Thursday, May 16, 2013

AUSTRALIA’S 2013 BEEF CATTLE INDUSTRY CRISIS


THE NATURE OF THE CRISIS

It is common ground now that the Australian Beef Cattle Industry is in crisis with cattle producers burdened with an unsustainable level of debt and falling property values receiving record or near record low prices in real terms for their cattle, with many facing forced sale of their assets.

Historical Context of the Current Cattle Crisis

Many, including HuntBlog have compared current cattle prices with 1974 cattle prices, but unlike 1974, there is plenty of US beef quota available to Australian exporters at the moment.

Further, China (which was not in the market in 1974) has been buying significant quantities of Australian beef at export prices, despite being restrained by the strength of the Australian dollar.

So, (unlike the situation in 1974), more beef could be exported today if it could be processed but in 2013 (unlike 1974) there is no capacity to slaughter the cattle and process the beef in Australia.

Again in sharp contrast to 1974, Australia's beef abattoir industry is now dominated by three large conglomerates and Australia's beef retail market is dominated by a Supermarket duopoly.

In in 1974, in the absence of viable export markets and with most of the production being dumped onto the domestic market the price of beef crashed on the domestic retail market and domestic beef consumption soared to 70 kg per person.

Conversely, in 2013 export beef prices remain relatively high with the price of beef on the retail shelves essentially unaltered and MLA forecasts that domestic beef consumption will fall to a little over 31 kilograms per person.

Causes of the Problem

Many have formed the view that the Australian cattle industry has become structurally unsustainable and uncompetitive as a consequence of the convergence of a number of overlapping organisational and Government policy factors in a relatively small economy with an increasing number of non-competitive duopoly and oligopoly market structures. 

These converging factors include:
  • the uncompetitive burden of Government influenced costs and charges on Australian producers; coupled with
  • export tariff barriers that are higher than barriers imposed upon our overseas competitors; plus
  • sharply lower farm subsidies paid to Australian farmers than their United States, Brazilian and EU counterparts; plus
  • the high cost of meat processing in Australia compared to those in competitor countries such as the US and Brazil; and
  • the lack of attention given to the Australian domestic meat market with a falling per capita consumption; with
  • Australian cattle producers receiving little more than half of the retail beef dollar that their American counterparts receive; and
  • the relatively high value of the Australian dollar in recent years as a consequence of the mining boom; and
  • the recent uncompetitively high Australian interest rates; plus
  • the current drought conditions besetting much of rural Australia; and
  • the debt crisis crippling Australian beef industry and rural Australia as a consequence of the uncompetitive costs burdens and disadvantages referred to above; and
  • dysfunctinal industry organisational structures and cash strapped State Farm Organisation based Peak Councils which are at a government representative level, structurally disconnected and unresponsive to their grass roots and do not provide the seamless interaction between policy setting and policy delivery needed in the 21st Century. 
The disadvantage flowing to Australian cattle producers in comparison to their overseas counterparts that flow from this perfect storm convergence of overlapping factors can be measured in billions of dollars, or in hundreds of dollars per head for each beast slaughtered in Australia. 

A précis of the Facts and Figures that disclose the burden of many of many of these problems on Australian Beef Industry in dollar terms is set out in the Annexure to this Newsletter or can be viewed on www.huntblog.com.au.

Possible Mix of Short and Long Term Answers to the Problem

Perhaps the real answer is that the cattle industry's future lies:

(a)   in the long term, through:
  • the lifting of the uncompetitive burden of Government influenced costs and charges on the red meat industry by the Government agreeing to pick up the tab for AQIS inspection, NLIS and other similar charges in the public interest as the Governments of our overseas competitors do;
  • greater weight being given by the Reserve Bank of Australia to Australia’s terms of trade when it is setting monetary policy and the cash rate;
  • an increase in the effort and priority given to tariff reduction in our overseas markets to equivalent levels that apply to our overseas competitors;
  • the strengthening of competition policy legislating and including powers of the ACCC to break-up the current supermarket retail duopoly influence on beef and rural produce retail prices in Australia; coupled with
  • the introduction of a comprehensive all of beef product grading system and a consumer friendly national truth in labelling legislation;
(b)   in the short term, through:
  • an urgent review of the $5 per head transaction levy coupled with a levy moratorium whilst that review is being undertaken; and
  • the provision of additional short term reconstruction debt bridging finance for the beef industry with increased drought assistance and transport rebates whilst the long term solutions are being put into place.
A Review of the Government Policies and the Uncompetitive Burden of Government Influenced Costs and Charges

The State and Federal Governments should set up a Task Force (perhaps under COAG) to consider measures that could be taken to remove the burdens of Australia’s Government influenced uncompetitive costs and charges from the Australian red meat industry to level similar to or in parity with Government’s costs and charges imposed on our overseas competitors.  

Perhaps there should also be a concurrent ministerial and departmental review of Government rural industry policy and approach to free trade in the context of: bio-security; government costs and charges on our rural industries generally and the cattle industry in particular; as well as exceptional-circumstances drought relief.

A joint DAFF/Department of Trade & Industry Task Force could be established to assist in negotiation of free trade agreements in an endeavour to bring the tariff burden of Australian exporters in line with the tariffs paid by our overseas competitors. 

Review of Industry Structures

A review of the transaction levy could be coupled with an urgent overarching independent review of all the red meat industry structures including the cost benefit currently being received by producers from their R&D and marketing levies and the effectiveness of the current cattle industry representative voice with Government.

Development Bank

A joint Government and Business Task Force could also be set up in conjunction with the policy and red meat industry organisation and costs and charges review to look at establishing a Development Bank to provide long term "patient" finance to assist Australian farmer innovation to take advantage of the foreshadowed Asian Food Bowl opportunities and implement carbon emission trading and/or direct action initiatives. This would allow the Australian export industry to compete with the overseas investors from China, South East Asia, South America and the Middle East and underpin the Australian rural and manufacturing export industry during the rest of the century. 

Commercial banks conventionally focus on providing working capital credit to industry. This working capital is lent against collateral contributed by the inventories for raw materials, final products and works in progress which implies a lower degree in maturity and liquidity mismatch than lending for capital investment.  This makes traditional commercial banks less suited to lending for capital investment.

To cover the shortfall in funds required for long term investment opportunities, developing countries around the world have needed to create Development Banks for the mandates required to provide long term credit on the terms to render such investment sustainable. 

The role of Development Banks in emerging economies which are competitors to Australian farmers in South America and Asia, and to a lesser extent in Africa are well known.

OECD estimates suggest that there are about 340 Development Banks in some 80 developing economies and there are indeed many examples of Development Banks in developed economies such as the United States and Europe. 

New developing economies relied heavily on Development Banks in their post war industrialisation effort and Development Banks in countries like Brazil and India have continued to have an important role in their emerging economies today. 

The Brazilian development bank BNDES stepped in to keep business credit going when private sector loans dried up in 2008 and during the GFC and it is reported to have lent a record US $100 billion in 2010, 23% higher than the previous record in 2009.

An Australian Development Bank would provide long term “patient” finance for the future of Australian rural and manufacturing (and indeed mining) industries in line with numerous precedents around the world and would not involve the propping up of failing businesses or industries.

Short Term Levy Moratorium

If necessary, the levy Legislation could be amended as a matter of urgency with bipartisan political support to allow for the moratorium on the $5 per head transaction levy during the levy period.  A $5 transaction levy moratorium during the review period would apply to all cattle sales and there would therefore be no equity issues between producers.

The AMPC and RMAC hold crisis levy reserves of about $65M between them and MLA hold cash reserves of $70M.  This means that there are total reserves of about $135M available that could be used as a buffer to keep cattle industry collective organisations afloat during a restructure review levy moratorium.

A transaction levy moratorium of, say, three or four months during a restructure review period would still leave ample crisis levy reserves for the future.

Reconstruction Finance

Short term reconstruction debt bridging finance could, in appropriate cases, be dealt with through a separate entity or body and through an expended farm finance package that was announced by the Federal Government at the end of last month.  A review and extension of exceptional circumstances drought relief should also be undertaken.

Outcomes

If the Government influenced costs and charges on the Australian red meat industry were reduced in revenue percentage terms so that they were in parity, or even half way to parity, with the Government influenced costs and charges and industry organisation expenses of our US counterparts the net savings to the red meat industry in Australia would be measured in billions of dollars and hundreds of dollars per head producers for each beef slaughtered. 

Similar savings could be made if Australia were able to negotiate equivalent tariff reductions to those enjoyed by many of our overseas competitors.

A review of our competition legislation & policy may result in more competition weakening the grip of the Coles/Woolworths duopoly on rural produce markets resulting in a higher share of the retail dollar for Australian producers.

If Australia’s producers share of the retail dollar could be increased to say half the level of our US counterparts, the rewards to producers would again be measured in the hundreds of dollars per beast sold onto the domestic market. 

The GHD Hassall 2010 report into a national beef grading system forecast that the introduction of a national beef grading and consumer friendly truth in labelling system for Australian consumers would increase the return to the beef industry of between $500 million and $1.2 billion a year.

Levy moratoriums and reconstruction finance could be arranged to deal with the short term issues and a Development Bank could be established to provide long term “patient” finance and underwrite the future of Australia’s manufacturing industries by encouraging them to take up Australia’s opportunities in the emerging Asian economies.

A review of the current red meat industry structures may result in reformed industry organisational structures with flat line connection to grass roots producers with the ability to provide a seamless interaction between policy setting and policy delivery that would provide a vibrant and well funded voice to Government on cattle industry issues. 

Conclusion

The introduction of these measures would provide short term bridging finance and cost relief to the cattle industry, allow our farmers to compete on a level playing field with their overseas competitors, encourage the long-term development of Australian domestic markets and provide long term development finance to underpin the future of rural Australia.  

Some Facts and Figures can be viewed here [View Here]


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