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This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
CONTENTS
Passage History
Dairy Industry Adjustment Bill 2000
Date Introduced: 16 February 2000
House: House of Representatives
Portfolio: Agriculture, Fisheries and Forestry
PurposeThe Bill forms part of a package of four Bills that provide an adjustment program for the deregulation of the Australian dairy industry. To facilitate this program the Bill establishes the Dairy Adjustment Authority, the Dairy Structural Adjustment Fund and provides for the collection of the dairy adjustment levy and the payment of grants to eligible dairy producers.
BackgroundThe Bill gives effect to the Government's decision, announced on 28 September 1999 to facilitate a dairy industry structural adjustment program subject to all States agreeing to deregulate their market milk schemes. Announcing the decision, the Minister for Agriculture, Fisheries and Forestry, the Honourable Warren Truss, said the package would assist restructure of the industry by helping farmers improve their efficiency and competitiveness after deregulation.(1)
Deregulation of the Australian dairy industry
The dairy industry is currently supported by two major sets of regulatory arrangements, the Domestic Market Support Scheme (DMS) for manufacturing milk, administered by the Commonwealth, and State regulatory arrangements for market milk.
Domestic Market Support Scheme
The DMS scheme is the current manifestation of a long series of Federal Government schemes providing assistance to manufacturing milk (ie milk used for butter, cheese, powder etc). It is funded through two levies: one paid by farmers on all milk sold for fresh consumption and the other paid by dairy product manufacturers on all milk used for dairy products consumed in Australia. These levies are effectively payments from consumers to producers through higher retail prices. Funds from the levies are pooled and in 1998/99 resulted in payments of around 1.6 cents per litre to dairy farmers supplying manufacturing milk. The scheme results in transfers of industry revenues from the market/fresh milk states of New South Wales, Queensland and Western Australia to Victoria, Tasmania and to a lesser extent South Australia. In 1998/99 DMS provided net payments of $96 million to the dairy industry, of which $85.6 million went to Victoria.(2)
With a declining pool of funds from levies and their application to increasing volumes of manufacturing milk, the DMS scheme now provides only a minimal amount of assistance. It is scheduled for termination on 30 June 2000 as provided for in the legislation which brought it into effect on 1 July 1995.
State regulatory arrangements - market milk
State governments have long regulated the market or fresh milk sector including pricing, production controls through quotas/pools, distribution arrangements and product quality. A key element has been a pricing structure with a substantial premium to farmers for their market milk.
At the post farmgate level, all States and Territories have deregulated their distribution chain controls on processing, vending and retailing. Decisions by States to remove pricing controls on the distribution chain were generally taken prior to the establishment of the National Competition Policy and were justified on grounds of efficiency in distribution. Queensland was the last state to remove post farmgate regulations which it did on 1 January 1999.
The current deregulation issue, which arises in part from reviews of dairy marketing arrangements by the States under National Competition Policy, basically concerns the control of farmgate prices. If controls were removed then the premium for market milk would be eliminated. All States would be affected but those with a greater dependence on market milk sales for revenue, that is New South Wales, Queensland and Western Australia, would be affected more than Victoria, Tasmania and South Australia.
Senate Rural and Regional Affairs and Transport References Committee Inquiry
The issue of deregulation of the dairy industry has been the subject of debate and inquiry over several years, the most comprehensive inquiry being that of the Senate Rural and Regional Affairs and Transport References Committee undertaken in 1999. That inquiry involved 12 hearings in every Australian State, attracted 116 written submissions and generated 681 pages of transcript of evidence from 99 witnesses. The report of the Senate inquiry, Deregulation of the Australian Dairy Industry, ('the Senate report') thoroughly explores all key issues relating to the proposed deregulation of the Australian dairy industry. This section of the Digest draws heavily on that report.
The principal support for deregulation emanates from Victoria. That State produces almost two thirds of Australia's milk and the market is dominated by two co-operatives, Murray Goulburn and Bonlac. Between them these two co-operatives process over 50 per cent of Australia's milk. Murray Goulburn and Bonlac are heavily geared towards the export market and it is this export market exposure, which is the main commercial driver behind deregulation.(3)
The Victorian Government has announced its intention to go ahead with deregulation on 1 July 2000(4) based on the outcome of the Victorian dairy industry plebiscite held in December 1999.(5) It is a commonly held view in the industry that if Victoria deregulates, it will become increasingly difficult for the other States to sustain any remaining price and market restrictions, due to the competitiveness of Victorian producers, processors and manufacturers.(6)
National Competition Policy Reviews
The National Competition Policy reviews of state regulatory arrangements undertaken as a result of the Competition Principles Agreement between the Commonwealth and the States have also added impetus to the deregulation push. All reviews from the various States accepted the inevitability of deregulation however, except for Victoria they concluded that the timing of full deregulation should be delayed by at least several years.(7)
Australian Dairy Industry Council
The Australian Dairy Industry Council, (ADIC), the industry's peak body, is also of the view that deregulation is inevitable and that the primary question is how deregulation should be handled. ADIC has taken the view that full deregulation should take place from 1 July 2000 to fit in with the sunset of the DMS Scheme and that the appropriate mechanism for dealing with the dramatic fall in dairy farmers' income at that date is a restructure package.(8) On April 23 1999, the ADIC submitted an industry proposal to the Minister for Agriculture, Fisheries and Forestry, seeking a national re-structure package of $1.25 billion to manage simultaneous orderly removal of the DMS arrangements and market milk regulations on 30 June 2000. It is ADIC's proposal, with expanded compensation and levy requirements, that forms the basis of the Government's proposed restructure package as set out in the Bill.
Arguments in favour of deregulation
According to the Senate report the major arguments advanced in favour of deregulation are:
Supporters of deregulation also point to the increasing competitiveness of other world producers who are increasingly able to match the cost of production of Australian dairy farmers.(10)
Arguments against deregulation
Four reasons were put to the Senate Inquiry by the dairy industry in support of the continuation of market milk regulatory arrangements, specifically:
According to the Senate report, the major concerns in relation to deregulation are:
The Committee had particular concerns about the detrimental consequences of deregulation for individual farmers, their businesses and communities including:
Despite these concerns, it is of note that the Senate inquiry accepted the inevitability of de-regulation stating:
sooner rather than later the market will force deregulation and that a managed outcome with a soft landing is preferable to a commercially driven crash. (14)
While the Committee noted that a staged approach to deregulation may moderate its immediate effects and allow farmers more time to restructure their businesses, it concluded that a one-off, properly designed, adequately resourced and fully coordinated approach to deregulation is the preferred approach, should deregulation occur on 1 July 2000.(15)
Main ProvisionsDairy Industry Adjustment Program
Item 17 inserts proposed Schedule 2 - Dairy industry adjustment program into the Dairy Produce Act 1986.
Clause 1 provides a simplified outline of the proposed Dairy Industry Adjustment Program. The program provides two types of grants to dairy producers, namely DSAP payments (made under proposed Schedule 2) and dairy exit payments (to be made under proposed Part 9C of the Farm Household Support Act 1992).
Clauses 2-8 contain definitions necessary for determining eligibility for DSAP payments. Eligibility for DSAP payments is dependent on having an eligible interest in a dairy farm enterprise. A dairy farm enterprise is a business that delivers market milk and or manufacturing milk. The enterprise may consist of owners, sharefarmers, lessors and lessees (clause 6). DSAP entitlements are calculated according to the overall enterprise amount for a particular dairy farm enterprise. The overall enterprise amount is based on milk delivered in the 1998-99 financial year on which the market milk levy was imposed or on which a domestic market support payment was paid.
Dairy producers will be able to apply for DSAP payments in a three-month period to be notified by Gazette notice (clause 4). DSAP payments will commence on Proclamation, which must be after 30 June 2000, and within six months of commencement of the proposed Act (clause 3). If Proclamation is not within six months of the Bill receiving Royal Assent then Part 2 of the Schedule is repealed. This effectively gives the States six months to remove those parts of their legislation relating to the regulation of market milk. Entitlement rights will accrue from 1 July regardless of the date of Proclamation (subclause 23(4)).
A DSAP payment is defined in clause 2 as a payment under the DSAP payment scheme. The acronym DSAP is not spelt out in the Bill or Explanatory Memorandum, however the Minister, the Honourable Warren Truss, did refer to the 'Dairy Structural Adjustment Program' in a media release of 17 February.
Proposed Division 1 sets out the broad principles of the DSAP 'scheme'. The detail of this scheme is to be formulated by the Minister within 14 days of commencement of the Schedule (clause 10). The scheme will be a disallowable instrument (clause 35).
The DSAP scheme will provide 3 types of payment rights:
These payment rights will be available to those producers who held an eligible interest in a dairy farm enterprise on 28 September 1999, the date of the Commonwealth Government's announcement regarding the provision of the adjustment package. Owner operators, sharefarmers, lessors and lessees will be eligible to claim their share of the overall enterprise amount attributable to a particular dairy farm enterprise (clause 13). Subclause 13(3) provides examples of payment rights where there are one or more parties sharing.
Standard payments rights will be based on milk deliveries in 1998-1999, and will be worked out by reference to a rate of 46.23 cents per litre for market milk and a national average rate of 8.96 cents per litre for manufacturing milk (clause 2).
Exceptional events supplementary payment rights
Where producers are entitled to standard payments rights and they satisfy the Dairy Adjustment Authority (DAA) that their milk deliveries in the 1998-99 were at least 30% down on the average for the three previous years because of exceptional events then they will be entitled to exceptional payment rights. The value of the payment is at the discretion of the DAA and payments must not exceed what would have been granted if the exceptional event had not occurred (clause 14).
Anomalous circumstances payment rights
Producers who hold an interest in an eligible interest in a dairy farm but who are not eligible for a standard payment under the scheme may be entitled to payments if they have been affected by anomalous circumstances as defined in the scheme. The grant of such payments will be at the discretion of the DAA (clause 15).
Where DSAP entitlements exceed $350,000, eligible dairy farmers will have to demonstrate that a minimum 70% of their total income in 1998/98 was earned from dairy production (clause 16).
To be eligible for DSAP payments producers will have an obligation to obtain advice from an independent financial adviser on the long-term prospects of their farming enterprise (clause 17). The advice given is confidential and there is no compulsion on dairy producers to act on that advice.
Timeframe of claims and payments
Under the scheme, claims for DSAP payments must be made within the three month claim period (clause 20) specified by the Gazette Notice advertising the DSAP (clause 4). Claims will be received outside this timeframe where there is evidence of error on the part of the DAA (clause 20). Payments are to be made after the DSAP payment start day and no later than the quarter ending on 30 June 2008 (clause 20). The DAA is to conduct a public information program about the scheme to encourage and assist dairy producers in making claims for payment (clause 22).
Clause 23 deals with the time frame for DSAP payments. In order to give the DAA time to assess claims, payments can not begin until 30 days after the three-month DSAP claim period. Diary producers are to receive their entitlements on a quarterly basis (clause 23(4)).
DSAP payments are taxable. For the purposes of the Income Tax Assessment Act 1997 a DSAP payment is taken to be a subsidy received by the particular producer for the purpose of carrying on a business (clause 74).
Dairy Adjustment Authority (DAA)
Proposed Division 6 establishes the Dairy Adjustment Authority (DAA). The DAA has powers to do all things necessary or convenient to be done for or in connection with the performance of its functions, including the power to enter into contracts and agreements on behalf of the Commonwealth (clause 56). Membership of the DAA is initially to consist of a chairman, 2 industry members, a government member and one other member all appointed by the Minister (clause 58). The Minister, may phase down the DAA in stages (clause 57). Subclauses 58(2)-58(6) set out the membership of the DAA for the phase down periods. Clauses 59-60 outline the qualification requirements and appointment procedures for members of the DAA. Remuneration is to be determined by the Remuneration Tribunal or as prescribed (clause 64).
Decisions of the DAA are reviewable (clause 25). Producers dissatisfied with a decision of the DAA have 28 days to request the DAA to reconsider the decision. Applications to the Administrative Appeals Tribunal can only be made after the DAA has either confirmed or varied its original decision (subclause 25(1)).
Clause 69 sets out the relationship between the Australian Dairy Corporation (the Corporation) and the DAA. The Corporation must if requested provide reasonable resources and facilities to the DAA so that the DAA can perform its functions (clause 69).
Dairy Structural Adjustment Fund
Proposed Part 3 deals with the Dairy Structural Adjustment Fund (DSAF).
Clause 76 establishes the Dairy Structural Adjustment Fund which is to be vested in and administered by the Australian Dairy Corporation ('the Corporation'). Clause 77 specifies the money to be credited to the DSAF, including the dairy adjustment levy, fees and civil penalties relating to the DSAP scheme and the recovery of overpayments.
Clause 78 specifies the purposes that the DSAF is to be used for. These include:
Collection of the dairy adjustment levy
A key feature of the adjustment package is that it is to be totally financed from a Commonwealth levy of 11 cents per litre on sales of liquid milk products over a target period of up to 8 years. The levy is to be imposed as the Dairy Adjustment Levy by any of the following proposed Acts:
Proposed Part 4 deals with the collection of the dairy adjustment levy.
The levy is to commence on 8 July 2000 (clause 88) and will terminate when the Minister is satisfied that all funding obligations associated with the Dairy Industry Adjustment Program have been met (clause 92). The levy is also to be terminated if DSAP payments do not commence within six months of the Bill receiving Royal Assent (clause 92).
Clause 87 details where the levy is payable. The levy is to be imposed at the point of sale of the leviable milk product to a retailer (clause 87). A leviable milk product is a dairy product that is marketed or for use principally as a beverage for human consumption or an ingredient for use in making a beverage for human consumption (clause 86). Clauses 94-96 deal with levy collection agents and collecting organisations. Under subclause 95(2) the collection agent is defined as the person who conducted the last process before the sale to a person for resale or applying the product to their own use. The Explanatory Memorandum says that in most cases the collection agent will be the milk processor.(16) Exemptions from the levy can be made by regulations (clause 90).
The second part of the Dairy Industry Adjustment Program is the dairy exit package. This is to provide access to a grant of up to $45,000 on the sale of the farm. The dairy exit package is effectively to be part of the current Restart Re-establishment Grant Scheme originally set up as the Farm Family Restart Scheme in 1997. Its legislative base is the Farm Household Support Act 1992.
Item 8 of schedule 2 of the Bill inserts proposed Part 9C - Dairy Exit Payments into the Farm Household Support Act 1992.
In contrast to DSAP payments, dairy exit payments will be subject to an assets test. To qualify for the $45,000 payment, producers must have less than $157,500 in net assets after the sale of their farm enterprise. The amount of the payment will be reduced by $2 for every $3 where a producer's net assets, after selling the farm enterprise, exceeds $90,000. The value of the net assets will include the value of the family home if it has been annexed from the farm enterprise but will not include up to $10,000 of household contents and personal effects. In addition, producers who receive the grant will undertake not to run or operate a farm again for 5 years. Note that these are the current arrangements for the Restart Re-establishment Grant Scheme.(17)
There are time limits on dairy exit payments. Applications must be lodged by 30 June 2002 and producers must finalise the sale of the farm by 30 June 2003 (proposed subsection 52C(3)).
Dairy exit payments will be exempt from capital gains tax (item 15).
Under proposed subsection 52C(1) the Minister has the discretion to formulate a DEP scheme to deal with matters such as eligibility and payment procedures relating to dairy exit payments (proposed subsection 52C(2)).
Like DSAP payments, producers wishing to receive a dairy exit payment have an obligation to obtain financial advice and career counselling where appropriate.
It is of note that dairy farmers already have access to this $45,000 exit payment through the Restart Re-establishment Grant Scheme.(18) The major difference between the two schemes is that funding for dairy exit payments will come from the levy imposed on retail milk rather than from consolidated revenue (proposed subsection 57(5)).
Concluding CommentsImplementation timetable of the Dairy Industry Adjustment Package
As the Government has indicated, the timeframe for implementation of this adjustment package is tight. The Minister, the Honourable Warren Truss, has expressed a wish that that the package be operating by 1 July 2000 to coincide with the termination of the DMS scheme on 30 June and the proposed commencement of deregulation in Victoria.(19) Therefore if payments are to be made available on 1 July, the Dairy Adjustment Authority which will be responsible for making those payments will need to be formally operating by 1 April. This is to allow a three-month registration period and to receive bids for entitlements. The Government has indicated that the readjustment package will not commence unless all States deregulate their market milk. Assuming the Bill receives Royal Assent by 1 April, then DSAP payments will only begin when all States have repealed those parts of their legislation relating to the current market milk arrangements.
Accompanying the structural adjustment package are three separate levy bills that impose the 11 cent levy on fluid milk. Collection of the levy will commence on 8 July 2000 regardless of whether there is State agreement to deregulate. It is therefore possible that consumers will be funding the levy before State Governments have all abolished their regulatory controls and before dairy producers are able to receive grants from the program.
The levy and consumer interest
The program is to be totally funded through an 11 cent levy on all retail milk sales. Minister Truss in his announcement on 28 September 1999 suggested that this levy will not affect milk prices.
This levy is unlikely to have any impact on retail prices as farm gate prices are expected to fall after deregulation by at least this amount.(20)
Similarly the dairy industry expects that removal of market milk regulations would result in a drop in farmgate prices of 11-15 cents per litre and therefore a levy of 11 cents to fund the compensation package should not, of itself, increase the retail price of milk to consumers.(21)
The Senate Inquiry, on the other hand, was concerned by evidence that suggested that the costs associated with deregulation would fall on milk producers and any benefits would not flow through to consumers in the form of cheaper milk.
According to the Committee Report:
The funding of the package via a consumer levy appears to be opportunistic. Consumers will probably not get any real benefits from the deregulation of the farmgate price for market milk, at least not in the short to medium term. The Committee is therefore at a loss to understand why consumers should fund the package. From a producer's point of view, it seems that they consider that they themselves are funding the package, through the fall in the farmgate price.
The cost to consumers is claimed to be neutral, the price of milk is not expected to increase, as "it replaces the present price structure established through existing regulation". However, there is a fundamental flaw in this claim - it assumes that the full extent or almost the full extent of the fall in price to the producer will be passed on to the consumer. The Committee considers that this assumption is unduly idealistic, that there will be nothing to stop retailers and processors from increasing their margins, and the consumer will be paying the price. The demand for drinking milk is highly inelastic - the processors and retailers know this and will take advantage of that fact.(22)
The Government's response to these concerns has been to fund the Australian Competition and Consumer Commission to the amount of $500,000 from the Dairy Structural Adjustment Fund so that the ACCC can monitor milk prices during deregulation.
World Trade Organization (WTO) commitments
The Government expects that the dairy industry adjustment package will be entirely consistent with Australia's WTO commitments.
During the Uruguay Round of Trade Negotiations, Australia committed to an 'Aggregate Measurement of Support' (AMS) of no more than A$471.86 million for 2000-01. In simplified terms, this is the limit of how much Australia can spend on production-distorting agricultural subsidies per year. This amount will remain unchanged in future years in the absence of a new Agreement on Agriculture in the WTO.
As no other agricultural industry in Australia receives any support counting toward this figure the total amount is available to support the dairy industry. The $1.73 billion package, provided for in the Bill, must be divided such that not more than A$471.86 million is spent per year. Many elements of the package would not count toward the AMS figure, and indeed may not even be considered bound by other commitments in the Agreement on Agriculture, especially if they are sufficiently decoupled(23) from production decisions. This includes the Dairy Exit Payments. They would be considered "Greenbox"(24) and hence not contributing to the AMS amount.
However the DSAP payments would count to the AMS figure, and so must not exceed the limit. Consideration has been given in drafting the legislation to ensure that recipients of DSAP payments over a number of years cannot take the stream of future payments as a current lump sum (eg from a financial institution), and hence take the total payments over the limit in any one year.
Australia has a particular interest, as an agricultural exporter, in making the Agreement on Agriculture effective on our trading partners. Therefore Australia cannot be seen to be violating it in any way, and it appears that the Bill meets that goal.
For a discussion of the constitutional implications of the Bill, the reader is referred to the Department of the Parliamentary Library's forthcoming Current Issues Brief entitled 'Dairy Industry Adjustment Bill 2000 - Constitutional Issues?'
The two major long-run beneficiaries from deregulation will be domestic consumers and producers of manufacturing milk, particularly that going to the highly competitive export market.
The Productivity Commission estimates that in 1997-98 the effective rate of assistance on fresh milk exceeded 200 per cent while that on manufactured milk was 18 per cent.(25) This represents a gross distortion of the Australian dairy market and industry and has hindered restructuring within the industry. The current regulatory regime involves a massive cross subsidy from domestic consumers to producers of manufacturing milk, a transfer estimated to exceed $500 million annually.(26) The bulk of this cross subsidy will be eliminated eventually under deregulation. This will benefit the domestic consumer through lower prices and also is likely to provide benefits through new milk products which will be more competitive with competing fruit and soft drinks following deregulation. This consumer benefit is of course subject to the proviso that the cost savings will be passed on by retailers and processors.
The major production of manufactured milk occurs in Victoria. It is largely exported and largely controlled by two processing companies. Producers and processors in Victoria are quite certain that they will be major beneficiaries from deregulation and have voted accordingly.
The major losers from deregulation will be producers of market milk and those States where market milk production represents a large share of total production. ABARE has estimated that the largest fall in dairy farm incomes will occur in Western Australia and New South Wales and hence that the largest payments per farm under the Dairy Industry Adjustment Package will go to producers in those two States. An estimate of a fall in income per farm of $28,350 per year is based on two rather stringent assumptions. The first is a medium to high estimate of fall in market milk price (15 cents per litre), and the second is the absence of structural changes in production methods, that is, no decline in production costs is assumed. It is possible that, in the long run with the removal of present price distortions and the provision of appropriate adjustment assistance, producers in the States who are the immediate losers from deregulation may have the greatest scope for reform and productivity improvement.
The specific loser will be the dairy farmer who loses his or her livelihood. The Explanatory Memorandum does not indicate the possible loss of dairy farms under deregulation and indeed this is very difficult to estimate with any confidence. In the past 25 years, the number of Australia dairy farms has fallen from around 30 000 to fewer than 13 500 and at the same time production has increased by 50 per cent.(27) At a recent Senate hearing, a spokesperson for Agriculture, Fisheries and Forestry Australia (AFFA) stated that early assessments indicated that around 4000 farmers 'would become vulnerable' under deregulation but it was not their expectation that they would all exit the industry.(28) AFFA had made a provision of $30 million for exit packages.(29) This would allow the maximum payment of $45 000 to only 667 producers.
A further key question is who should pay for the adjustment assistance to those disadvantaged by deregulation. The Explanatory Memorandum argues that the Australian community will benefit from softening the adjustment process. It can be argued that the Australian taxpayer should bear this cost but in this Bill it is proposed that the domestic consumer of dairy products should pay a levy to fully finance the adjustment program. In effect, the domestic consumer is being asked to wait eight years before enjoying the full benefits of dairy deregulation.
Endnotes
For more details of domestic market support schemes in agriculture, and the relationship with WTO rules, see the paper "Domestic Support Policies" available at http://www.econ.ag.gov/briefing/wto/issues/domestic.htm
Mary Anne Neilsen
7 March 2000
Bills Digest Service
Information and Research Services
This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.
ISSN 1328-8091
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Published by the Department of the Parliamentary Library, 2000.