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Egg Industry Service Provision Bill 2002
WARNING:
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
Purpose
Background
Main Provisions
Concluding Comments
Appendix 1 - Comparison
of 'Privatisation' Measures in AFFA Portfolio
Endnotes
Contact Officer & Copyright Details
Egg Industry Service Provision Bill 2002
Date Introduced: 28 August 2002
House: House of Representatives
Portfolio: Agriculture, Fisheries and Forestry
Many readers will be aware of some of the issues facing the egg industry in recent years. The egg industry, and the poultry industry in general, has faced controversy over animal welfare issues, antibiotics in growth promotants, and outbreaks of Newcastle Disease.(1) In the past decade, there have been other issues such as the deregulation of egg marketing and a decline in the comparatively low annual consumption of eggs in Australia. Most of these issues have some form of direct or indirect connection with the measures in this Bill.
One of the most conspicuous issues in the egg industry has been 'battery hen' cages. The Put the Chicken Before the Egg campaign by the RSPCA, and the Free Chook by 2000 campaign supported by Animals Australia, were designed to phase out 'caged' production systems and to shift consumer perceptions via branding of 'barn laid eggs' (see below).(2)
The conflict came to a head at a meeting of the Agriculture and Resource Management Council (ARMCANZ) in August 2000. At that meeting, attended by RSPCA and AEIA, ARMCANZ decided to 'support caged layer hen housing for the foreseeable future'.(3) (The Australian Egg Industry Association (AEIA) is the peak representative body for 'commercial egg producers, processors of egg products and the marketers thereof'.(4)) This decision was alleged to have violated an agreement among stakeholders regarding a phase out of cages(5) and an earlier alleged undertaking by AEIA to review caged production systems based on community concern arising out of the animal liberation campaigns.(6)
A single egg yolk contains almost 200 to 250mg of cholesterol.(7) This fact seems to have had a strong impact on demand and consumption of eggs in Australia. But eggs may be unfairly associated with cholesterol problems.(8) The real problem may be saturated fats and, perhaps, an association between eggs and other foods such as bacon or sausages.
From the 1920's processing and marketing of primary produce was increasingly controlled by statute and compulsory cooperatives. The statutory marketing arrangements typically involved demand/supply management using market entry barriers, production control mechanisms, such as quotas and licences, along with various pricing and vesting powers.
From the 1970's these arrangements were increasingly subject to scrutiny and review. The focus was driven partly by competition principles and by other environmental changes:
For example, better and cheaper communications, the development of new financial tools to manage risk, and the adoption of a flexible exchange rate, have substantially reduced the need for statutory arrangements to smooth out the effects of fluctuations.(9)
In the late 1980's and 1990's many statutory marketing arrangements were deregulated. The focus was on irregularities or inefficiencies produced by the regulatory arrangements, with the prospect of further corporatisation or privatisation of the residual public bodies.(10)
In the late 1990's corporatisation and privatisation received renewed attention under the National Competition Policy and the Competition Principles Agreement among the Commonwealth and State and Territory Governments.(11) The focus in this debate has been review of legislative arrangements and privatisation of marketing and research and development bodies. The recent history at the Commonwealth level, is discussed below.
The egg industry has followed the trend above. Deregulation has occurred in New South Wales, Victoria, Queensland, South Australia, the Australian Capital Territory and Northern Territory.(12) 'Statutory marketing' still exists in Tasmania and Western Australia. But it has been reviewed in Tasmania(13) and is under review in Western Australia.(14)
This Bill follows three sets of Acts passed in 2000-2001 which deal with privatisation or corporatisation in the Agriculture, Fisheries and Forestry Portfolio. These are:
All of these Acts seek to transfer control over marketing and research and development activities from government to industry participants. They provide for private control in relation to the use of participant levies whilst retaining an element of public control in relation to the use of government subsidies. Where relevant they are discussed below. More detail appears in Bills Digest No. 52 1999-2000; No. 58 1999-2000 and No. 93 2000-2001. For a comparative table showing the key similarities and differences among these Acts see Appendix 1 - Comparison of 'Privatisation' Measures in AFFA Portfolio.
The Bill will facilitate the creation of the Australian Egg Corporation Limited (AECL). This will be a company limited by guarantee which will undertake the generic promotion (see discussion below) and research and development activities that are currently undertaken under the auspices of the Rural Industries Research and Development Corporation. AECL will also assume the role in setting levies exercised by AEIA.
The proposed transition date is 1 January 2003.
The Bill would also introduce a compulsory levy to support generic promotion by AECL.
At present, producers pay a compulsory statutory 'laying chicken levy' under the Primary Industries Excise Levies Act 1999. The levy is imposed on hatcheries which supply laying chicks to egg producers. It is set at 7.87 cents/bird, which is distributed as follows:
Total laying chicken levy collection was $738 000 in 1998-99 and $716 000 in 1999-00.(16)
The proposed compulsory promotional levy would be imposed on producers, but collected by hatcheries along with the laying chicken levy. The compulsory levy would be 32.5 cents/bird, in addition to the existing 7.87 cent/bird levy.
The Explanatory Memorandum states that in the 1990's, average annual egg consumption in Australia fell from 146 to 137 eggs per person. By contrast, the AEIA estimates that in the same period consumption only fell from 159 to 152 eggs per person. In either case, egg consumption in Australia is well below per capita consumption levels in a number of other countries and is significantly short of an egg industry target of 200 eggs per person.
Various conclusions may loosely be drawn from these figures:
Figure 1: Consumption of Eggs in Australia (1960-1999)(19)
Figure 2: Annual Consumption of Eggs in Various Countries (1999)(20)
Three different production categories exist: 'caged', 'barn laid/deep litter' and 'free range':(21)
By far the largest proportion of eggs are produced in cage production systems:
Figure 3: Production Systems: Market Share(22)
And the vast bulk of the Australian flock is held in New South Wales and Victoria:
Figure 4: State Flock Percentages(23)
In caged production systems, there is a minimum space requirement of 550 cm2/bird. That is, new cages constructed after 2001 must comply with a 1995 standard of 550 cm2/bird. There will be a phase-out of old cages of less than 550 cm2/bird by 1 January 2008. There will also be a requirement that each cage have a commercial life of at least 20 years.(24) These standards, which reflect a compromise between production and animal welfare, aim to provide certainty to producers and to promote investment in new infrastructure. Perhaps significantly, AEIA said that '[t]his will cause considerable hardship for some producers with cages installed prior to 1995, which must be phased out by 2008'.(25)
It is perhaps significant that the present minimum space requirement in the European Union is 750 cm2/bird. The EU will phase-out cages of less than 750 cm2/bird by 2012.(26)
At present, an estimated 25% of commercial egg producers (³ 1000 laying hens) operate a free range production system, suggesting a substantial niche market in free range eggs.(27) Some large commercial producers (@ 20 000 hens) operate all types of production systems.
There has been little growth in the egg industry in Australia as in other countries:
Figure 5: Egg Industry Growth (Various Countries) (1961-71 to 1997-98)(28)
And there may be small prospects for growth, except perhaps in processed products:
Limited Growth Prospects: About 65-70% of egg consumption is in the household sector with little growth. Prospects for growth rely on processed products supplied to the food service sector, including restaurants and take-away foods as well as prepared pre-packaged meals. The processed market is where imports have grown strongly.(29)
One of the hot issues in the egg industry, as in other industries, is generic promotion. Its significance is underscored by the apparent decline in egg consumption in Australia.
The AEIA has argued that the decline in Australia is a result of 'a market failure in egg promotion' and that the decline will continue without generic promotion. However, this may be an unproven or contestable claim, at least in relation to generic promotion.
The fact that there has been a market failure may not be surprising. But there are various forms of promotion and various returns on each form of promotion. Generic promotion includes the promotion of eggs vis-à-vis other foods. One alternative is brand promotion, or the promotion of eggs by individual companies. Another alternative would seem to be niche promotion, or the promotion of eggs from different production systems. What are the returns on the various forms of promotion in terms of consumption and demand?
Attempts have been made at generic promotion in the past. The Explanatory Memorandum provides the example of the Incredible Egg Company, established by AEIA in 1987 to promote egg consumption and the egg industry generally. While the company initially enjoyed widespread support, it failed 'due, to a large extent, [to] resentment at the large number of "free riders" benefiting at the expense of those producers who paid their contributions'.(30) Other factors included the administrative costs of compliance.
The case for generic promotion would seemed to be based on the fact that there are few consumer substitutes for eggs and that generic promotion will assist all producers. Moreover, it is argued, brand promotion and the creation of brand recognition 'has not been enough to redress declining per capita consumption'.(31) Specifically, it is suggested that, 'the nature of the marketing system, which is dominated by supermarkets, means that generic promotion is the most appropriate method of communicating to consumers'.(32)
The case against generic promotion may be more complex. In other industries, such as the dairy industry, various studies have been conducted into the effects of generic promotion. Some of these studies suggest that the returns on generic promotion may be affected by the extent of government regulation or competition, producer and consumer segmentation, brand marketing by larger producers, product substitutes and substitute promotion, and the elasticity of demand or the extent to which demand for a product is affected by price.(33)
One study cautioned that there may be greater returns from investment in research and development than in generic promotion.(34) Another study found that there were low returns on generic promotion and even smaller returns or profits for producers: 'It is not profitable to increase raw milk promotion expenditure on the domestic or on the export market ... a $1 increase in domestic raw milk promotion returns only $0.21 to dairy farmers'.(35) A one per cent increase in promotion expenditure was associated with a 0.004 per cent increase in dairy revenue and producer surplus but a 0.018 per cent decrease in net profits.(36)
Arguably, the strongest returns, or the strongest incentives, exist for brand promotion. As noted above, labelling of eggs as 'free range' or 'barn laid' may have little or no effect on consumption in these niche markets. Moreover, as a recent dairy industry study noted, the increasing importance of brands and the investment by national producers in them has the potential to render generic [or niche] promotion irrelevant.(37) This statement would seem to have particular relevance to the egg industry which is dominated by large producers.
Ultimately, more research may be required on promotion. As one of the studies concluded: '[o]n-going cost-benefit analysis may help to determine future activities in this area'.(38)
It is worth noting that generic promotion was a major issue in wool industry privatisation. In that industry, expenditure on promotion had far exceeded research and development. A reform task force concluded that generic advertising did not have clearly measurable benefits for growers and should be the responsibility of retailers and brand owners. These concerns were reflected in specific legislative measures to focus promotion expenditure.(39)
A related issue is likely to be the volume of demand. While the Australian Bureau of Statistics and AEIA have compiled historical databases of consumption, there has been little research on demand. This may be critical: whereas consumption is a static measure, demand is a variable reflecting factors such as prices, incomes, dietary preferences, etc. As noted above, returns on generic promotion are affected by the elasticity of egg demand. It may be that eggs have a very low price or income elasticities, suggesting that reducing costs or prices may not improve consumption. Advertising elasticities may be negligible, suggesting there may be little correlation between generic promotion and egg demand.(40)
A recent Australian study identified a range of determinants of egg demand in Australia. The study associated a range of factors with decreasing demand in Australia: age, price of substitutes, household income, female workforce, and urbanisation. A particularly high correlation existed between demand and concerns over cholesterol. In terms of advertising, the study found a 'general increasing trend in the importance of advertising over-time' in respect of sales, but less so, if at all, in respect of total retail revenue. The authors said that the results 'do not suggest that, universally, advertising expenditure will always have a positive effect on egg sales' although they noted that 'advertising can have a significant influence on sales' particularly in relation to health or cholesterol concerns.(41)
However, the positive outcomes were variable, with national advertising having a strong marginal effect in Queensland and state advertising having a similar effect in Victoria. Also, the impact of advertising on total revenue varied considerably from year to year.
Overall, expenditure on generic promotion may have less effect on sales than the manner in which an advertising campaign is pursued.(42) Arguably, it may not be possible to predict the costs and benefits of generic promotion without further examination of egg demand and the determinants identified above to determine whether they can be directly affected.
The Explanatory Memorandum states that the Bill is supported by hatchery operators and by large and small producers alike. Moreover, it is supported by 'those involved in niche products' on the basis that 'any increase in egg consumption will ultimately feed through into their products as well'.(43) Payers will also be eligible to 'register for membership of [AECL] and will be able to vote on issues such as the rate of the levy'.
These claims are based on consultations undertaken by AEIA in April-Sptember 2001 to assess support for the establishment of AECL and the introduction of the compulsory levy. Of 508 egg producers across Australia, AEIA obtained responses from 238 (47%) representing over 96% of the 'ownership of laying hens in Australia'. Of those, 93.7% supported the creation of AECL and 87% supported the promotional levy.(44)
Opposition seemed to be limited. The Explanatory Memorandum stated the concerns identified by AEIA as being 'philosophical dislike of generic ideas', duplication of existing local marketing and 'lack of understanding of the proposal and industry issues'.(45)
There may be a disparity between large and small producers. Of the 508 egg producers in Australia (ABS), AEIA estimate that 340 are commercial producers (³ 1000 laying hens). The statistics above suggest that most if not all of the responses were received from the larger commercial producers. While this suggests a strong representation of the 'ownership of laying hens', it suggests a weak representation of smaller or niche producers.
It is perhaps significant that these smaller or niche producers are likely to be associated with non-cage production systems or 'barn laid' or 'free range' eggs.
The Minister for Agriculture, Fisheries and Forestry may enter into a contract with an 'eligible body' involving payments for promotion and research and development activities (proposed section 7). An 'eligible body' must be registered as a company limited by guarantee (proposed section 4). The Minister must be satisfied that the contract makes adequate provision to ensure that each payment is spent on relevant activities (see Table 3). Once a contract has been made, the Minister may declare the eligible body to be the 'industry services body' for the purposes of the Bill (proposed section 6).
Table 3: Commonwealth funding for 'eligible body'
|
Payment |
activities |
for the benefit of |
financial |
total limit |
annual limit |
|
promotion payments |
promotion and other services |
Australian egg industry |
egg levies |
total egg levy after transfer time |
N/A |
|
research |
R&D only |
Australian egg industry |
laying chicken levy (+penalties) |
total laying chicken levy |
N/A |
|
matching payments |
R&D only |
Australian egg industry & Australian community |
laying chicken levy |
total laying chicken levy |
lesser of:
|
In addition, an allowance is made for a carry forward of 'unmatched R&D excess' (proposed subsections 8(5) and (6)). This is the amount spent by the industry services body in a given year that is not met by 'matching payments' because of the total or annual limits on funding. No such allowance is made in the horticulture, wool and pigs industries.
Directions
The Minister may give written directions to the industry services body if s/he is satisfied that the direction is in the national interest 'because of exceptional and urgent circumstances' (proposed section 9). The directions are binding and must be tabled in Parliament within 15 sitting days, unless doing so would be likely to prejudice the national interest or the commercial interests of the body (proposed subsections 9(3) and (4)). Despite these powers, the Minister is not taken to be a director of, or to be in a position to exercise control over, the industry services body (proposed subsections 9(5) and (6)).
The Minister may delegate any or all of his or her powers and functions to the Secretary or an SES employee (proposed section 10). In relation to the horticulture industry, the power to give directions cannot be delegated, indicating that it must be exercised personally.(47)
In giving directions, the Minister must not require the body to incur expenses that exceed the public payments made under the funding contract. This restriction applies to payments made in the present year and to unspent or uncommitted payments from previous years (proposed subparagraph 9(1)(a)(ii)). In the horticulture and pig industries this restriction is only expressed to apply to payments 'under this Act'. If it is assumed that the restriction in the other industries applies to payments in the present year this may suggest that there will be more ministerial control over unspent or uncommitted payments in the egg industry. It permits retrospective control over the financial arrangements of the body. Alternatively, it may suggest that there is to be greater protection for spent or committed payments, if it is assumed that the restriction in the other industries applies to payments in previous years. It prohibits retrospective burdens on the financial resources of the body.
Given the emphasis on 'exceptional and urgent circumstances', and the need to make calls upon the resources of the industry body, the latter interpretation is probably correct. Given the scope in the funding contract to control use of payments, the former seems redundant.
As indicated, this Bill may be loosely compared or contrasted with these other sets of Acts in the Agriculture, Fisheries and Forestry Portfolio which deal with privatisation:
The push toward privatisation might be seen as an extension of the National Competition Policy and the Competition Principles Agreement. However, while the deregulation of the egg industry might have had a strong relationship with competition principles, by virtue of removing market entry barriers, production controls and pricing and vesting powers, the privatisation of the research and development program may have a weaker relationship. Does privatisation in this area necessarily have a positive effect on competition?
Arguably, there is and will continue to be, a general 'market failure' in relation to research and development and promotion activities. On this basis, as tradition would have it, the government has a positive intervention role. However, by recreating the 'market' in terms of stakeholders, and with minimum intervention in the form of compulsory statutory levies, the government is able to deal with 'market failure' by ordinary market processes.
The argument is that the shift from public to private has less to do with competition than with accountability. In a sense, there is a simple shift from administrative law and public political processes to corporations law and private political processes. In the Government's view this has certain advantages in terms of giving stakeholders greater control over the regulatory process and greater responsibility for the welfare of the industry.(48) However, it may have certain disadvantages for the egg industry and the wider community.
Once established, AECL will be a private company which receives the bulk of its income from a compulsory levy and matching public funding. It will perform a public function for Australian egg producers and the Australian community. As such, it might be expected to have special accountability obligations. To some degree it will be accountable to its members (in a management sense) and accountable to the public (in a financial reporting sense) under the Corporations Act 2001. It will also be accountable to the Executive (in both senses) in terms of funding contracts for research and development. But, it will not be accountable to Parliament. This is not unusual in the context of Government Business Enterprises. It reflects a compromise resolving a tension between private sector structure and public sector accountability.(49) But, it would seem to be unusual given the history of the egg industry and the level of government regulation of research and development in the wider agricultural sector. It may place pressure on accountability mechanisms, such as the terms and conditions of the funding contract and the constitution, etc. of AECL.
The main reason given for creating AECL is to establish a system of generic promotion backed by a compulsory levy. But, there may be little evidence that generic promotion will achieve the desired outcome of increasing per capita consumption of eggs.
The Explanatory Memorandum states that '[i]n New Zealand, the egg industry has been turned around by generic promotion'.(50) However, this claim appears to be questionable. Statistics New Zealand reported in 1998 '[t]otal egg production has remained relatively static for the past decade, with slight drops in per capita consumption - now around 200 eggs per person annually'.(51) The Poultry Industry Association of New Zealand reported in 2001 '[t]otal egg production has remained relatively static for the past decade, with a slight increase in per capita consumption - now around 203 eggs per person annually'.(52)
It may be that the increase in per capita consumption from 200 to 203 is part of the short term variability in consumption patterns evidenced in Figure 1. Neither the Government nor the industry have produced any independent substantive analysis proving that generic promotion has produced a significant turn around in egg consumption in New Zealand.
Despite the move to alternative housing systems (free range and barn laid) which now represent 8% of the market the egg industry and hence AEIA is still dominated by caged production systems and is therefore committed to large commercial producers (@ 20 000 hens). But, there appears to be a significant number of medium sized producers (1000 £ x £ 2000 hens) or large producers whose operations are segmented in both markets.
The comments in the background relating to statistics and generic promotion suggest that in either of these sectors, producers may be unlikely to benefit from generic promotion. Consumption seems highly unlikely to reach the annual industry target of 200 eggs per capita, based on historical patterns and uncertainties in the effect of promotion on demand. Large and niche producers may benefit from brand promotion, but competing promotion may result in substitution between egg types rather than increased consumption.
These issues would seem to be complicated by social factors, such as lingering concerns over cholesterol, and the simmering conflict over animal welfare issues. Moreover, there may be market factors such as the overwhelming dominance of cage production systems.
The possibility of divergent views between large and niche producers, and the dominance of large producers in the egg industry, may create complex governance issues for AECL. Significantly, the measures above set no standards relating to the constitution of AECL. In the horticulture and wool industries, the industry services body must have an appropriate constitution. In the wool industry, voting rights for members are based on shareholding and the process for acquiring shares is defined in the relevant statute. In the pig industry, voting rights are based on aggregation of producers into cells of 7000 sows. Thus, the three relevant Acts had more detail on structure, constitutions, voting rights, etc.
Marketing services companies have previously been established for agricultural industries such as wool, horticulture and pigs. However, compared to these and most other agricultural industries, the egg industry has a number of features worth noting, including:
If the egg industry is sufficiently different the question could be raised as to whether the service delivery model which has been implemented for other industries is the most suitable for the egg industry.
|
Provision |
Pigs |
Horticulture |
Wool |
Eggs |
|
Agreement and declaration for levies funding: |
||||
|
4 |
4 (56) |
4 (57) |
4 (58) |
|
8 |
4 (59) |
4 (60) |
8 |
|
guarantee |
guarantee |
shares(61) |
guarantee(62) |
|
8 |
8 |
4 (63) |
8 |
|
follows |
follows(64) |
precedes |
follows |
|
8 |
4 (65) |
8 |
8 |
|
8 |
4 (66) |
8 |
8 |
|
Public v Private aspects: |
||||
|
4 |
4 (67) |
8 |
4 |
|
4 |
4 (68) |
8 |
4 |
|
8 |
8 |
4 (69) |
8 |
|
4 |
8 |
4 |
|
|
8 |
exports licences(70) |
levy setting(71) |
levy setting(72) |
|
8 |
4 (73) |
8 |
8 |
|
Flexible restructuring environment: |
||||
|
declaration |
legislation(74) |
declaration |
declaration |
|
4 |
4 (75) |
4 (76) |
4 (77) |
|
8 |
4 (78) |
4 (79) |
8 |
|
4 |
4 |
4 |
8 |
|
||||
|
4 |
4 |
4 |
4 (81) |
|
8 |
8 |
4 (82) |
8 |
|
8 |
8 |
4 (83) |
8 |
|
4 |
4 (84) |
8 |
4 (85) |
|
Power for the Commonwealth to: |
||||
|
4 |
8 |
8 |
8 |
|
4 |
8 |
8 |
8 |
|
Body liable for restructure expenses |
4 (86) |
8 |
8 |
4 |
|
Provision for transfer of employees |
4 |
4 (87) |
8 |
8 |
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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