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Australian meat industry consultative structure and quota allocation

CHAIR —Welcome, Mr O'Dell. Would you like to make an opening statement? Then we will go to questions.

Mr O'Dell —The committee has my submission. The point I would like to make about this submission is that the Lakes Creek abattoir has closed. This is not a scene of what could happen; this is in fact what has happened. We, with Teys, recognise the importance of the Lakes Creek abattoir in the processing industry, it being the second largest abattoir in Australia, and recognise the impact that this has had on the Rockhampton community and the Central Queensland grazing area in general.

While we are concentrating efforts currently on the due diligence process of trying to get an amalgamation between two organisations, we are committed to reviewing all options to re-open that abattoir. It needs to be said that you could only contemplate re-opening that abattoir if an appropriate allocation of US quota was forthcoming. When we go to the next point about the appropriateness of the year of consideration of allocation of quota, clearly this year is very inappropriate for that abattoir. We, therefore, support the year 2001 as the year to base calculations upon, not only because of our current situation but also because we believe that year is free of the distortion that happened due to the late allocation of quotas—as happened this year.

I might turn now to some of the frequently asked questions that I have heard during the course of the last two days and attempt answers to some of them. There seem to be questions being asked about the AMH submission and AMH scheme. I thought that the AMH submission relative to the Townsville facility was quite a good submission. It acknowledged many of the issues that are relevant to the industry today. They make the point:

The Townsville facility ... is more dependent on the US market than other AMH facilities, which have more diversification opportunities ...

They also make the point:

[middot]The area from which cattle is generally drawn for processing at Townsville has significant numbers of Bos Indicus cattle. These are more adaptable to the harsh environment of Northern Australia. However the disadvantage of this genotype, plus the harsh environment means that in many cases the meat derived from these animals is less suitable than that of other breeds for markets other than the North American manufacturing beef market.

They talk about the different degrees of dependence of various abattoirs on various markets. These are well referenced in the table, which compares the various markets. The point here that is relevant to the Innisfail plant is that whatever AMH have submitted here about Townsville—and I agree with their submission—is even more applicable to our Innisfail facility because it is another 300 kilometres further north.

We then talk about schemes that could be considered and used for some form of quota allocation. One of the problems with the geography, particularly when you get to Innisfail, as you may be aware, is that it vies with Tully and Babinda for the Golden Gumboot award each year. With a rainfall of some 300 inches, you cannot run the facility on a year-round basis. If we were to allocate quota on a quarter-by-quarter basis, that in itself would create a problem because you are not going to have a quarter's proceedings at one point in the year to get the quota for the next part of the year. If you do not get the quota, you do not have the starting point for the next quarter and you have a perpetuating situation. Clearly, something would need to be done to accommodate that. Our Katherine abattoir is not operating due to the success of the live cattle trade, but when it did operate it was basically a six-month abattoir. Again, a quarter-by-quarter allocation would create a problem there. I also understand that in the far south of Australia—and I cite the Naracoorte abattoir—similar problems exist. While I am sure that AMH have put a considerable amount of thought and effort into their proposal, I draw your attention to the fact that there are some flaws that need to be thought through.

I also made note yesterday of some questions that were asked which inferred that CMG were not hot boning specialists. By and large that could be argued to be true, but the Innisfail abattoir is hot boning—full stop. I think Mr Kennedy correctly got to the point in his previous submission when he said that the devil is always in the detail. Some processors have their plants spread across different parts of Australia and, therefore, are in a position to derive an average situation, whereas others are not. That needs to be taken into consideration with the allocation of quota and the schemes for it.

Do I support the minister's model? Ideally, no. I would go to a marketplace model. A marketplace model is the model which economists would say provides the maximum return for Australia—the maximum economic rent. We can look at it in all sorts of ways. In his theories on evolution, Darwin talked about the survival of the fittest and we all know what happens when we introduce a species into a country that has had thousands of years to settle an ecosystem. We still have problems with rabbits and foxes in Australia from their introduction 200 years ago. The more we fiddle with the system, imposing quota controls away from a free market system, the longer it is going to take to settle down. I would certainly advocate minimalist intervention; and, in our opinion, minimalist intervention is a market based system.

That is essentially where we are coming from. We are conscious of the need to try and get an abattoir running. Some 1,300 people have been displaced from employment. We are conscious that it is the second largest abattoir in Australia and we are conscious of the effect on the Rockhampton community, but we want to make you well aware that we could only contemplate such a reopening with an adequate allowance of quota for that abattoir.

Senator O'BRIEN —In your submission you say that Lakes Creek employed 1,300 people prior to its recent closure. That isn't right, is it? The number reduced just before closure.

Mr O'Dell —Sure. If you want to talk about the immediate present, the figure was 700, but it was 1,300 last year.

Senator O'BRIEN —That is right. Prior to the dispute or lockout—however you want to describe it—it was 1,300.

Mr O'Dell —Yes, you are correct. It was 1,300 and then 700 at closure.

Senator O'BRIEN —When did you reopen? I think you said at the last hearings that you were going to open for business the following day.

Mr O'Dell —I do not have the precise date; April or May is in my mind. I would be happy to furnish you with that information.

Senator O'BRIEN —But it only opened for a very short time.

Mr O'Dell —We opened and then there were ongoing levels of industrial disputes with protected industrial action being taken. We tried to run. We ran for days, stopped and extended weekends and the rest. We found it a very difficult operating environment. We were seriously trying to run it, but we were being thwarted in our efforts to do so.

Senator O'BRIEN —Did any other factors lead you to mothball the Lakes Creek plant?

Mr O'Dell —Through a variety of owners, the Lakes Creek plant has generally been unprofitable over the last decade. We are looking at forming a joint venture to change the cost structure of the business in total, so that would give us a fighting chance in its own right. At a business level, appropriate macro-action is being contemplated and, at a microlevel, we need quota to facilitate a flow of cash to the business.

Senator O'BRIEN —What would your company's reaction be to the minister carrying his current quota model forward?

Mr O'Dell —We would accept that. Ideally, we would not support it. Ideally, we would go back to a market based scheme. However, in terms of a compromise, we could live with it.

Senator O'BRIEN —In particular, I take it clearly from your submission that you are of the view that 2001 should be the base year for quota allocation next year?

Mr O'Dell —Correct.

Senator O'BRIEN —That would be a good year with regard to the Lakes Creek operation. That would be the best possible outcome.

Mr O'Dell —The issue goes beyond focusing on Lakes Creek. The year 2001 is the last year free of distortion in the marketplace. When one goes to the level of the detail—

Senator O'BRIEN —For Lakes Creek?

Mr O'Dell —No, for the industry at large.

Senator O'BRIEN —But some people would say, and I think Mr Kennedy says that it is not the best year for him for reasons—

Mr O'Dell —That is correct and I think Mr Kennedy has a real issue to put forward which should be heard. However, there is clear evidence of people changing their shipment records enormously between 2001 and 2002 and the ministerial orders being issued. It is on that basis that I come to 2001. I am sure Mr Kennedy had a very valid argument and I do not wish to oppose that argument. It is a very complex issue.

Senator O'BRIEN —I understand that CMG still has a right to quota even though you have mothballed Lakes Creek, the Rockhampton plant, and even though you have entered into an arrangement with Teys Bros. I take it from your submission that you are virtually asking for quota for next year as a prerequisite to possibly reopening Lakes Creek.

Mr O'Dell —I think that is a little strong. The issue is that we are seriously looking at reopening that abattoir and we will only do so if we believe that we can get a viable outcome in commercial terms. Certainly, if we did not have a quota allocation, I cannot see how we could get a viable outcome.

Senator O'BRIEN —So you are seeking a quota entitlement for Lakes Creek and, if that is secured, you will consider reopening the plant?

Mr O'Dell —Absolutely.

Senator O'BRIEN —And if it is not secured you will not reopen the plant?

Mr O'Dell —I think it would be very difficult to contemplate opening the second-largest abattoir in Australia with no quota whatsoever to go to the US; the cards would be stacked against you.

Senator O'BRIEN —So should the quota entitlement be conditional on the reopening of Lakes Creek?

Mr O'Dell —The issue is that we have a business at large. We are conscious of our need to try to get what is the second-largest abattoir in Australia up and running, and to place conditions on that is perhaps judging the issue too soon—the issue being that there are a number of abattoirs in the group. There is Naracoorte, Beenleigh, Biloela, Lakes Creek, Innisfail and Katherine—all of which need to be taken into the mix. As we well know, in the course of Australian history we get various things like droughts and floods which will affect various regions and, for various reasons, opportunities will change. We would not like to prejudge it by saying that this is an absolute must; I simply say to you that this is a variable that we need at our disposal for favourable consideration.

Senator O'BRIEN —I hear that. The fact of the matter is that Lakes Creek—if my memory serves me correctly—probably exported over 40,000 tonnes in 2001.

Mr O'Dell —Correct.

Senator O'BRIEN —So we are talking about a probable quota entitlement up there somewhere in that vicinity, without wanting to put a precise number on it, under the minister's current model.

Mr O'Dell —From memory, the CMG ended it with an allocation of some 34,500 tonnes, down from 49,000 tonnes the previous year. So we lost badly—some 13,500 tonnes—and we are impacted by that. But in order to get Lakes Creek going we need a viable situation in front of us.

Senator O'BRIEN —So, depending on the discretionary or other components, somewhere between 34,000 and 40,000 tonnes would be the probable quota outcome under Minister Truss's model? That is depending on whether you take 30,000 out, or 10,000 or nothing for a discretionary quota. Is that a fair comment?

Mr O'Dell —A reasonable comment.

Senator O'BRIEN —That has a pretty high value in the market. Some people are saying that it is a premium of 75c, which has a value of over $20 million.

Mr O'Dell —I can say to you that we have not sold any quota. It stayed within the group.

Senator O'BRIEN —It is early days as well. I would be very surprised if a business as astute as CMG did not take commercial advantage, one way or another, of a quota entitlement it had for this year. You are not going to tell me that CMG will hand that to other participants free of charge or not use it—

Mr O'Dell —CMG, with its potential partner, will attempt to use that quota itself.

Senator O'BRIEN —So it becomes a component in your commercial relationship with Teys. It is obviously open to you to do that; there is nothing illegitimate about it, and one would expect that that would be one of the options that you would strongly consider. But it is a valuable thing and, whether or not you open Lakes Creek again next year, you will have the benefit of $20-plus million worth of quota, if the minister's model is replicated next year, based on the 2001 history of Lakes Creek.

Mr O'Dell —And clearly, if quota is allocated and a viable situation is achieved, it is our desire to open Lakes Creek—not the other models you are suggesting.

Senator O'BRIEN —It would be fair to say, wouldn't it, that your quota entitlement ought only be leveraged if that plant opens?

Mr O'Dell —Having a quota entitlement for that plant would facilitate the possibility of it opening. Having no quota entitlement will facilitate, in my mind, a continued closure.

CHAIR —Would it be fair to say that the quota that you may have been allocated prior to the closure—and the brownie points earned earlier in its history—are now warehoused in the arrangements between yourself and Teys?

Mr O'Dell —Correct.

CHAIR —So you still have those brownie points?

Mr O'Dell —Yes.

CHAIR —And so you would still have them for next year?

Mr O'Dell —Depending on the model.

CHAIR —Yes, depending on the model. So really you still have the Rockhampton quota available to you but it is warehoused elsewhere.

Mr O'Dell —Yes, but also bear in mind this: it was a late allocation quota. We have only just formed such an arrangement with Teys. We are therefore disadvantaged in commercial arrangements by any moves to warehouse, as you would say, because we have a very limited period of time in which to warehouse that quota. These orders were late in coming, by anybody's judgment, in the quota year. Even later was the potential of an arrangement between ourselves and Teys. So, again, the practical time to make use of that availability is very limited.

Senator O'BRIEN —That said, the reality is—as you told us—that it is part of the equation, part of the commercial relationship between CMG and Teys at the moment. That is essentially what you told us, isn't it?

Mr O'Dell —Essentially, the point is that CMG and Teys are looking at a commercial relationship, and, naturally, in a commercial relationship we would see where that quota fits. It is not the basis of the commercial relationship.

Senator O'BRIEN —I mean for this year, not for next year. We do not know with real certainty what next year holds, do we?

Mr O'Dell —We do not.

Senator O'BRIEN —But we do know that in this quota year you have a considerable amount of quota which comes out of Lakes Creek operating history from 2001. That is part of the commercial relationship between Teys and CMG at the moment. Is that right?

Mr O'Dell —It is still captive within the group, yes.

Senator O'BRIEN —We can only take this so far. It is pretty clear that you are not committed to opening Lakes Creek but that you see the quota entitlement leveraged off Lakes Creek's 2001 operation as an important issue as to whether you reopen it.

Mr O'Dell —I would like to rephrase your suggestion to me when you said we are not committed to reopening Lakes Creek. We are certainly committed to exploring all of the ways of reopening Lakes Creek. If we could open it as a viable concern, I believe that would be an answer. I cannot prejudge the decision, but that is clearly an intent. But we cannot do that if we are not going to be viable, and we could not be viable if we did not have an adequate quota allowance.

Senator O'BRIEN —But, on the other hand, you are saying to us that quota based on Lakes Creek's 2001 operation should not be contingent on your reopening Lakes Creek.

Mr O'Dell —I do not think that is the point I make, because one uses one's quota across one's facilities.

Senator O'BRIEN —It has become an asset.

Mr O'Dell —Yes.

CHAIR —I am sure that we all hope, and the people of Rockhampton hope, that you get started again up there. To enable you to start and to get better work practices et cetera and end all the blues, do you need to reconstruct anything? I have not been there. How would you describe the plant? Is it antiquated?

Mr O'Dell —The plant is quite modern. There has been a very significant extension to that plant over the last three or so years.

CHAIR —So it is what you would call a modern processing plant?

Mr O'Dell —We have put some $50-odd million into that plant.

CHAIR —That answers the question.

Mr O'Dell —It is basically as modern as any Australia has. I am sure individuals will say that components of their plants are more modern, but by any stretch of the imagination it is up there with the best.

Senator O'BRIEN —Has the company approached the minister's office about next year's quota entitlement?

Mr O'Dell —No more than anybody else would have done in the process leading up to the previous submissions.

Senator O'BRIEN —When did you approach the minister's office?

Mr O'Dell —The last time I had contact with the minister's office was months ago—before our last—

Senator O'BRIEN —Pre-May?

Mr O'Dell —Yes.

Senator O'BRIEN —What is the situation with Katherine? You have no quota entitlement leveraging for Katherine, and, as I understand it, the situation at the moment is that the live cattle trade is paying such a premium for cattle in the Territory that it is pretty hard for any processor to afford to buy into that market and make a dollar.

Mr O'Dell —That is correct. But we continue to have a skeleton staff at Katherine and we keep the plant in good condition so that, if the situation should change, we would capitalise upon that.

Senator O'BRIEN —So the market for the Territory is basically Indonesia, the Philippines to a lesser extent, and Egypt, I believe.

Mr O'Dell —That is correct.

Senator O'BRIEN —And they are taking 1[half ] million cattle a year?

Mr O'Dell —I could not attest to the number but it is certainly, by and large, a live-trade state.

Senator O'BRIEN —So it is not likely that Katherine is going to come back into the market, unless there is a big swing in those South Pacific and South-East Asian markets?

Mr O'Dell —If we were to have disease within Australia, not that I wish it upon our industry, things would reverse very quickly. We are the only significant viable option in the Territory. We keep a skeleton staff. Last year I wrote to all graziers in the Territory asking for their support to put a minimal number of cattle through and they, in their wisdom, decided not to. They kept to the live trade. We accepted that. We have kept the staff on and will continue to keep the staff on.

Senator O'BRIEN —I presume that you have a similar skeleton staff in the Lakes Creek plant and that the rest of the staff have been paid off?

Mr O'Dell —Correct.

Senator O'BRIEN —Do you know whether they are still in the town or have gone to other employment opportunities in different abattoirs?

Mr O'Dell —No, I do not.

Senator O'BRIEN —Are there other abattoirs in the Rockhampton area?

Mr O'Dell —There are certainly a number of growth opportunities in the district. There is a quite large Comalco aluminium plant in Gladstone. I understand a number of the trade staff have already been employed there. There is a magnesium plant towards the back of Rockhampton, and I understand that people are there but I cannot attest to the numbers.

Senator O'BRIEN —Thank you.

Senator COLBECK —I am interested in the perspective that you have put that Japanese specialist exporters have triggered the situation we are now in; your view as to where that leads us; and your perception of what has been given several different names today on an overall industry basis.

Mr O'Dell —Are you talking about the AMH model?

Senator COLBECK —Yes.

Mr O'Dell —I referred earlier to some of the content of the AMH submission on the Townsville plant in which they talked about some of the specific northern Australian issues. I referred to the fact that our Innisfail plant is some 300 kilometres further north of Townsville, so whatever applies to the Townsville plant will apply to Innisfail, but our situation is exacerbated by weather extremes: we are in a rainfall belt and get some 300 inches of rain there. You cannot run that plant on a year-round basis, so, if you are going to trigger a quota allocation quarter by quarter, there is a hole in the system somewhere. If you have a hole in the system, you do not get into the next quarter and it perpetuates its way through. I then referred to the fact—and this is why we got into debate about the Territory—that, when the Katherine plant was operating, it was also a seasonal plant. I am aware from a superficial discussion with the Teys family earlier today that a similar situation exists at the Naracoorte abattoir. The point I wanted to make is that, whilst the model has clearly had thought put into it, there are still issues that need to be resolved.

Senator COLBECK —Take a situation where quota has been fully utilised. Given that there is an element within this proposal that requires, in essence, a company to earn their stripes, would you see that as a capacity to limit entry into the market and access to quota? If there is no quota available and it is being fully utilised by all the other players, how do you actually grow into or gain access to the system?

Mr O'Dell —We have always been a supporter of the new entrant provision and of a hardship component.

CHAIR —Given that the quota from Rockhampton has now been warehoused elsewhere, I presume that whatever arrangement you come to with the other abattoirs and Teys will have an incentive to get going and use the quota that is warehoused. Would that be fair to say?

Mr O'Dell —The other abattoirs are working to do that, yes.

CHAIR —Would it then be fair to say that, if you did that, other people in the industry could say that the proposition you have put about the reopening of Rockhampton would be an attempt to double-dip?

Mr O'Dell —I would not have thought so, because they would not be asking for a double-dip in terms of that proposition. I think that specific situation needs to be reviewed—I am only talking about the Lakes Creek abattoir—because AFFA records are kept per abattoir. I understand what you have put to me, but it is certainly not an attempt by me to give you a double-dipping proposition.

Senator O'BRIEN —I was reflecting on a conversation with the Chair, and I think you could take the view that the Consolidated Meat Group submission is almost a gun at the head of the allocator saying, `If we don't get the quota then Lakes Creek is gone.'

Mr O'Dell —I would shy away from that by a country mile. It is simply the case that we have a duty to inform this panel of the reality of commercial life and make you aware. For those reasons we are saying, specific to Lakes Creek, that 2002 is a very inappropriate year on which to base a quota for the coming year, because it would seal its fate. We do not want to see that fate sealed; we are looking for an opportunity to get this place up and running. It has a very important place in the industry and an important place in the community. It is not a case of guns at heads; it is a case of just stating facts so you can take them into full consideration.

Senator O'BRIEN —You are asking for a quota that you may or may not use for Lakes Creek: you may reopen the plant, you may simply use the quota elsewhere or it would be opened as an asset to sell. But you are saying to us that we should not withhold the quota subject to the reopening of Lakes Creek. I am trying to understand why you would say that is an equitable position that we should adopt.

Mr O'Dell —I think there are more people who have to come to a decision on Lakes Creek than me. Clearly, I represent the historical interests at Lakes Creek and, if I look at that in terms of trying to get that abattoir up and running, you need a quota to get it going. Clearly, the decision making process will involve a new partner to the business, so to speak. They need to have a majority say in what is going on, given they will have the management responsibility for the new entity. I am simply trying to leave a viable option to be pursued.

CHAIR —Thank you very much.

[6.07 p.m.]