Senate

Second Reading Speech

By Senator O'Brien

In April 1999 the Australian Dairy Industry Council presented the industry's case to the Commonwealth Government that, in their view, deregulation of the domestic market milk arrangements was inevitable. This view was based on their analysis that commercial pressures would undermine any regulatory regime and that it was in the interests of the dairy industry in competing against imported product and in being able to expand into the vital export sector.

The industry proposed a package of assistance, coupled with the need for systemic and simultaneous deregulation of the market milk sector to enable structural adjustment within the industry with least possible disruption.

The Government responded to the industry's proposal on 28September 1999, announcing details of a structural adjustment package which would be implemented should all States deregulate their market milk schemes. This proposal represents the single largest deregulation and adjustment process of any rural sector.

Commercial pressures for deregulation have been growing in the dairy industry for a number of years. This is evidenced by the extent of merger and acquisition activity, the impact of UHT milk on domestic market milk prices and the growing dependence of the dairy industry on exports, which last year brought more than $2 billion to the Australian economy.

All state dairy farmer organisations have accepted that deregulation is inevitable.

In December 1999, a plebiscite of Victorian dairy producers, who collectively represent 63% of all milk produced in Australia, voted overwhelmingly to accept deregulation - 84% of all dairy farmers voted and 89% of those recorded their views in favour of the deregulation proposal.

The Victorian Government in responding to this overwhelming mandate announced it would proceed with deregulation. Polling in NSW indicates support of 65% of producers.

The Senate Committee Report into Deregulation of the Australian Dairy Industry which reported in October 1999 concluded that "sooner rather than later the market would force deregulation" and that "a soft landing is preferable to a commercially-driven crash". The Senate Committee's Report has assisted in providing informed debate on the deregulation issue.

There is general agreement that if deregulation is to occur, it needs to be done in an orderly way. The Commonwealth's package provides a substantive response to the industry's request for support while it adjusts to deregulation, and responds to the recommendations in the Senate Committee's Report. I will outline the detail of this $1.74 billion package shortly.

Against the background that market milk arrangements were State run systems and the responsibility of the States, the Commonwealth responded in September 1999, with details of a structural adjustment package it would be prepared to implement, should all States agreed to deregulate their arrangements.

The condition the Commonwealth imposes upon the package that all States must deregulate arises from the Commonwealth's obligation to ensure that all dairy farmers across Australia are treated fairly and equally, and the necessity to avoid significant market distortion. The Government was also mindful of the fact that introduction of a levy of 11 cents per litre on consumers in States which maintained high regulated market milk prices would place an intolerable burden upon consumers in those States as well as provide an adjustment package to those producers who still benefited from high regulated prices.

I wish to emphasise a very important point. The levy of 11 cents per litre will commence on 8 July 2000. There is no other introductory date option because to do otherwise would cause major disruption and uncertainty in the dairy market and to consumer prices. The Commonwealth Domestic Market Support Scheme terminates on 30June 2000. Deregulation in States needs to have effect from that date.

Any State which does not meet the deadline of 30 June to deregulate will be responsible for denying producers across Australia timely access to the benefits of the package and will risk an unacceptable impost upon consumers of milk in that State. It will be at their peril for them to ignore the critical timing deadlines we all have to accept as immovable.

This Bill provides for payments to producers to commence from a date to be fixed by proclamation. I would intend that such a proclamation would be made as soon as the Government is satisfied that appropriate deregulation arrangements have been made by all States. Hopefully this will be possible by July 2000, but if it is not, entitlement rights will, in any event, accrue from 1 July regardless of the exact date of commencement of the payments.

This package is not about providing compensation for removal of quotas and regulation, or about providing income support. The adjustment flowing from this package will lead to better industry performance than would otherwise be possible and which in turn will assist in maintaining and, in the long term, increasing job opportunities and incomes in regional dairying areas.

To ensure the focus is on structural adjustment the Government is requiring that each producer undertake a farm business assessment before they are eligible for a payment. While these assessments will remain confidential to each producer, their preparation ensures that the producer has fully considered the impact of deregulation on his or her individual enterprise, with the benefit of independent, expert financial advice, and taken their own decision on the most appropriate response.

Impact on regions

Before I turn to the detail of the Bill and the specifics of how this adjustment assistance is to be delivered to producers, let me briefly point out some key facts about how regions will benefit, for this package is not just for dairy farmers.

Deregulation without a package would be devastating for some regions. What the package does is assist to sustain the viability of the dairy industry in those regions by maintaining viable dairy enterprises, with the subsequent maintenance of employment. The essential service industries which support dairy farm enterprises will also be better able to remain viable because of the survival of their customers. Rural communities will be provided with a major, and real, contribution which will help maintain the basic fabric of their economies.

Let me give substance to this. It is estimated that WA will receive $108 million, SA $127 million, Tasmania $76 million, Queensland $220 million, NSW $337 million and Victoria $765 million from this package.

As examples of regions where dairying is concentrated, the Gippsland region of Victoria, the North Coast of New South Wales and the South East Queensland, will receive over $220 million, $100 million and $166 million respectively. These are very significant injections to regions which would otherwise suffer the impact of commercial market restructuring without support.

Structural Adjustment payments

The Dairy Industry Adjustment Bill 2000 provides the framework for two programs which will be the delivery responsibility of a new Dairy Adjustment Authority established for this purpose.

A Dairy Structural Adjustment Program will provide in total $1.632 billion to producers based on their deliveries of manufacturing and market milk in 1998/99. These payments will be calculated for market milk deliveries at the rate of 46.23 cents per litre and for manufacturing milk on a fat and protein basis with a national average of 8.96 cents per litre. The higher payment available for market milk reflects the premium associated with market milk delivery under the current regulated arrangements. Payments will be made in quarterly instalments over 8 years and are transferable to primary producers.

To be eligible for payment under the package producers must have had an interest in an eligible dairy enterprise on 28 September 1999, the date of the Government's announcement of the package. Where a producer can show that due to severe and abnormal circumstances deliveries in 1998/99 were 30% or more below the average of the previous three years, the Authority may consider providing a supplementary payment.

In addition, it is recognised there may be a few producers who were dairying in 1998/99 and remain in the industry and yet, for one reason or another, do not meet all the criteria for a standard entitlement. In such cases the Authority would have some discretion to consider their claim and may allocate an entitlement based on their `anomalous' circumstances.

It is the Government's intention that all eligible participants in the industry - owner/operators, sharefarmers, lessees and lessors - share these payments. The entitlement determined for each party will reflect their share of the revenue received from milk sales from the enterprise in question as at 28 September 1999. Consideration will also be given to the extent to which each party contributed to the enterprise. For example, where a party contributes elements considered essential to achieving access to the market milk premium, such as quota, or in its absence, land and livestock, they would be eligible to share also in the premium payment associated with the market milk payment.

The Authority will be closely examining sharefarmer arrangements to assess whether they meet eligibility requirements. It is not intended normal employer/employee-type arrangements, or payment for service contract arrangements, will create an eligible interest in a dairy farm enterprise. In leasing arrangements, the lease payment will be used to determine the share of income from milk sales.

It is also the Government's intention that payments above $350,000 flow only to those who are primarily dairy producers. To achieve this objective, claimants for amounts in excess of $350,000 will need to verify that more than 70% of their income is derived from dairying.

Exit from Dairying

While the package is basically designed to provide adjustment assistance to dairy farmers who are potentially viable and profitable suppliers of milk after this transition, it also addresses the needs of some farmers who may need to seriously consider leaving the industry. It is not intended entitlement holders will be required to remain involved in the farm which generated their entitlement and they can exit and continue to receive their payment stream or dispose of it to another primary producer. Equally, sharefarmers would be in a position to invest in their own enterprise if they so chose.

The package also includes a specific $30 million Dairy Exit Program to allow farmers who choose to leave their farms and agriculture to do so with some dignity and prospects for the future.

The exit program will run for the first 2 years of the package and will provide payments of up to $45,000 tax free. Conditions for an exit payment will be the same assets test and eligibility requirements which apply under the Restart Re-establishment Grants of the Farm Family Restart Scheme.

Producers may access this exit payment as an up-front payment or may switch from the structural adjustment program to the exit program within the first 2 years. Where a producer chooses to switch to exit, the assessed exit payment will be net of any funds already received under the structural adjustment program and only that component taken as an exit payment will be assessed as non-taxable income.

While it is not known how many producers will seek to access the exit program, the Government is conscious that the adjustment to deregulation will be particularly difficult for some and farmers will need to seriously consider their options.

The Levy

The package will be funded from a levy of 11 cents per litre on the sale or equivalent transaction of all liquid milk products - these include whole-milk, modified milk, Ultra Heat Treated (UHT) milk and flavoured milk. The details of the imposition of the levy are contained in the accompanying Levy Imposition Bills. Sales of imported milk will also be covered by the levy, as the levy will apply to all liquid milk products sold domestically at the point of use. Liquid milk products destined to be exported will be exempt.

The 11 cents per litre levy commences on 8 July 2000 and is expected to run 8 years. The money raised from this levy will enable payments to producers under the package. The levy will also meet all administration and borrowing costs associated with the package, costs associated with collection of the levy, as well as costs incurred by the Australian Competition and Consumer Commission (ACCC) in monitoring of retail price activity. The levy will cease when all payments are made and costs are met.

This Bill provides for efficient and cost-effective levy collection arrangements which have been developed in close consultation and with the full cooperation of dairy industry processors.

The 11 cents per litre levy is not expected, of itself, to lead to increased retail milk prices, with deregulation. While there will be variability between regions, depending on market factors, the farm gate price for market milk is expected to fall towards the manufacturing milk price, with margins expected to reflect distance, environmental and seasonal factors and the ability of producers to negotiate supply contracts with manufacturers. The industry's estimate is that the deregulated price will fall by up to 15 cents per litre. The levy is less than this anticipated fall in price to farmers. The ACCC will monitor retail milk prices before and for 6 months after introduction of the levy to ensure any price changes are in accordance with acceptable competitive practices.

The Dairy Adjustment Authority

A statutory Dairy Adjustment Authority will be established which will be responsible for administration of the package. The Authority will be supported in its operation by the Australian Dairy Corporation (ADC). However the Authority will operate independently of the Corporation. The main role of the Authority will be to assess applications for payments in accordance with statutory eligibility criteria and to direct the ADC in delivering payments. Decisions of the Authority will be appealable to the Administrative Appeals Tribunal. The management of the package will, of course, be subject to the normal Commonwealth accountability, audit and reporting requirements of statutory bodies.

The Board of the Authority will comprise five persons. There will be two dairy industry members, two who have specific qualifications in the fields of business management, finance, legal or actuarial practice, one of whom will be the Chair, and a government member. Once the initial assessment of applications has been finalised and the payment arrangements are well established (after about 2 years), I anticipate the Authority will be phased down to a smaller body.

Producers will be given a strict three-month period in which to register their interest in an entitlement. Initially, the Authority will endeavour to contact all producers whose names are on delivery records of companies, cooperatives or State milk authorities. During this period the Authority will undertake an extensive public advertising campaign to ensure there is widespread awareness of the package and alert anyone who may have an interest in a payment about how they should go about establishing eligibility. Importantly, any application for an entitlement needs to be lodged in this period as it will not subsequently be possible to adjust entitlements after they have been allocated by the Authority.

This package assists producers of all scales of operation, to adjust their enterprises to the new market realities. The Government is committed to ensuring dairy farmers have the choices and the support to either continue in the industry profitably or exit agriculture with dignity. The result of this adjustment will be that the Australian dairy industry's production base will be more efficient, more competitive and our dairy product export prospects further enhanced. Consumers will ultimately benefit from the deregulated market.

I commend the Bill to the house.