently affording assistance to these juices. Further, the production of orange juice receives substantially higher levels of tariff assistance than the

production of other juices. Consequently, it seems unlikely that the removal of the discriminatory element of the sales tax exemption in relation to orange juice would place production of orange juice at a disadvantage relative to other juices.

The Commission is still of the view that the local content provision associated with the sales tax exemption applying to orange juice should be removed. However, the Commission considers that a more detailed examination of the assistance afforded through the discrimination in the exemption against imports is required.

As the Commission is recommending a change in the form of tariff assistance combined with a reduction to the level of such assistance, the simultaneous termination of the discriminatory element of the exemption for orange juice could impose unmanageable adjustment pressures upon the industry due to the uncertainty associated with the existing and possible future effects of the exemption. For these reasons, the Commission does not propose at this stage to recommend that the exemption as it applies to orange juice be modified. Nevertheless, the Commission considers it desirable that this form of assistance to orange juice should be reviewed as part of a wider examination of sales tax measures which discriminate between local and imported goods.

The FISCC minimum pricing arrangements have the potential to affect the distribution of assistance between growers and processors provided by way of tariff assistance against imports. If FISCC prices are high compared with the prices which would have prevailed for oranges (in the absence of such minimum pricing arrangements) growers would receive a large proportion of the assistance provided by the variable tariff arrangement. However, 6

6 The Commission acknowledges that the relative position of orange juice would be affected by other factors including possible differences in the sensitivity of fruit juice production to changes in juice prices and differences in the sensitivity of fruit juice consumption to changes in final product prices arising from changes to assistance afforded to orange juice against imports.

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since processors have paid a price premium above FISCC prices for oranges sent for processing in recent years, FISCC prices have been less important in determining the distribution of assistance between growers and processors. If orange prices are set too high they will affect the

competitiveness of local processors. While this appears to have occurred in some years during the 1970s, it would appear that the high tariff assistance provided under the variable tariff arrrangement has not been fully reflected in higher FISCC prices.

The amount by which minimum prices can be increased is dependent on the extent to which assistance provided by the variable tariff enables processors to pay higher prices for oranges. With an altered form or reduced level of tariff assistance, minimum prices determined by FISCC could become a significant determinant of the competiveness of processors.

Thus, in considering appropriate longer term forms and levels of tariff assistance, it is also necessary to examine the role of FISCC in setting minimum prices for oranges.

The minimum price arrangements and other prescribed conditions associated with FISCC have tended to institutionalise the industry's approach to fruit price formation and conditions of payment. These arrangements have tended to limit the incentive for growers and processors to develop forms of

payment which differentiate between growers and regions on the basis of their efficiency in producing oranges with attributes appropriate to the different markets. This issue was discussed in section 4·3·

Although FISCC has stated that factors other than costs of production are considered in determining minimum prices, it appears that the existing arrangements have directed the attention of growers to costs of production as an appropriate basis for determining prices for oranges. In consequence of this, there has been a tendency for growers to give insufficient attention to the role of other market conditions in the determination of prices. Requests by witnesses representing growers, indicate that in general growers consider that assistance against imports of orange juice should be determined so as to support the maintenance of real FISCC prices. The effect of this institutionally based nexus between price formation for oranges and protection against imports has been to remove the incentive for

the development of a more competitive local industry.

In view of the increasing importance of processing as an outlet for oranges, the Commission considers that the advantages of the present minimum pricing arrangement, as perceived by the industry, do not outweigh the disadvantages. Accordingly, the Commission proposes to recommend that FISCC pricing arrangements no longer apply to oranges delivered for

processing. The Commission notes that a preliminary discussion paper prepared by the Department of Primary Industry has concluded that 'there appears to be little reason why the domestic sugar rebate should not be terminated at the earliest opportunity'. An additional preliminary

conclusion related to pricing arrangements for fruit products. The Department observed that 'any pricing arrangement should desirably provide for price differentials between regions and over a season, so as to reflect market forces' J 7

7 Department of Primary Industry, 'Review of the Domestic Sugar Rebate System', Discussion Paper, Canberra, May 1982.

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Marketing arrangements operating at a State and regional level may have effects similar to those of FISCC. These arrangements have the potential to alter quantities of oranges delivered to the fresh and processed

markets, the manner in which growers market their fruit to these markets, the returns to growers and thereby the cost of oranges sent for processing. Irrespective of whether these marketing arrangements can be justified, in terms of say orderly marketing objectives, they have the potential to distort marketing decisions and impede efficient adjustment to changing market conditions. If the prices, conditions of payment and practices

relating to the allocation of oranges to the different markets for oranges, under these arrangments, were flexible enough to accommmodate changing market conditions, it is probable that the distorting effects would be

minor. However, if the arrangements operate without adequate regard to the factors influencing the fresh and processed markets and the availability of competing products such as other fresh fruit and imports of concentrated orange juice, they will adversely affect the structure of the local industry.

The ability of the industry to adjust to changing economic conditions is also affected by State regulations relating to land use, land tenure and water use. Restrictions on the size of farms, together with policies relating to the pricing and distribution of water are likely to have had a considerable effect on the size distribution of farms and pattern of land use. This is also an issue in the Commission’s current inquiry into

Canning Fruit.

The RAS has the potential to assist some marginal farmers to improve their economic performance or to leave farming and to provide welfare assistance to certain farmers. In this inquiry and several previous inquiries, problems associated with the use of the Scheme, by horticultural industries, have been raised by witnesses.

It has been argued that the type of assistance afforded under the RAS is of limited use in facilitating adjustment in horticultural industries. Reasons advanced to explain the limited use made of RAS by these industries include: uncertainty about the future prospects of the industries involved attributable in part to the lack of suitable alternatives on horticultural farms, the reluctance of growers to borrow or to become dependent on external sources of finance, difficulty in meeting eligibility criteria for RAS assistance and the stigma associated with the use of the RAS. Some of these factors would apply to all farmers while others may be specific to particular farmers and/or industries. However, the relative importance of these and other factors influencing the utilisation of RAS by horticultural industries (including the citrus industry) has not been established.

8 The adequacy of the RAS in the context of adjustment by horticultural industries has been raised in the following Commission inquiries: IAC, Rural Reconstruction, AGPS, January 1976; IAC,Fruit Growing Reconstruction, Part A , AGPS, January 1976; IAC, Apples and Pears, Part _B, AGPS, January 1976; IAC, Dried Vine Fruit, Part C , AGPS, January

1976; IAC, South Australain Riverland, Part D , AGPS, January 1976; IAC, The Australian Citrus Industry, AGPS, June 1978; and IAC, Grapes and Wine, AGPS, July 1979.

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In view of the comments received relating to the effectiveness of RAS, the Commission is of the view that consideration could be given to reviewing the suitability of the Scheme for horticultural industries. However, such a review would more suitably be undertaken as part of an overall review of RAS. The case for undertaking such a review would of course tend to be

strengthened if the government accepts the Commission's recommendations relating to tariff assistance for the goods under reference. This can be attributed to the likely increase in the relevance of RAS in facilitating adjustment by orange growing farms at the margin of economic viability. Consideration may also have to be given to the level of funding accorded to RAS.

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6. STATUTORY REPORTING REQUIREMENTS

Section 2 3 A of the Industries Assistance Commission Act requires the Commission to report explicitly on a number of matters when recommending assistance to an industry. The evidence available to the Commission to respond to these requirements was limited. The reporting requirements

together with the Commission's responses are set out below.

(a) The Commission shall report on the level of assistance required to ensure that the level of activity and employment in the industry is not less than that which existed at the time the reference was made.

The industry currently receives a high and very protective form of assistance through the variable tariff arrangement. As noted in Chapter 2, while there has been a continuing decline in the number of farms growing oranges throughout the 1970s, the number of trees and volume of oranges produced has shown a noticeable expansion since the introduction of the variable tariff in April 1979· The capacity of the processing sector has also expanded. Further declines in the number of growers and an increase in the average size of farms producing oranges seem likely to continue even if there were no changes to the level of assistance provided in response to automonous adjustments in the growing sector.

The level of activity and employment in the growing and processing sectors is affected by a number of factors in addition to the level of assistance available. The biennial bearing pattern of oranges and climatic conditions influence activity in these sectors of the industry. For example, the volume of oranges produced and the quantity made available for processing during the 1982 season is expected to be below that of the previous season due to adverse weather conditions.

The growth in domestic demand for orange juice since the early 1970s has been about 12.5 per cent per annum even though protection against imports has enabled domestic prices to be higher than they otherwise would have been. Locally produced orange juice has not met this demand thereby necessitating a significant although variable level of imports. Imports of orange juice will continue to be required, at varying levels, to satisfy the anticipated growth in domestic demand for orange juice.

Under the present level of assistance both the growing and processing sectors of the industry have expanded. Activity and employment in the converting sector of the industry are dependent on the overall size of the

market for orange juice rather than the proportion supplied locally. Hence, the level of assistance required to maintain the level of activity and employment in the industry at the time the reference was made (February 1981) would be below that afforded, on average, to industry over the last three years. However, for the reasons mentioned earlier it is not practicable to estimate this level.

(b) If the Commission recommends the giving to the industry of assistance that would result in a level of assistance less than the level referred to in (a) it shall state its reasons for not recommending assistance that would avoid that result.

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In the Commissions view the existing structure of assistance is inconsistent with the policy guidelines relating to industry policies discussed in Chapter 5.

In developing its proposals for longer term assistance to the industry, the Commission has been concerned that assistance measures should not be directed at defending an industry structure existing at a particular point in time but rather at encouraging the more efficient use of resources. In addition, to achieve this objective, the Commission has been concerned that undue disruption be avoided.

The Commission noted in Chapter 3, that orange growing is a high cost activity which has received a significant increase in assistance during the 1970s. The assistance provided by the variable tariff is higher and more protective than that conferred on other activities undertaken by farms growing oranges. The Commission's assistance proposals are directed at

reducing the disparities in assistance between orange growing and other activities so as to improve the allocation of resources between these activities. The present structure of assistance tends to distort production and investment decisions by isolating the industry from changes in its competitive environment. The maintenance of such an assistance

structure would, in the Commission's view, tend to distort the subsequent development of the industry and encourage expectations of further increases in assistance.

(c) The Commission shall report whether, in the view of the Commission, the structure of the industry can be improved and, if so, the manner in which, and the measures by which, the improvement can be achieved and the consequence of such improvement.

In Chapter 5, the Commission discussed the effects of the current variable tariff assistance as well as a number of forms of non-tariff interventions which directly and indirectly influence the structure and efficiency of the industry. The main non-tariff forms of involvement discussed by the

Commission were the discriminatory sales tax exemption, the operations of FISCC, statutory marketing boards, State regulations relating to land and water use and the RAS.

In discussing the variable tariff arrangement in section 5-3-1, the Commission indicated that asistance made available by this arrangement exerted an adverse influence on the structure and efficiency of the industry. A decrease in the level of assistance should ensure that the subsequent development of the industry is related to real market opportunities and contribute to improved inter-industry resource use. Further, the alteration to the level and form of assistance should discourage investment dependent on the maintenance of the existing

structure of assistance. Under the Commission's proposals the industry would be encouraged to adapt to its competitive environment.

The Commission's proposed tariff structure is also designed to prevent the large scale loss of resources beyond the level required to provide a basis for an efficient industry, which could otherwise occur in the event of sudden and substantial falls in world prices.

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Orange juice beverages are exempt from sales tax provided at least 25 per cent, by volume, of these beverages is of local origin. As this local content provision discriminates against imports it has the potential to afford considerable assistance to the industry. This form of assistance is indirect and the level of assistance it provides together with its effects

are obscure. The variability of assistance provided by the discriminatory exemption together with the characteristics of the exemption noted above, suggest that such a form of assistance is not conducive to efficient resource use. Moreover, as noted in section 4.2, the discriminatory form of the sales tax exemption would have influenced the stockholding, production and marketing decisions of processors and convertors by encouraging them to modify their production practices so as to use local juice and thereby qualify for the exemption. The Commission considers that a more efficient industry structure would evolve if production decisions

were based solely on commercial considerations rather than seeking to meet conditions required to qualify for the exemption.

While the Commission does not propose to recommend that the local content provision as it currently applies to the juices under reference be modified at this stage, it considers that this provision should be reviewed as part of a wider examination of sales tax measures which discriminate between local and imported goods. The rationale for this approach is set out in section 5·3·2.

The discontinuation of FISCC minimum pricing arrangements for oranges delivered for processing would tend to encourage the development of a more market oriented approach to fruit payment. One effect of such a change is likely to be more flexible pricing arrangements within the industry with

terms and conditions of payment reflecting more closely the desirable attributes of fruit sold on the fresh and processed markets. The production of oranges within the growing sector would tend in consequence to become more responsive to the requirements of these markets. In the case of processing, the production of higher yielding oranges would be encouraged. The competitiveness of the processing sector in producing concentrated orange juice would be improved by such a development in the growing sector. The Commission also observed that the operation of various marketing boards may have effects similar to those of FISCC.

In addition to these institutionally based forms of intervention, there are State regulations pertaining to land use and water use in irrigation districts. The Commission considers it is probable that these restrictions on the size of farms and policies relating to the pricing and distribution of irrigation water have resulted in a different size distribution of farms and pattern of land use than may otherwise have obtained. In some cases, it is probable that these forms of intervention have also influenced the adjustment options available to citrus farms.

A further influence on the adjustment process within the growing sector of the industry is the assistance provisions of the BAS. The provisions of this Scheme have the potential to assist marginal farms to improve their economic performance or alternatively to facilitate adjustment out of orange growing. The effectiveness of some of these provisions may be impaired by State regulations relating to land and water use. The Commission is of the view that consideration should be given to reviewing the effectiveness of the BAS for horticultural industries. As noted in section 5·3·2, the Commission considers that such a review would more suitably be undertaken as part of an overall review of BAS.

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(d) If the Commission recommends the giving, continuance or withdrawal of assistance to an industry, it shall report on the probable consequences of the taking of measures to given effect to those recommendations,

including:

(i) economic and social consequences; and

(ii) employment consequences, both generally and in particular regions.

The evidence provided by industry witnesses tended to be very general in relation to the economic, social and employment consequences of altering the existing assistance arrangements. This also limited the capacity of the Commission to comment in detail on these matters.

The Commission's tariff assistance recommendations incorporate an element of phasing designed to expose the industry gradually to a more market oriented assistance structure. The implied reduction in grower returns would initially be about $5 per tonne of oranges sent for processing. This would be followed by a decline of almost $1 2 per tonne over the staging period of 5 years. These estimates of the effects of changing the tariff structure have been derived assuming that world prices over the staging period broadly correspond to those which have applied on average since the variable tariff was introduced in April 1979· In addition, it has been assumed that landing costs for imports and processing costs remain unchanged during the 5 year period. Further, no allowance has been made

for adjustment undertaken by growers which could moderate the effects of a lower price for processing oranges on their returns (see Table 5.1 in Chapter 5)·

The implied reduction in grower returns would increase if world prices fall below this level. However, the tariff structure incorporates a variable tariff to moderate the effect if world prices move towards 'distress' levels. Although the Commission has been unable to quantify the precise

effects of its recommendations on activity and employment in the industry, it considers that any of the adverse effects would be cushioned by the graduated nature of the progressive reduction in assistance to the industry together with the underpinning assistance element incorporated into the overall tariff structure.

In developing the recommended tariff structure, the Commission took account of evidence submitted by the industry relating to the limited adjustment capacity of the growing sector in the short term and the economic, social and regional characteristics of the industry. For the reasons discussed in

section 4.1.1 the Commission considers that these aspects of the industry did not justify retention of the existing variable tariff. However, some of these features do influence the capacity of the industry to adjust and this has been taken into account in assessing the rate at which the present

level of assistance should be reduced.

The recommended change in tariff assistance to the industry would ensure that the industry was increasingly exposed to the effects of price changes on the world market. Alterations to non-tariff forms of intervention such as FISCC, discriminatory sales tax exemption and certain State government controls would be required to ensure that the full benefits from tariff reform are realised.

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Under the Commissions proposals, import competition would be likely to increase, requiring the industry to adjust. The economic and social consequences of these changes would be felt mostly by orange growers and to a lesser extent processors. Convertors would not be greatly affected as activity within this sector is dependent on the overall size of the market for orange juice rather than the proportion supplied domestically. The price reducing effects of the proposed changes in assistance could lead to

the expansion of this sector due to increased demand for orange juice with lower prices.

As discussed in Chapter 2 of this report, evidence submitted by the BAE indicated that there are considerable differences in the1economic performance of farms comprising the growing sector of the industry. This evidence suggests that most farms currently producing oranges are likely to be able to absorb the reductions in farm income and possible reductions in the capital value of their properties associated with the proposed changes to assistance. Some may find orange growing unprofitable. Inevitably, the social and employment consequences are likely to vary, depending on the competitiveness of farms in producing oranges, the relative importance of the processing and fresh orange markets, the scope for reducing costs or raising productivity and the availability of alternative activities.

The Commission acknowledges that, while adoption of its recommendations would benefit the community in general, they would have adverse economic effects on some individuals and in some regions. Nevertheless, it

considers that these effects would be manageable. Inevitably, any changes directed at improving the efficiency of resource use in the longer term will have adverse consequences for some. For those growers who face personal hardship as a result of implementation of these proposals there are welfare provisions within the HAS over and above those which are generally available. Growers who experience difficulty in adjusting to changes in assistance may avail themselves of other provisions of HAS to assist them in adjusting their farm activities.

(e) The Commission shall report on any other matter requested by the Minister.

As discussed in section 1.1, in forwarding the reference on orange and tangerine juice, the Minister requested that, if during the course of its inquiry, the Commission found evidence of significant duty evasion under the present assistance arrangements and considered that short term action should be taken to correct the situation pending its report, it provide the Government with an interim report on the matter (see also Appendix 1).

The Commission did not find evidence of duty evasion. Consequently, an interim report was not provided. However, evidence did suggest that the variable tariff arrangement encouraged practices designed to avoid duty. Imports of orange juice cleared for home consumption have been entering Australia at a recorded vfd of approximately $2.40 per kg TSS, which is well above the prices at which orange juice has been traded

internationally. This divergence in import prices was discussed in section 3 -1 -

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As noted in Chapter 4, most witnesses seeking retention of the variable tariff also requested that the basis of calculating duty be changed from the present concept of vfd to fob price as defined in Section 8 of the Customs Tariff Act 1966. This request appears to have been directed at reducing the scope for duty avoidance under the variable tariff. For the reasons outlined in section 5·2, the Commission is not satisfied that such a change would be effective in reducing duty avoidance.

Under the Commission's recommended tariff structure the incentive for importers to engage in practices designed to reduce their liability for duty would largely be removed. In contrast to the existing variable tariff arrangement, importers would be encouraged to obtain orange juice concentrate on competitive terms with associated benefits to consumers of this product.

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7. RECOMMENDATIONS

The Industries Assistance Commission recommends that:

1. The existing tariff arrangements applying to juices falling within paragraph 20.07.21 of the Customs Tariff he terminated.

2. On implementation of the first recommendation, assistance for juices falling within paragraph 20.07.21 of the Customs Tariff be provided for a period of five years by:

a. a composite rate of duty comprising an ad valorem rate of 10 per cent and a specific rate of $0.75 per kilogram Total Soluble Solids, the specific rate to be reduced after the first year by $0.05 per kilogram Total Soluble

Solids per year; and

b. an additional duty equal to the amount by which the value for duty is less than $1.00 per kilogram Total Soluble Solids.

5. Assistance to the industry be reviewed by the Commission before the end of the five year period.

4. Minimum pricing determinations by the Fruit Industry Sugar Concession Committee for oranges sent for processing be discontinued.

Attention is drawn to the Commission's comments on:

. Duty evasion (section 5.1, section 5*2 and point (e) in Chapter 6);

. Sales tax exemption (sections 3*2, 4.2, 5.3 and Appendix 7);

. Developing Country Preferences (section 5.3.1);

. Rural Adjustment Scheme (section 5·3·2);

. Statutory marketing boards or authorities (section 3*3 and 5.3.2); and

. State regulations relating to land use, land tenure and water use (section 5-3.2).

G.F. JOHNSON ........................... Commissioner

C. DYSON ............................... Associate Commissioner

CANBERRA, AUSTRALIAN CAPITAL TERRITORY ....................... 30 June 1982

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APPENDIX 1

COPY OF MINISTER'S LETTER AND TERMS OF REFERENCE

Minister for Business and Consumer Affairs, Parliament House, CANBERRA. A.C.T. 2600

13 February 1981

Dear Mr McKinnon,

The attached reference requests the Industries Assistance Commission to review the assistance arrangements for orange juice and provide a report by 30 June 1982.

I would also request that, if during the course of its inquiry, the Commission finds evidence of significant duty evasion under the present assistance arrangements and considers that short term action should be taken to correct the situation pending provision of its report, it provide the Government with an interim report on the matter.

Yours sincerely,

JOHN MOORE

Mr W.A. McKinnon, Chairman, Industries Assistance Commission, P.0. Box 80, BELCONNEN. A.C.T. 2616

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I, JOHN COLINTON MOORE, Minister for Business and Consumer Affairs, in pursuance of my powers under Section 23 of the Industries Assistance Commission Act 1973» hereby request the Industries Assistance Commission to,

(i) review the operation of the variable tariff arrangements applying to juices of a kind falling within paragraph 20.07.21 in Schedule 1 to the Customs Tariff Act 1966, as proposed to be altered, and

(ii) inquire and report by 30 June 1982 on whether the existing assistance arrangements applying to the abovementioned goods should be varied, and if so, the nature and extent of any variations.

MINISTER FOR BUSINESS AND CONSUMER AFFAIRS

13 February 1981

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APPENDIX 2

TARIFF PROVISIONS

CUSTOM TARIFF

Rates of Duty

Item Goods General Preferential

20.07 FRUIT JUICES (INCLUDING GRAPE MUST) AND VEGETABLE JUICES, WHETHER OR NOT CONTAINING ADDED SUGAR, BUT UNFERMENTED AND NOT CONTAINING SPIRIT:

20.07.1 - Lime juice, unsweetened Not Under Reference

20.07.2 - Citrus fruit juices, NSA:

CONCENTRATES: See Concentrates order

20.07.21 - - Orange and tangerine (including Free, Free,

mandarin) juices and the juices and $"D" and $"D" of the hybrids of oranges and per kg per kg

tangerines (including mandarins) TSS; TSS; or, if or, if

no duty no duty

is appli- is appli-

$"D" is the amount by which the cable - cable -

value for duty per kg Total Free, Free,

Soluble Solids is less than and 2 % and 2%

$2.40 per kg TSS.

DC:Free PNG:Free and $"D" per kg

TSS

NZ:Free

CONCENTRATES ORDER

(Section 35 of the Customs Tariff)

CONCENTRATES ORDER NO. 1 (1974)

Goods included in the following class of concentrates, that is to say, concentrates of fruit juice, shall be treated as if they were such quantity of the fruit juice of which they are a concentrate as is equal to the quantity of fruit juice into which they could be converted.

For the purposes of that Order, the quantity of goods into which goods consisting of a concentrate of fruit juice can be converted shall be determined by the Collector having regard to the degree of concentration of the concentrate.

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APPENDIX 3

LIST OF WITNESSES

Name of witness and capacity in Name of organisation or which appearing company represented Address

Kenneth Henry White, AU Services

director Tony Lammond, consultant

Henry Edward Walker, Australian Citrus Growers' Federation

president Hugh Cope, general secretary Otto Frederick Walpole,

economic research officer

Agis Costa Korallis, Australian Citrus Industry Council

president Neville Cunningham, vice president Hugh Cope,

secretary

Robert Edison Bain, Bureau of Agricultural Economics

assistant director John Nelson Girdlestone, officer-in-charge, horticultural crops production research section

William Joseph Fitzpatrick, Department of Business and Consumer Affairs chief inspector, investigation sub-section, appraisements/ revenue branch

Allan Edward Glen, Cottee's General Foods Ltd

corporate affairs director

Harold Spencer Cottee, Harold W. Cottee Pty Ltd

chairman

C/- PO Box 179, Civic Square, Australian Capital Territory

Room 107, 10th Floor, 118 King William Street, Adelaide, South Australia

Room 107, 10th Floor, 118 King William Street, Adelaide, South Australia

P.0. Box 1563, Canberra City, Australian Capital Territory

Barton, Australian Capital Territory

7-9 Merriwa Street, Gordon, New South Wales

c/- Harold S. Cottee, 448 Old Northern Road, Glenhaven, N e w South Wales

Name of witness and capacity in Name of organisation or which appearing company represented Address

John Barry Forsyth, principal horticulturist Cyril Bernard James Catt, senior economist

Geoffrey Neil Thomas, chief agricultural economist Peter Terence Gallasch, senior research officer - citrus Ann Jeanette Sunning,

senior agricultural economist

Robert Michael Geoffrey Long industrial officer

Victor Fuchs, director; general manager John Arthur Ellis, consultant

John Patrick Cosgrave, representative

Hugh Cope, for Dudley Marrows, grower

Michael McNamara Lucey, general manager Ian Harold Griffiths, citrus administration manager

Ronald Albert Stewart, president; grower William Edward McMahon, secretary; grower

Department of Agriculture, New South Wales

Department of Agriculture, South Australia for the South Australian Government

Food Preservers' Union of Australia

Keith Harris & Co Ltd

Hattah Orchards

Mildura Co-operative Fruit Company Limited

New South Wales Free Growers' Citrus Council and the Hills, Hawkesbury, Camden Citrus Branch

McKell Building, Rawson Place, Sydney, New South Wales East Maitland, New South Wales

Box 1671, GPO., Adelaide, South Australia

Box 4929, Melbourne, Victoria

7 Sefton Road, Thornleigh, New South Wales

Colignan, Victoria

River Road, Buronga, New South Wales

PO Box 104, Mildura, Victoria

Drift Road, Richmond, New South Wales

Name of witness and capacity in which appearing Name of organisation or company represented Address

Brian Edward McClory, general manager - River Growers Co-operative Limited

Tackle Spanos, grower

South Australian Co-operative Packers Association

Group of Concerned Citrus Growers

PO Box 383, Loxton, South Australia

8 Kingfisher Court, Mildura, Victoria

Dudley Marrows, Citrus Section, Fruits Group 24-28 Collins Street, Melbourne,

member - citrus section Victorian Farmers <& Graziers Association Victoria

Ian Robert Mansell, member - citrus section John Bateson Faulkner, representative

APPENDIX 4

REQUESTS AND SUGGESTIONS

Organisation or Company Represented Requests and Suggestions

AU Services Preliminary Hearing

If the variable tariff system was to be continued for a further five years, and then made subject to a further IAC review to assess the restructuring which had occurred, the current protective needs of the industry would be met and the Commission would progressively achieve a more acceptable balance of protection accorded the citrus and other fruit industries in Australia.

. Short term action is warranted to ensure that the level of protection intended under the variable tariff arrangement is maintained;

. all possible action should be taken to stop any duty evasion practices; and

. if it is not possible to adequately police the present variable tariff arrangement consideration may need to be given to establishing a specific rate of tariff per kg TSS which is based on the average monthly fob price for orange concentrate ex Santos, Brazil, as determined by the Bank of of Brazil/CACEX, and is then varied as that fob price is changed.

Preliminary Hearing . The existing form of tariff assistance - the variable tariff - be maintained on orange and tangerine juices;

. the level of the 'threshold price' under the variable tariff be adjusted upwards to take account of changes in grower/processor economics since 1979 with a view to restoring the local industry's relative competitive position and rate of return. (On this basis the variable tariff support price would need to be set at approximately $3-50 per kg TSS at the time of implementation of the Government's decision in 1982.);

Australian Citrus Growers' Federation Duty Evasion Hearing

Organisation or Company Represented Requests and Suggestions

Australian Citrus Growers' Federation - Cont'd . the level of price support be adjusted at two-yearly intervals thereafter to allow for the effects of inflation and to ensure that the relative competitive position was being maintained; and

. the basis of the variable tariff be altered from the present concept of the value for duty of the imported goods to 'fob price1 as defined in Section 8 of the Customs Tariff Act 1966.

Draft Report Hearing . The variable tariff arrangement be continued for a further three years with appropriate adjustment in the level of the threshold price to take into account the reduction in the effective level of protection being caused

by inflation;

. the continuation of minimum price determinations by FISCC for oranges sent for processing;

. the Commission should not proceed with any action in relation to the sales tax exemption;

. eligibility for RAS finance would need to be broadened if the HAS is to be considered as a form of assistance to citrus growers;

. funds available to the RAS would have to be increased substantially; and

. any review of the RAS which would make the scheme more accessible to citrus growers should be supported.

In the event that the Commission is still not prepared to recommend continuation of the variable tariff:

. that the composite tariff arrangement be modified so that it contains an underpinning mechanism; or

. a sliding scale tariff arrangement similar to that which has applied to ginger products be introduced.

Organisation or Company Represented Requests and Suggestions

Australian Citrus Industry Council Preliminary Hearing

. The variable tariff be retained;

. the tariff be reviewed upward annually to protect the industry from increased costs;

. it would be reasonable that the tariff review take account of movements in a price index such as the CPI;

. reclassification of goods presently under Section 154 of the Customs Act to Section 8 of the Customs Tariff Act 1966; and

. the socio economic impact on whole communities, rather than a specific assistance to the industry, should be taken into account.

Craft Report Hearing • The variable tariff arrangement be continued for a further term of between three to five years with some appropriate adjustment of the threshold price based on the CPI so that the real level of protection is maintained;

. the sales tax exemption as it now exists should be maintained; and

. the FISCC remain as the minimum price fixing body for citrus fruits.

Bureau of Agricultural Economics Preliminary Hearing

. An assistance package be developed in which the level of support is gradually reduced to a level commensurate with that received by other horticultural industries;

. this package should also be designed to ensure that a degree of price stability is provided to the domestic industry but that prices should move in accord with longer term trends in world markets; and

. assistance be phased down over an extended period to enable and encourage the industry to achieve productivity gains and longer term cost reductions or to adjust by diversion of some resources into other enterprises or off- farm pursuits.

Organisation or Company Represented Requests and Suggestions

Department of Business And Consumer Affairs

Cottee's General Foods Ltd

Harold W. Cottee Pty Ltd

Department of Agriculture, New South Wales

Duty Evasion Hearing . In a variable tariff mechanism the way is left open for any importer to avoid duty by paying additional funds to his supplier rather than as duty;

. there is no evidence that assistance has been undermined by the operation of the variable tariff;

. investigations have revealed no evidence of fraudulent evasion; and

• sales to Australia at prices higher than those paid on sales to other countries might indicate that duty has been avoided but this information would not, of itself, indicate evasion of duty.

Draft Report Hearing • The Commission should not make any recommendation which would in any way modify or prejudice the existing sales tax exemption applying to cordials containing 25 per cent Australian fruit juice.

Draft Report Hearing • The Australian Citrus Industry must be protected for a further period (of, say, three years) during which time it should prepare itself to compete against low cost imports. During this period there should be a full

reviewal of all assistance provided to the industry with the ultimate aim of arriving at a single basis of protection.

Preliminary Hearing . Continuation of the existing variable tariff arrangements for a further period of at least 3 years; and

. the rate of tariff to be regularly reviewed in order to reduce the effects of inflation negating its benefits, enabling further industry adjustment to take place.

Organisation or Company Represented Requests and Suggestions

Preliminary Hearing . The current level of assistance continue to be afforded the citrus industry;

. a mechanism of a variable tariff be retained;

. the period of assistance be extended beyond the three year term as operates at present; and

. the level of assistance be reviewed annually on the basis of factors established with all sectors of the industry.

Draft Report Hearing . An alternative, which may be preferable to a variable tariff, is an underwriting scheme.

Food Preservers' Union of Australia Preliminary Hearing

. A board should be set up consisting of growers, processors and unions concerned to regulate the amount of citrus concentrate imports permitted into Australia; and

. all imports should be restricted to an amount required to cover the period of shortage of supply in relation to the local product.

Keith Harris & Co. Ltd Duty Evasion Hearing

. Any change forthcoming from this segment of the inquiry should not prevent the subsequent implementation of a level of protection and the associated system as would provide the necessary long term assistance for the industry.

Department of Agriculture, South Australia for the South Australian Government

Keith Harris & Co. Ltd - Cont'd

Hattah Orchards

Preliminary Hearing . Support requests made hy the Australian Citrus Industry Council in relation to the variable tariff arrangement;

. it is essential for FISCC pricing and conditions attaching thereto, to continue; and

. current levels of sales tax exemption should continue.

Draft Report Hearing . Some reduction in protection is justified from the viewpoint of the general community, but any reduction should be progressively from the existing level.

Dudley Marrows

Mildura Co-operative Fruit Company Limited

New South Wales Free Growers' Citrus Council and the Hills, Hawkesbury, Camden Citrus Branch

Duty Evasion Hearing . A quantitative import restriction should be introduced whilst the position is being fully appraised.

Duty Evasion Hearing • Strongly support the concept of the variable tariff; and

. the current method of assessment on invoice value should be discontinued and replaced with an assessment based on the fob market value of the country of origin of the concentrate.

Duty Evasion Hearing . Support continuation of the variable tariff arrangement; and

. duty should be collected on the fob value of imported orange juice concentrate.

Preliminary Hearing . Continuation of the existing variable tariff system set to defend the FISCC minimum metropolitan price for processing Valencia oranges; and

. there should be no change in the status quo regarding the sales tax exemption on fruit juice drinks containing 25 per cent Australian juices.

Organisation or Company Represented Requests and Suggestions

New South Wales Free Growers' Citrus Council Draft Report Hearing and the Hills, Hawkesbury, Camden Citrus . Reiterated earlier requests and suggestions; and Branch - Cont'd . if at some time in the future it is found that there are trends within the

industry that could be proved to indicate the industry is overprotected, this could most satisfactorily be rectified by altering the level of assistance not the form.

Preliminary Hearing . Support the variable tariff with the addition of an in-built factor of indexation in line with CPI increases as being an appropriate mechanism for providing an intended level of long term assistance; and

. support the retention of the present marketing arrangements with modifications to allow for changes in consumer preferences.

Group of Concerned Citrus Growers Duty Evasion Hearing

. Immediate action is needed to ensure the variable tariff system operates so that importers of juice do in fact pay the threshold price for juice and will have to sell on the basis that juice really has cost them this price; and

. the stocks situation should be ascertained and if these are seriously large, urgent action should be taken to limit further imports until stocks are reduced.

South Australian Co-operative Packers Association

Organisation or Company Represented Requests and Suggestions

Citrus Section, Fruits Group, Victorian Duty Evasion Hearing Farmers & Graziers Association . A strong circumstantial case exists to suggest that the required duties

are not being paid; and

. for the period to the conclusion of the full scale IAC review of the industry a system of quantitative restriction of imports of citrus juices be implemented in a form which would permit the full uptake of Australian production for processing.

Draft Report Hearing . More consideration should be given to the value of the industry to the nation.

APPENDIX 5

STATISTICS

TABLE 5.1 : AVERAGE YIELD PER (kg) BEARING TREE : : 1963-64 TO 1980-81

Oranges

Navel Valencia Total Mandarins

1965-64 52.0 48.4 49.8 38.6

1964-65 62.2 59.2 60.1 42.9

1965-66 53.7 46.4 49.4 32.9

1966-67 53.9 57.9 56.2 41 .2

1967-68 49.0 51.4 50.6 41.2

1968-69 56.9 59.9 58.6 39.2

1969-70 50.6 53.2 52.1 41 .0

1970-71 63-4 72.5 68.8 40.9

1971-72 63.1 61.5 62.2 46.3

1972-73 67.4 80.6 75.2 45.7

1973-74 66.1 69.7 68.3 55.9

1974-75 75.1 80.0 77.9 53-2

1975-76 77.9 86.3 82.8 55-4

1976-77 73-4 74.1 73.6 65»6

1977-78 73-3 85.9 80.5 59.4

1978-79 81 .2 84.2 82.9 71 .8

1979-80 81 .8a 90.8a 87.2 na

1980-81 93-9a 89.1a 90.6 76.5

a Excludes Northern Territory, na Not available.

SOURCE: ABS and BAE.

91

TABLE 5.2 : DISTRIBUTION OF FARMS BY FARM CASH OPERATING SURPLUS : 1979-80 : AVERAGE PER FARM (Per cent)

New South Wales Victoria South Australia

Cash operating surplus MIA Sunraysia Sunraysia/ Robinvale Riverland All Regions

Under $5 000 4.0 7.0 58.9 10.2 26.9

$5 000 and under $15 000 26.4 17.3 2.8 22.3 15.2

$15 000 and under $25 000 30.6 19.3 8.1 21 .1 17.7

$25 000 and under $40 000 27.6 14.2 6.1 19.6 15.3

$40 000 and over 11.5 42.3 24.2 26.8 24.7

Total 100.0 100.0 100.0 100.0 100.0

SOURCE: BAE evidence.

92

TABLE 5.3 : FARM CASH OPERATING SURPLUS FOR VARIOUS HORTICULTURAL INDUSTRIES : 1979-80 TO 1981-82 : AVERAGE PER FARM ($)

Deciduous

Year Canning Fruit Apple and Pear Multi-purpose Grape Wine Grape Citrus

1979- 80 20 700 23 100 27 500 26 200 27 100

1980- 81 23 700 9 900 11 100 17 400 16 500

1981- 82P 5 000 300 14 700 18 100 15 400

p Projected

SOURCE: BAE evidence.

TABLE 5.4 : SELECTED CITRUS FARM CHARACTERISTICS BY QUARTILE OF FARM CASH OPERATING SURPLUS : 1979-80

Unit

First Quartile

Second Quartile

Third Quartile

Total planted orchard and vineyard area Area planted to oranges Proportion of orange area to

total orchard and vineyard area Orange area harvested Harvested production

- Navels - Valencias Yield per harvested hectare - Navels

- Valencias - Total Orange receipts - Fresh

- Processing - Total Total cash receipts Proportion of total receipts

from oranges Cash costs Cash operating surplus Total capital Total labour units Total farm receipts/total

cash costs Off-farm receipts Total farm receipts/ total labour units Total farm receipts/total

capital excluding land Total farm receipts/total capital including land Total capital excluding land

Land capital Proportion of total orange production

ha 12.5(9)

ha 7.2(8)

% 48 (7)

ha 6.0 (8)

tonnes 36 (23)

tonnes 68 (21 )

tonnes/ha 15.3 (15

tonnes/ha 19.0 (18

tonnes/ha 17.5 (17

$ $ $

man years

$

$/man years

$ $

1

4 996 (34) 6 724 (16) 11 720 (21J 29 087 (13)

21 14

40

31 052 , .

-1 965 (37 127 181 ( 7

354 (1 2

0

4 190ό9?ίίί

8 217 (14)

0.62(11 )

0.23(12

46 975 (10

80 206 (7

10

1 5.4( 6 8 . 2 ( 10

53 ( 9

7 .2( 9

46

133

22.7 (4 25.6 (8 24.8 (7

14 286 (17) 6 947 (25) 21 233 (13) 41 556 ( 6)

51 (13)

29 081 ( 7)

12 474 ( 9)

137 748 ( 8)

3.91(8)

1.43(5)

1 942 (34)

10 625 ( 9)

0.82(7)

0.30(5

50 488 (10

87 260 (8

19

2 0. 2 ( 1 0 9-7(18

48 7.1

64

150

ί , ϋ

M i

32.2 (11 29.4 11 30.2 (11

12 323 (15) 12 024 (26) 24 348 (11 } 65 205 ( 6)

42 (5)

37 326 ( 9)

27 879 ( 4)

167 812 ( 7 )

4.50(10)

1 .75(4)

1 994 (49)

14 4 8 0 ( 8 )

0.87(7)

0.39(5

74 924 (9

92 889 (7

22

Figures in parentheses are relative standard errors expressed as percentages of the estimates.

SOURCE: BAE evidence.

Fourth Quartile

34.7(10 20.0(17

58 (15

15.3(15

184 (16 290 (15

29.5 (6 32.0 (8 31.0 (8

49 196 ,18, 20 183 .22, 69 379 ( ,14. 182 308 ( ,11.

38 ( (22;

1 1 1 945 i15 70 363 ] 7

325 057 I 9

8.85I(16

1 .63'( 4 311 i (28

20 609 ( 6 )

1 .44(10)

49

All Farms

20 124 (17) 11 507 (22) 31 632 15)

79 754 (17)

27 058 (16) 189 874 ( 9)

5.2(15)

2

1 .

154 5$ ) 15 311 ( 8)

1 .06(8)

0..42(6)

74 915 (1.2) 114 960 9

100

Customs Tariff History

Tariff Item and Operative Date

20.07.21- 133 From 1-7-60 NB.: From 13-4-79 to 30-6-80 recorded under code 31.

From 1-7-78 to 13-4-79 recorded under 20.07.29 code 129.

20.07.21- 144 From 1-7-80 NB: From 13-4-79 to 30-6-80 recorded under code 64.

Prior to 13-4-79 NSR included code 42

20.07.21- IX 13-4-79 to 9-5-79

NB: From 9^5-79 NSR see 20.07.21 codes 97 and 122. Prior to 13-4-79 NSR included in codes 25 and 36.

20.07.21-42 For 13-4-79 NB: From 13-4-79 NSR see 20.07.21 codes 111 and 144. Prior to 13-4-79 NSR included

in 20.07.29 codes 162 and 184

20.07.29-162 1-7-75 to 13-4-79

NB: From 13-4-79 NSR see 20.07.21 cdoe 42 and 20.07. code 195. NOTE: 20.07.29 code 162 contains goods not under

reference, 20.07.29 code 195 NUR.

Customs Tariff History

Tariff Item a nd Operative D at a

20.07.29-184 1-7-78 to 13-4-79

NB: From 13-4-79 NSR see 20.07.21 code 42 and 20.07.29 code 209 NOTH: 20.07.29 code 184 contains goods not under gg^erence, 20.07.29 code 209

* Subject to revision. TSS: Total Soluble Solids NSR: Not Separately Recorded NUR: Not Under Reference

SOURCE: Compiled from information supplied by the Australian Bureau of Statistics

APPENDIX 6

EXTRACT OF SECTION 8, SUB-SECTIONS (1) AND (2), OF THE CUSTOMS TARIFF ACT, 1966

8.-(1) For the purposes of this Act, the FOB price of goods that have been exported to Australia is, subject to the next succeeding sub-secton, an amount, expressed in Australian currency, equal to -

FOB price. Amended by No 18, 1972, s.3.

(a) where the goods have been sold by the exporter, on or before the date of exportation, to the person who imported them into Australia - sum of -

(i) the price paid or to be paid for the goods by the importer, but not including any part of that price that, in the opinion of the Minister, represents a charge in respect of

transport or insurance of the goods after they have been exported or in respect of any other matter arising after that time; and

(ii) any charges or costs in respect of the supplying of outside packages for, or in respect of the handling (including the placing in outside packages), the transporting or the loading of, the goods in the country of export with a view to exporting the goods from that country, being charges or costs that have been incurred by the importer and are not included in the price referred to in the last preceding sub-paragraph; or

(b) in any other case - the amount that, in the opinion of the Minister, having regard to any matter that he considers relevant, would have been the FOB price of the goods in accordance with the last preceding paragraph if the export of the goods to Australia had been the result of a sale of the goods by the exporter to a person in Australia.

-(2) Where the Minister is of opinion that there are reasonable grounds for believing that, in relation to any goods, the amount of the price referred to in sub-paragraph (i) of paragraph (a) of the last preceding sub-section, or the amount of any charge or cost referred to in sub­ paragraph (ii) of that paragraph, was fixed, or other action was taken or other arrangements were made, with a view to reducing the amount of duty or support duty payable in respect of the goods, the Minister may determine an amount to be the FOB price of the goods for the purposes of this Act, being the amount that, in the opinion of the Minister, having regard to any matter that he considers relevant, would have been the FOB price of the goods in accordance with the last preceding sub-section if the amount of that

first-mentioned price, or of that charge or cost, had not been fixed, or that other action had not been taken or those other arrangements had not been made, with that view.

98

APPENDIX 7

SOME POTENTIAL EFFECTS OF THE LOCAL CONTENT PROVISION ASSOCIATED WITH THE SALES TAX EXEMPTION APPLYING TO ORANGE AND TANGERINE JUICES

Sales taxes are levied on many goods sold in Australia. Where applicable, the tax is levied at the wholesale level and is usually based on the wholesale price, irrespective of whether the goods are produced locally or imported.

For some goods, sales tax discriminates between sources of supply. The Commission understands that this applies to beer, wine and fruit juices. For beer and wine, the exemptions are such that sales tax applies to all imports. Thus, the economic effects of the discrimination are essentially

the same as an additional tariff. An unusual feature of the exemption applying to fruit juices (including orange and tangerine juices) is the requirement for a minimum proportion of 25 per cent, by volume, of the product to be juice of Australian fruit. This local content requirement has the potential to afford very high levels of assistance.

To determine the extent of assistance that could be provided it is useful to compare two situations.

One is where the local content requirement to qualify for the exemption is met. The wholesale price for pure orange juice in this situation will depend upon the costs to convertors of local and imported juices, the level of tariff and other importing costs, the proportion of local juice

included, costs of preparing retail packs (eg costs of materials such as cartons etc) and the wholesale margin.

Mathematically, the wholesale price in this situation may be expressed as:

WP = (1 - x) (Pw (1 + t) + L) + x.Pd + M (l)

Where: WP = wholesale price per unit Pw = price per unit of imports (fob) Pd = price per unit of local juice L = landing and transport costs per unit associated with importing

t = tariff as a proportion of fob price of imports x = proportion of local juice included, where x is greater than or equal to 0.25 M = costs to prepare retail packs plus wholesale margin.

In this situation, if the cost of local orange juice is greater than the cost of imports, minimum wholesale prices to qualify for the sales tax exemption would be achieved with the inclusion of only the specified minimum local content (i.e 25 per cent (25/100) juice in the case of a pure

juice product and 71 per cent (0.25/0.35) in the case of a juice drink product containing 35 per cent juice).

The second situation is where the sales tax is paid. Here the wholesale price will depend upon the same factors as above, plus the level of sales tax. In this situation, a convertor would be prepared to pay no more than the ldp cost for orange juice.

99

This situation can be expressed as:

WP = (1 + ST) ((1 - x) (Pw(1 + t) + L) + x.Pd + M) (2)

Where: ST = sales tax as a proportion of wholesale price and x = proportion of local juice included where x is less than 0.25·

Under these conditions, if the cost of local juice is higher than the cost of imported juice, minimum wholesale prices would be achieved with no local content. Thus the terms x and Pd are deleted.

The maximum assistance that could be provided to local juice if all orange juice were sold as pure juice is where the wholesale price in situation one just equals that in situation two. That is, where:

(1 - x) (Pw (1 + t) + L) + x.Pd + M From (1)

= (1 + ST) ((Pw (1 + t) + L) + M) From (2)

which yields a maximum price for domestic juice of:

ST ST

Pd = ( _ + 1) (Pw (1 + t) + L) + — M (3)

x x

or a level of protection in tariff equivalent terms of:

Pd - Pw

Pw

+ t) +

(L + M). L

— 7Γ---- ) + Tr-

Pw Pw

(4)

At present the specified minimum local content is 25 per cent and the sales tax otherwise payable 17.5 per cent. If it is assumed that the ad valorem equivalent of the protection currently provided by the variable tariff is 70 per cent, landing and transport costs are 4 cents per litre and the costs to prepare retail packs plus wholesale margin is 30 cents per litre then, at an fob world price of 18 cents per litre, convertors would be prepared to pay up to 80 cents per litre or almost four and a half times the world price for local juice (see equation (3))· This would be equivalent to assistance in ad valorem tariff terms of about 340 per cent.

From equation (4), it can be seen that the level of assistance that could be provided by the discrimination in the exemption from sales tax increases with increases in the rate of sales tax, costs to prepare retail packs plus wholesale margin, level of tariff and other importing costs. It decreases with increases in the specified level of local content and world price. If no customs tariff applied, then in terms of the above example, the discriminatory sales tax treatment alone would have the potential to provide assistance equivalent to a tariff of about 220 per cent.

Using the above data, variations in protection with changes in world prices for different tariff rates are illustrated in Figure 1. As indicated in the figure, small changes in world prices could result in significant

changes to the level of assistance provided by the local content provision associated with the exemption from sales tax.

100

FIGURE 1 : VARIATIONS IN PROTECTION WITH CHANGES IN WORLD PRICES FOR DIFFERENT TARIFF RATES

Protection in tariff equivalents

(per cent)

400 '

Tariff

per cent

45 per cent

200 _

0 per cent

100 .

World price (Pw)

(cents per litre)

101

A similar analysis on assistance effects of the discriminatory local content provision may be carried out for other orange and tangerine juice products. The equations become somewhat more complicated and are not

presented here. Using the data above, the maximum potential assistance to orange juice production, if all orange juice were sold as drink containing 35 per cent juice, would be equivalent to about an ad valorem tariff of about 270 per cent.

The major consumer products incorporating orange and tangerine juices are pure orange juice and orange fruit juice drink which contains a minimum of 35 per cent pure juice. The ACGF indicated it believed that equal quantities of orange juice and orange fruit juice drink were sold. In 1980-81, as shown in Table 2.1, domestic consumption of orange juice was approximately 140 million litres. If it is assumed that orange juice is only used in pure orange juice and orange fruit juice drink, and that only the minimum orange juice is included in orange fruit juice drink, then the amount of orange juice sold in pure orange juice form is 104 million litres (ie x = (140- x)/0.35) and in orange fruit juice drink 36 million litres (ie 140 - 104).

On this basis, the total market for pure orange juice and orange fruit juice drink would be some 208 million litres. This would require a minimum inclusion of 52 million litres of local juice (ie 25 per cent of 208 million litres) if payment of sales tax were to be avoided. Local

production is estimated to have been about 115 million litres in 1980-81 (see Table 2.1). Thus, at present it would appear that there is plenty of scope for convertors to obtain sufficient local juice to qualify for the

exemption.

However, for individual convertors, the situation could be quite different. If a major convertor had preferential access to a significant quantity of local juice and included only local juice in his products, then the availability of local juice to other convertors would be considerably reduced. For example, if it is assumed that a convertor has a market for

25 million litres of pure orange juice and uses only local juice, then the availability of local juice in 1980-81 would have been reduced from 115 million litres to 90 million litres. The requirement for local juice to avoid sales tax on the balance of the market of 183 million litres (ie. 208-25) is 46 million litres (ie. 183 x 0.25)· In other words, the protective effect of the discriminatory exemption could have its full effect at a local production of 71 million litres (ie. 25 + 46). Thus, while there would still be sufficient local juice to avoid the payment of sales tax, the margin of availability for some convertors would be considerably reduced.

If the level of tariff assistance were to be reduced, some expansion in demand for orange juice might be expected together with some reduction in the growth of local production. Thus, the discriminatory sales tax exemption could become more relevant as both these changes would tend to reduce the proportion of local juice relative to imports. In recent years, demand has been growing at about 12 per cent per annum. The BAB projected

that demand could be 190 million litres by 1 985-86. On the other hand, from 1974-75 to 1976-77, production of orange juice fluctuated between about 70 and 80 million litres. Thus, it would appear that it would not require significant changes to the industry before the discrimination

102

relating to source of supply associated with the exemption from sales tax became a major influence on the future development of the industry. Given that it is normal for there to be significant seasonal variations in production of oranges by the growing sector and that the potential assistance available under the sales tax exemption is high and sensitive to world price movements, such discrimination could result in a highly unstable economic environment for the development of the industry and be costly to the community.

103

APPENDIX 8

DUMPING PROCEDURES

In 1975i Australia adopted the GATT Anti-Dumping Code (Article VI of GATT) and enacted the requirements of the Code in the Customs Tariff (Anti­ dumping) Act 1975·

Under Article 6, anti-dumping action can be taken only if it can be shown that the imports at dumping prices constitute the principal cause of, or threat of, material injury to the domestic industry. Dumping occurs when goods are exported from a country at a price which is less than the 'normal

value' of the goods when sold for domestic consumption in the country of export. 'Export price' and 'normal value' are defined in sections 4 and 5 of the Customs Tariff (Anti-Dumping) Act.

A dumping complaint to the Commonwealth Government must be supported by the major proportion of the domestic producing industry. The industry must present to the Department of Industry and Commerce prima facie evidence of

dumping and of material injury, or threat of material injury, principally caused by those dumped imports. This prima facie evidence is supplied to the Government of the exporting country and with the approval of that Government the Department undertakes investigations to verify the 'normal values' in the country of export.

If the overseas inquiries confirm dumping the Department arranges a meeting of directly interested parties. Subsequently, if the Minister is satisfied that imports at dumping prices constitute the principal cause of, or threat of, material injury to an Australian industry, dumping duties are imposed. The 'dumping duty' is normally equivalent to the difference between the

'export price' and the 'normal value'.

If imports at allegedly dumping prices are from New Zealand, NAFTA provides for consultation between the New Zealand and Australian Governments. Anti­ dumping action can be imposed only if a satisfactory solution cannot be reached in sixty days as a result of those consultations.

Under the anti-dumping legislation the Commonwealth Government can impose countervailing duties if bounties or subsidies paid on the production or transport of goods exported to Australia cause or threaten to cause material injury to an Australian industry. The criteria and procedures

for imposing these duties are similar to those for dumping.

104

ISBN Ο 644 02009 1

< 82/122 Cal. No. 82 1391 2