Potential commercial and direct sheep industry benefits from recycling transponders in NLIS electronic identification devices

Transcription

1 Potential commercial and direct sheep industry benefits from recycling transponders in NLIS electronic identification devices Report prepared for Leader Products Pty Ltd March 2012 Prepared by Greg Martin IDA Economics PO Box 418 HALL ACT 2618 Ph )

2 Contents Summary 3 Key points 3 Background 3 Transponder demand 4 Recycling transponders 4 Impact on EID prices to sheep producers 5 Savings through lower EID prices 5 Bringing forward the reduction in EID prices 6 Conclusion 6 Introduction 7 Terms of reference 8 Study Approach 8 Leader submissions and analysis Subsequent research, field trials and analysis by Leader Products 9 Leader Products responses to the issues raised by the Standards Committee 10 Implications of Leader Product research and analysis to date 11 Demand and supply of transponders for livestock identification 12 Demand for electronic EIDs 12 Recycling of transponders used for livestock in Australia: Processes involved and associated costs. 16 Approach 16 Estimated unit costs of recycled transponders 16 Analysis 18 Implications of recycling 18 Price of transponders 18 Current cattle and sheep electronic device prices 19 Observations re prices of NLIS cattle electronic identification devices 20 Conclusion 23 Supply of recycled transponders 23 Conclusion 27 Cost savings from recycling transponders 27 Estimated industry level benefits 28 Other issues 28 Mandating recycling 28 Distribution costs 29 Further opportunities to reduce costs to producers 29 Attachment 33

3 Summary Key points o Allowing recycling of transponders (microchips) used in sheep EID (electronic identification devices) could significantly reduce costs to sheep producers, should EID become mandatory. Currently within species recycling of EID transponders is not permitted. o Recycling (using recovered cattle EID transponders, including field trials) by Leader Products has demonstrated that there are no technical issues with recycling transponders. Recycling within species could save EID manufacturers 50 cents per EID. o As a result recycling could lead to lower EID prices for producers for Victorian sheep producers EID prices falling from $0.90 each (current cost and estimated cost in 2014) to $0.50 by 2017, if all of the transponder cost saving flowed through to sheep producers. (2014 being suggested as a possible implementation date for mandatory EID for sheep and with an estimated 80% of transponders able to be recycled). o For sheep producers in the rest of Australia, EID prices could fall from $1.55 in 2014 to $1.15 by o The annual cost saving to manufacturers from using recycled transponders, and in turn to sheep producers if fully passed on, would total $14m by o The fall in EID prices could happen earlier if financial support by industry or governments was to be paid to EID manufacturers intending to recycle transponders. In the absence of a subsidy it would take a year or more before the lower cost of recycled transponders began to flow through to EID prices to producers. This financial support is estimated to total $9m in 2014, phasing down to nil by Background Under the National Livestock Identification System in Australia (NLIS) all cattle leaving a property must be identified with an NLIS approved electronic device. For sheep and goats an NLIS approved tag must be applied, however use of an electronic NLIS approved EID, instead of a visual tag, is voluntary. A major factor limiting the use of electronic tags (EIDs electronic identification devices) in the sheep and goat industries is the cost of EIDs. This applies for both voluntary uptake and policy for compulsory electronic ID for all sheep leaving a property. Depending upon the brand, NLIS approved EIDs for cattle retail to producers for $2.70-$3.45 (Australia generally, except Victoria) and for Victorian producers (sourced through the DPI) $ (all prices per EID, delivered, excluding GST). Electronic NLIS sheep EIDs retail for around $1.55- $1.65 (Australia generally) and for Victorian producers $0.90 to $1.00. Leader Products is also selling electronic NLIS (Sheep) EIDs containing recovered NLIS (Cattle) transponders in States other than Victoria. These EIDs retail for about $1.10 each. A significant cost component of new EIDs is the transponder (or microchip). Even allowing for the current higher exchange rate, a new transponder typically costs around $0.75, for use in sheep EIDs and $1.25 with the greater read distance transponder for use in cattle. Introduction of mandatory EID sheep would be expected to bring this price down to a degree (given the volumes involved), but

4 recycling of sheep EID transponders would limit the extent of the decrease. For present purposes a $0.75 (new) transponder cost for use sheep EIDs has been used.. Recycling of the transponders in NLIS (Sheep) and NLIS (Cattle) EIDs has the potential to lower the cost of EIDs for livestock producers both cattle and sheep producers. The EID supplied by Leader Products has the capacity for the transponder to be readily recycled. Other EID suppliers, should EID be required for sheep (and transponder recycling permitted) are likely o develop EIDs capable of enabling transponder recycling. That is, for EIDs to be collected by meat processors, shipped back to the respective manufacturer, the transponder extracted from the EID and reused by that EID manufacturer (after appropriate testing and updating of the NLIS database). In 2009, Leader Products made a submission to the NLIS Standards Committee for the possible use of recycled NLIS (Cattle) transponders back into NLIS (Sheep) EIDs. The Committee raised a number of issues which Leader Products responded to. The Committee subsequently granted provisional NLIS (Sheep) accreditation to the EID, and requested that its performance in the field be monitored. In addition, Leader Products has issued over a million non-nlis sheep EIDs to sheep producers containing recovered NLIS (Cattle) transponders without any issues of product performance. In summary, Leader Products has demonstrated that recycling of transponders is technically feasible. A remaining issue is the potential impact on EID prices of recycled transponders and thus the direct economic benefit (cost saving) to Australian livestock producers from permitting recycled transponders to be used in livestock EIDs. This report examines those issues from the perspective of sheep producers. Transponder demand For the purposes of this analysis, mandatory EID for sheep is assumed to apply from To simplify the analysis the demand for EIDs for goats have not been included. Goat slaughterings, Australia wide, total around 1.5 million per annum) Transponder demand is estimated at around 36 million in 2015 rising to around 40 million by 2021, assuming there are no exempt pathways. If an OTH exemption applied as part of an enhanced NLIS (Sheep & Goats) system, and applied from , demand is estimated at around 31 million in Demand by Victorian producers is estimated at around 14.5 million in 2015 and 12.5 million if there were an exemption for OTH sales. Taken together, lamb and sheep slaughterings in Victoria plus live exports from Victoria represent about 40% of the Australian total. Recycling transponders Recycling of transponders previously used in electronic NLIS livestock EIDs involves collection of EIDs, extracting the transponders, checking transponder performance and updating the NLIS database. Using the description of the processes involved and Leader Products experience (in recycling some 2 million transponders) the unit costs of recycling transponders have been estimated.

5 The cost analysis includes the labour and equipment costs of recycling; a bounty to meat processors to sort EIDs for recycling and wastage losses from recycled transponders failing to read at testing. Given the potential volumes involved, it is estimated that Leader Products can recycle a transponder for around $0.26 per transponder. That is, a recycled transponder, performing to exactly the same technical standards as a new transponder, would cost a manufacturer around $0.26 as against the cost of a new transponder of $0.75 (sheep EID transponder) or $1.25 (cattle EID transponder). This suggests a cost saving to EID manufacturers of around $0.50/transponder (sheep EID transponders) and $1 (cattle EID transponders). Recycling costs may differ for other EID manufacturers depending upon the technical requirements and cost of extracting transponders from their respective EIDs. These cost savings would encourage transponder recycling by manufacturers. It is estimated that by 2017 recycled transponder would make up about 76% of the total transponder supply for sheep EID, given a start to mandatory EID in Impact on EID prices to sheep producers These cost savings in transponders could have a significant effect on EID prices to sheep producers. However, the effect on EID prices would depend upon the extent of recycling, which it estimated would increase over time and the extent to which lower transponder costs to manufacturers flow through to lower producer prices. Using the estimated recycling levels outlined above (and given 2014 prices remain at 2012 prices, in real terms), and an 80% flow through to producers, the EID price to o Victorian sheep producers is estimated to fall from a 2014 price of $0.9 to $0.5 by 2017 o producers in the Rest of Australia from $1.55 in 2014 to $1.15 by Savings through lower EID prices From an economy wide perspective, the benefit of recycling transponders is the total cost saving to manufacturers from using recycled transponders instead of new transponders. This saving is estimated at around $9 million in 2015, given the estimated number of recycled transponders (with recycled transponder availability and use lagged a year behind EID sales, and given mandated EID for all sheep post 2014). For Victorian producers the saving is estimated at $4 million. The savings are estimated to increase as the proportion of recycled transponders in total EID sales increases and given the projected increase in the flock size. An important question for livestock producers is whether the cost savings to EID manufacturers will flow through to them. Cattle EID prices have fallen since mandatory electronic NLIS ID was introduced nationally in The prices have been lowest in Victoria where the Victorian DPI began distributing EID cattle EIDs in These price falls suggest that lower costs of components and lower retail margins can deliver costs savings to EID purchasers, ie livestock producers. Nonetheless, as Leader Products has itself found, offering lower EID prices ex manufacturer does not necessarily translate near term into lower retail prices to producers. It is probable that not all of the savings from a lower cost recycled transponders would be passed onto producer at least initially where the rural retailer network acts

6 as agents for the distribution of EIDs. However, it would be expected that most of the saving in transponder costs in sheep EIDs would flow through sheep producers. With a full flow through of the transponder cost savings, the EID cost saving to sheep producers is estimated at $9 million (2015) and $14 million (2017), all in 2012, ie real, prices. If only 80% of the cost saving from using recycled transponders would be passed onto producers, the cost savings to them (through lower average prices of EIDs) is estimated at $11 million per annum by This assumes that the enhanced mandatory sheep EID system would operate without exemptions. (Estimated cost savings, by year without and with an OTH exemption are detailed in Error! Reference source not found.). Bringing forward the reduction in EID prices EID prices with recycling of transponders would fall as the extent of recycling increased. A subsidy to manufacturers could be used to hasten this reduction in EID prices, ie to bring forward the lower EID price that is expected with recycling. Using the estimated recycling rates above, and assuming all of the cost reduction in transponders with recycling flows through to EID prices to producers, the estimated subsidy to deliver the future (2017) EID price from the start of mandatory EID in 2014, would total around $15.6 m, if a 75% subsidy rate were paid to manufacturers. That is, if manufacturers were paid a subsidy to ensure that the price of EIDs was kept no higher than 25% above the estimated eventual EID price with recycling. Conclusion As long as the technical tests for reuse are addressed, it is hard to argue against a market driven voluntary outcome of permitting EID manufacturers to decide whether it is in their commercial interest to recycle transponders. The analysis presented here suggests that there are commercial gains to EID manufacturers from recycling transponders and that most of the cost saving, if not all of it, would be passed onto sheep producers.

7 Introduction Under the National Livestock Identification System in Australia (NLIS) all cattle leaving a property must be identified with an NLIS approved electronic device. For sheep and goats an NLIS approved EID must be applied, however use of an NLIS approved EID, instead of a visual tag, is voluntary. To date the use of EIDs for sheep and goats has been limited. There is some use by producers for solely on farm management purposes (these are non-nlis EIDs, with the EID usually removed prior to stock leaving the property, given the cost of EIDs). In Victoria, where the use of electronic NLIS (Sheep) EIDs has been promoted, there is a greater number of sheep are identified with NLIS (Sheep) EIDs when they are sold. A major factor limiting the use of EIDs in the sheep and goat industries is the cost of EIDs. This applies for both voluntary uptake and, in the context of a possible future policy, for compulsory electronic ID for all sheep leaving a property. Depending upon the brand, NLIS approved EIDs for cattle retail to producers for $2.70-$3.45 (Australia generally, except Victoria) and for Victorian producers (sourced through the DPI) $ (all prices per EID, delivered, excluding GST). NLIS sheep EIDs retail for around $ (Australia generally) or for Victorian producers $0.90 to $1.00 (Table 2). A significant cost component of new EIDs is the transponder component. Leader report that, for its present volumes of purchase, a new transponder typically costs around $0.75 cents for use in sheep and $1.25 for the greater read distance transponder for use in cattle. This cost represents around 20-25% of the retail price (Australian generally) and over 60% for EIDs sold by the Victorian DPI. Recycling of the transponders in electronic NLIS (Sheep) and NLIS (Cattle) EIDs within species has the potential to lower the cost of EIDs for livestock producers both cattle and sheep producers. Livestock producers have a keen interest in EID prices. Any cost saving in EID prices to cattle producers directly improves profitability: cattle EIDs have to be purchased since electronic tagging is mandatory under the NLIS (Cattle). For sheep producers the same situation would apply if mandatory electronic identification for sheep and lambs was introduced. To date, the high cost of electronic identification of sheep and lambs has been cited as one of the major reasons for maintaining the current policy of mandating only a visual tag and allowing voluntary use of electronic identification under the NLIS (Sheep & Goats). The prospect of lower cost electronic identification for sheep and lambs could be expected to broaden support for mandatory electronic identification for sheep and lambs. The EID supplied by Leader Products has the capacity for the transponder to be readily recycled. That is, for EIDs to be collected by meat processors, shipped to recycling, the transponder extracted from the EID and the transponder then reused by the original EID manufacturer, after appropriate testing and updating of the NLIS database. Recycling back to the original EID manufacturer is required as the first 3 digits of the transponder number identify the original EID manufacturer. A transponder with the (Leader ICAR) prefix (951) can only be used by another manufacturer when authorised by (Leader) and by the NLIS Standards Committee.

8 In 2009 Leader Products made a submission to the NLIS Standards Committee regarding the possible use of recycled transponders back into NLIS accredited devices. The Committee raised a number of issues. To assist in examining these issues, the Committee agreed that it would be useful to test the recycling principles by allowing HDX transponders recovered from NLIS Cattle EIDs to be used in NLIS Sheep EIDs on a limited scale. Leader Products subsequently undertook those trials and in 2010 submitted its response to the Committee on all issues except the analysis of the impact on EID prices and the associated potential economic benefit to Australian livestock producers from recycled transponders used in livestock EIDs. This report addresses those issues, ie potential cost savings vs perceived risks. 1 This study was commissioned by Leader Products, with funding provided to Leader Products by the Victorian Department of Primary Industry. Terms of reference The Terms of Reference for the study are as follows. 1. The study will focus on the impact on tag price of: A tag recovery and transponder recycling program as part of an electronic NLIS (Sheep & Goats) system in Victoria. A recycling program based on the national implementation of an electronic NLIS (Sheep & Goats) system. 2. The study will take into account anticipated collection and recovery costs, the possibility of more than one company selling recyclable tags/transponders and the possibility that some accredited tags will not be recyclable. 3. The implications in relation to the impact on tag price of a phased introduced to an electronic system over a number of years verses the rapid introduction of an electronic system will also be considered. 4. The study will identify start-up costs and the associated investment needed to establish sustainable arrangements in relation to tag recovery and transponder recycling 5. The implications on supply of transponders and costs with the use of recovered cattle transponders in the production of NLIS Sheep tags 6. The effect on the cost of supply of NLIS Sheep tags with a requirement for mandatory collection of NLIS tags at abattoirs Study Approach This report: examines the Leader Products submission to the Standards Committee examines the trial results presented by Leader Products outlines the processes and estimated costs and risks associated with recycling transponders estimates the future demand and supply of transponders for NLIS EIDs (sheep and cattle) examines the issues associated with future EID prices with recycling of transponders 1 Leader Products Pty Ltd, Submission to the NLIS Standards Committee, Use of recycled transponders into NLIS devices: Issues raised by the Standards Committee, April 2010.

9 estimates the potential benefits to Australian livestock producers from recycling transponders reviews a range of associated issues and risks associated with recycling transponders in EIDs examines the opportunity to bring forward the price advantage of recycling through industry or government financial support. In undertaking this analysis, IDA Economics has drawn upon the research and analysis undertaken by Leader Products; official (ABS) and industry data; industry discussions and other analysis of electronic tagging of livestock. A key aspect of the analysis is transparent quantification enabling a ready assessment of the approach, data estimates and the capacity to examine the implications of alternative data estimates. Further, the analysis adopts a conservative approach in order to avoid classic optimism bias ie underestimating the costs and overestimating the revenue or benefits. As result, the conservative approach means that the cost estimates are more likely to be at the upper end of the range and the benefits at the lower end, ie EID prices may well be cheaper. Leader submissions and analysis In 2010 Leader Products made a submission to the NLIS Standards Committee regarding the possible use of recycled NLIS (Cattle) transponders back into NLIS (Cattle) accredited devices. In response the Standards Committee raised a number of issues and comments regarding the proposal. In particular: The changes to the NLIS database terms of use to allow the recycling firm to set recovered transponders to recycled and to set the status to deceased where the transponder is still active on the NLIS database Possible implications of the use of recycled devices for suppliers of third party software Possible trade implications for supply of beef particularly to the EU The procedures and safeguards to ensure the ongoing satisfactory performance of recycled transponders The economic justification for the use of recycled transponders. Subsequent research, field trials and analysis by Leader Products Since the initial Leader Products submission there have been several developments regarding NLIS transponder recycling. The Standards Committee agreed that it would be useful to further test the recycling principles conditional on the volume supplied being limited to 100,000 EIDs and conditional on performance being monitored. The aim was to test: The ability of the NLIS database to be able to set the status of recycled devices to RC1 (for cattle devices already set to deceased) and RC2 (for cattle devices which are not already set to deceased). These statuses are applied on the device numbers uploaded by Leader. The procedures for recovery and testing recovered transponders The proportion of recovered devices which will not read on return

10 The performance (read range) of recovered devices relative to new transponders The proportion of recycled devices which fail to read after application to sheep Any other issues which may result from reuse. Leader Products were licensed to produce 100,000 NLIS Sheep EIDs using HDX transponders recovered from cattle EIDs at slaughter. To date, about 40,000 of these recycled transponders have been extracted and sold. As a result of this trial, Leader Products report that: Following changes to the database and the terms of use, Leader have been able to upload recovered transponder numbers and have the database automatically set the status to RC1 or RC2, depending on whether the device was set to deceased. Leader have developed procedures to sort, read and clean recovered transponders and then to test read distances before allowing the transponders to be reused. All recovered EIDs are read early in the recycling process. EIDs which do not read are discarded. The proportion of non-reading EIDs is very low at about 0.1% All recovered transponders are checked for read range against a standard panel reader. The proportion of recovered transponders which do not read to the standard is very low and less than 0.1% Leader Products is monitoring reports from clients who receive EIDs with the recycled transponders. To date, with 40,000 EIDs in the field, no adverse reports have been received. No other issues of importance have been found during the trial period. Leader Products responses to the issues raised by the Standards Committee Leader reported that the issues raised by the Standards Committee above have been largely addressed by the trial use of recycled transponders from NLIS Cattle to NLIS Sheep. Specifically: Changes to the NLIS database to record recycled status and the setting of this status This functionality was developed in 2009 and is now fully operational. After recovery and testing of used transponders, Leader uploads the transponder numbers to the NLIS database which automatically sets the status to RC1 (already set to deceased) or RC2 (still active on the database) This database function has been used for all transponders recovered since it has been available and has performed without any difficulties. Implications of recycled transponders for third party software suppliers Leader Products has contacted all the mainstream suppliers of livestock recording software for cattle producers, breed societies, saleyards and abattoirs. At present there are few sheep specific software livestock recording programs with most cattle management systems also applicable to sheep. The key issue is re-issue of the same transponder to the same producer and hence the same electronic ID number a likely low probability to begin with. In most situations (abattoirs, saleyards) ID files are archived and hence problems arising from the same ID reoccurring will not be relevant. On-farm software suppliers reported to Leader Products that their programs would allow

11 reuse but some would require minor modification which would be readily accommodated with sufficient prior notice. Cattle breed society database managers reported that the situation could be handled with program modification and is seems that the same would apply to sheep breed societies if mandatory use of NLIS electronic ID was adopted. While this aspect requires further investigation, it appears that it should not cause any major disruption to the smooth operation of third party software. There were, however, two requests made by suppliers: That there be a lead time from notification to implementation to allow for changes to be made to the software and test these changes There be a time period of at least a week from slaughter until the same transponder could be received back at the same abattoir. This avoids ID conflicts given the typical archiving schedules. Possible trade implications The view has been expressed that importing countries, in particular the EU, might not approve of the use of recycled transponders. This has been relevant with cattle where there is a closed supply chain only beef from cattle from EU accredited properties can be exported to the EU. (If this were to be an issue with beef, there are ways to manage this such as only using new transponders for EU cattle). It has not been raised as an issue with sheep. Ensuring satisfactory performance of recycled transponders In the trials, recycled transponders have been tested to ensure that all read and the read range is the same as for new transponders. This testing, on over a million collected EIDs, has shown that nonreading or low performance transponders are not an issue in recycled transponders. However, it is envisaged that the testing will be continued to ensure that there is no difference between new and recycled transponders, even with repeated recovery and reuse. Also, producer clients who have purchased EIDs with recycled cattle transponders (in both NLIS and non-nlis EIDs) are being monitored to ensure that the transponders continue to operate to the required read rates and read distances. No performance issues have been reported or are expected. Implications of Leader Product research and analysis to date The research by Leader Products shows that: Recycling of EIDs is technically feasible from only one of the electronic sheep and cattle tags currently on the market ie Leader Product EIDs, with transponders from Leader cattle EIDs recycled in Leader sheep EIDs. o Other EID manufacturers can be expected to develop EIDs (or recovery and reuse systems) which will enable recycling of the transponders if recycling of transponders is permitted (or recovery and reuse systems) o The lead time might be 1 to 2 years (ie EID development and accreditation against the Standards of those EIDs)

12 There are no technical performance issues in recycling transponders: the testing requirements to meet the performance set by the Standards Committee would mean that recycled transponders would have the same performance capability as new transponders. o Further, a very high proportion of recycled transponders from sheep EIDs are likely to meet the standards given the experience in recycling transponders from cattle EIDs and, the relatively shorter in field life of new transponders in the sheep industry, especially as lamb slaughtering make up around 75% total sheep/lamb slaughterings. o Meeting the Australian Standards would ensure that livestock traceability required for the NLTPS for disease control and disease response could be achieved. Ensuring that transponders previously registered on the NLIS database are appropriately cancelled and re-registered is vital to retaining the integrity of the NLIS system. Leader Products and NLIS Ltd have developed the appropriate protocols: protocols for other EID suppliers would need to be developed based on the successful Leader Products protocols in place. Recycled transponders would have market price advantage against new transponders. The extent to which this advantage is passed through to livestock producers will depend upon the market circumstances. Even so, any cost saving, even if not passed through to livestock producers, would represent an economic gain fewer resources would be used to produce electronic livestock transponders than otherwise, and disposal costs would be reduced. In that context it has to be noted that in the absence of recycling, mandatory electronic ID of sheep would result in disposing of some 30 million plus transponders per year, unless another reuse of these transponders can be developed. Demand and supply of transponders for livestock identification Demand for electronic EIDs Sheep electronic identification There is very limited demand for electronic NLIS devices for sheep at the present time, although in States other than Victoria demand for non-nlis devices, including boluses, is increasing. Leader report recent large orders by several producers, ie 200,000 plus. Current demand is estimated at approximately 20,000 per month based in Victorian DPI sales for electronic NLIS (Sheep) devices since the introduction of an NLIS accredited one-piece EID. 2 Demand for transponders for sheep identification Transponder demand is estimated for Australia and Victoria. It is assumed that Victoria along with other States will require mandatory electronic identification from 2014 without exemptions. The resulting demand for EID transponders with the policy change requires detailed consideration of the possible implementation scenarios since those scenarios impact upon both the costs of EID, the potential volume of transponders in available for subsequent recycling, given recycling is permitted, and the industry level cost savings from transponder recycling. 2 Source: Victorian DPI, Pers. Comm.

13 There are several scenarios for implementation of EID for sheep and lambs, each with differing implications for modelling the demand for transponders and the subsequent supply of recycled transponders. EID implementation scenarios include: From 2014 requiring all sheep leaving the property to carry electronic ID (ie all sheep slaughtered, exported live or sold to other producers) From 2014 requiring all lambs leaving the property to carry electronic id with all sheep from say 2015/2016 required to carry electronic ID No exemptions or exempting OTH sales from EID for say 5 years (or indeed permanently) For present purposes, mandatory EID from 2014 has been modelled as All lambs sold in 2014 and onwards require EID tagging All sheep sold in 2015 and onwards require EID tagging. This implementation scenario implies that: All lambs marked in 2014 and subsequent years will be EID tagged Lambs marked in 2013, but not intended for sale in 2013, will be either EID tagged at marking in 2013 or tagged at sale time in 2015 or a later year. Estimates of demand for EIDs have been made against this scenario using available data for slaughterings (lambs and sheep) and live exports, including MLA projections to Historical lamb marking data, although available, has not been used as the basis for estimating EID demand. That data is difficult to reconcile with same year and later year slaughterings and live exports (especially at a state level where there is significant inter-state movements of sheep and lambs) and with developments in the industry (eg flock expansion and changes in flock composition away from wool production to meat production and hence lags between lamb marking and sale of property) (Box 1). Box: Using lamb markings to estimate EID/transponder demand Lamb markings would present better proxy if the policy required only lambs to carry an EID; but that policy alone would result in a drawn out process for full EID across all sheep sold. At some point, all sheep leaving a property would need to be tagged with an EID. In the intervening years an estimate of the number of lambs held over or sold to other producers and help over would need to be made. The relationship between lamb markings and the number of sheep slaughtered or exported live depends upon whether the flock is expanding, in steady state or contracting as well as the lag between marking and slaughter as many sheep are retained or sold as breeding ewes or wethers. There are apparent differences between states in lamb marked and numbers slaughtered plus exported live. In Victoria in recent years, for example, lambs marked has been much less than the number of lambs/sheep slaughtered suggesting either or both flock rebuilding or significant inter-state movement of lambs and sheep to Victoria for slaughter/live export. An implication of the methodology adopted here is that for Victoria actual demand for transponders (lambs marked) plus lambs/sheep traded between producers will be less than the estimated demand (slaughtering plus live exports plus sheep traded between producers). Table: Sheep flock: Lambs market and lambs/sheep slaughtered/export live: Australia and Victoria: 2010 and 2011 (million head): Australia Australia Victoria Victoria Sheep population (June) Lambs marked Slaughterings Live exports Total slaughterings and live exports Source: ABS, 71110DO001_ Principal Agricultural Commodities, Australia, Preliminary,

14 Also, there are no industry level projections of lamb markings. Equally, simply using slaughter and live export numbers does not take account of lambs held on farm or sheep sales between producers for breeding, fattening or wethers for wool production (and therefore EID demand). For the purposes of modelling, demand for EIDs for the sheep industry (Australia and Victoria) has been estimated as follows: 2014 (all lambs sold carry an EID): o Projected total lambs slaughtered o plus 2% to account for on farm EID/animal losses post marking (for lambs, a 1% figure should be achievable, but a 2% across the board figure has been used). While there will be some, albeit small percentage loss of (lambs and EIDs) between marking and sale, EID tagging at marking will likely continue to be the least cost option compared to identification and tagging of untagged stock at the time sheep leave the property. 2015: (all lambs and sheep sold carry an EID): o projection total lambs and sheep slaughtered, o plus projected live exports o plus 10% of lambs and sheep slaughtered/exported live as a broad proxy for lambs/sheep sold to other producers and not previously EID tagged, o plus 2% to account for on farm EID/animal losses post marking 2016 on wards o projected total lambs and sheep slaughtered o projected live exports o plus 10% of lambs and sheep slaughtered/exported live as a broad proxy for lambs/sheep sold to other producers and not previously EID tagged, o less 25% of the additional 10% of markings in the previous year (s), as these stock are already tagged when they go to slaughter ie the additional 10% of lambs marked each year are sold to slaughter over 4 years o plus 2% to account for on farm EID/animal losses post marking In addition, another scenario of an exemption for OTH sales has been modelled. That is, OTH sales between 2014 and 2019 are exempt from having to be EID tagged. OTH sales of sheep and lambs are estimated at 17% of sales (estimated as slaughtering plus live export plus producer to producer sales): a weighted average of 20% lambs and 7% sheep 3, noting that lambs make up around 75% of slaughtering. For Victoria, the two year average to Victorian share of Australian slaughterings (43%) and live exports (19%) giving an average of 40% of the total slaughterings plus live exports has been held constant post ABARE, 2010, Australian lamb: Financial performance of slaughter lamb producing farms, to , 10.1, Canberra, pgs 8-9

15 In summary, in 2014 Australian transponder demand (lambs and sheep, no exemptions) is estimated to total around 32m with Victorian demand at 13 m (Figure 1). Australian demand is then estimated to continue increase as mandatory EID for sheep is required along with continuing expansion of the flock. By 2020 demand is estimated at around 39 m. Similarly within Victorian where demand is estimated to total around 15.5m by (The Australian and Victorian graph lines are not parallel since the Victorian share of demand remains a constant 40% of the Australian total with the graph scale linear). An OTH exemption (2014 to 2019), assuming no change in the proportion of stock sold OTH (estimated at 17%), would mean demand in 2014 totalling around 28 m (Australia) and 11 m (Victoria). Figure 1: Estimated demand for EID transponders: Sheep: Australia and Victoria No OTH exemption OTH exemption Initial 'higher' increase than impied by slaghterings as some lambs tagged and held/sold to other producers, and then sold to slaughter (over subsequent years) End of OTH exemption Australia Victoria Australia Victoria Notes. Mandated EID 2014: all lambs leaving property and all sheep from Demand estimated as MLA projected slaughterings to 2016 (adjusted to reflect producer to producer sales) plus MLA projected live exports (to 2016), with constant growth (3%) for both destinations beyond OTH slaughterings estimated at 17% (weighted average sheep and lambs) and exemption applied 2104 to Victoria: 40% of Australia total slaughterings/live exports. Source: IDA Economics estimates Supply of transponders for livestock identification: No recycling In the absence of recycling the supply of new transponders would equal total demand for EIDs. All transponders would be new. The next sections consider the implications of permitting recycling transponders previously used for sheep EID.

16 Recycling of transponders used for livestock in Australia: Processes involved and associated costs Approach Recycling of transponders from previously used NLIS livestock EIDs involves collection of EIDs, extracting the transponders, checking transponder performance and updating the NLIS database. An outline of the processes involved, the estimated costs and the estimated unit costs per recycled transponder are presented in Error! Reference source not found.. Further, the recycling process involved is no different for cattle and sheep EIDs. An important aspect of recycling is that transponders from EIDs can only be recycled by the original EID manufacturer. The first 3 digits of each individual transponder code identify the EID manufacturer. In the absence of a change to this policy, argued to be required to maintain the integrity of the NLIS system, each manufacturer could only recycle their own transponders back into their EIDs. That is not to say that a manufacturer cannot contract out the transponder recycling process in whole or in part (with the consent of the Standards Committee). Estimated unit costs of recycled transponders The unit cost of suppling a recycled fully tested and performing transponder is estimated at $0.26 per transponder unit (all costings exclude GST). That is, ex the recycler ready for an EID manufacturer to source and use instead of a new transponder. This estimated price includes a contingency margin of 15%. A major component of the cost of a recycled transponder is the bounty paid to meat processors to collect EIDs, sort and pack them ready for pick up to despatch to the recycler. That is, at the current bounty rate. At 60% of the estimated cost of supplying a fully functioning transponder it is the dominating cost component. A key issue is whether the current bounty rate is over and above what would be required, in a larger scale operation, to interest meat processors in sorting and appropriately packaging EIDs. It is probable that a lower bounty rate would be acceptable to meat processors. On a larger scale it may be more appropriate for the recycler to undertake the sorting of EIDs into those from which transponders can be recovered and the non-recoverables disposed of. Thus meat processors would need to do no more than despatch all EIDs to the recycler, which would most likely represent a cost saving to them (compared to current practice) since there would be no disposal cost. With recyclers accepting responsibility for sorting EIDs there is an incentive for them to minimise sorting costs, through, for example, mechanical sorting systems. Instead of negotiations over an appropriate bounty, recyclers would develop least cost options and sorting would be truly cost reflective. It is probable that recycling costs would be lower than the current bounty rate, especially given that Leader Products were keen to encourage meat processors to participate. Further, over time a higher proportion of EIDs would be designed to enable easier transponder extraction. Indeed, where the recycler and the EID manufacturer are one and the same there would be a direct incentive for manufacturers to design EIDs to enable easy extraction.

17 Table 1: Recycling transponders for livestock EIDs: processes and estimated unit costs Process Cost items Process cost ($) Transponder recycling companies/industry/government agencies Communication and advice to processors re tag recycling options Costs to meat processors Cents per recycled transponder All NLIS Tags removed on slaughter chain Tags sorted by processor: Manual (visual) or transponder sort Tag removal cost from ear (no additional cost, current practice) Labour or transponder read/sort machine (costs covered via bounty from transponder recyclers) Note lower cost for processor to sort than freight all tags to recycler $0.00 Processors supplied with box Box cost and flat pack box delivery met by recycler $0.00 Tags boxed for pickup Costs for transponder recycler No additional cost compared with boxing tags for otherwise disposal Cost saving for processor in not having to dispose of tags sent to recycler $0.00 $0.00 Boxes and freight ex meat processor to recycler Box cost Boxes for meat processor Box holds 2,500 tags Box cost $2.75 per box 0.11 Freight of boxes to meat processor Transport ex meat processor to recycler Freight (postage) processor to recycler $23.00 per box 0.92 Transponder recovery costs No security issues as tag (transponder) status already notified to NLIS database by processor Batch size for costing 500,000 tags per year Labour $20.00 per hour Labour on costs (leave, super, payroll tax) 10% Labour management/organisation costs 30% Total labour rate $ $28.60 per hour Receive, and wash tags Sort/wash tags (labour) 0.75 hours/box 0.86 Amortised & maintenance cost tag washing equipment $50 per week for equipment 0.01 Test recyclable transponders: read/not read at specified range Test (labour) 2.30 hours/box 2.50 Amortised & maintenance cost reader/sorter equipment $50.00 per week 0.01 Remove transponder from tag Extraction (labour) 1.15 hours/box 1.25 Amortised & maintenance cost extraction equipment $100 per week 0.01 Disposal cost tag material (excl transponder) Wash/clean extracted transponders Wash (labour) 0.25 hours/box 0.27 Amortised & maintenance cost transponder washing $50 per week 0.01 equipment Re-read transponders and load IDs to NLIS database. Tansponder read costs (labour) 1.15 hours/box 1.25 Read equipment: Use transponder read equipment used for $ sorting) Additional warranty recalls on recycled transponders Bounty to processors (eligible tags delivered to recycler) NLIS database fee (no additional cost compared to new transponders None, given 'as reliable as new transponder' trial performance to date Processor sorting of tags $ $ % reliable (ie tags collected with potentially recyclable transponders)) Tag bounty to meat processors Average bounty rate $0.14 per tag NLIS database NLIS database update and re-issue ID against recycler No database charge for update 0.00 No separate reporting of transponders recycled - obtainable from NLIS database 0.00 Distribution to tag manufacturers transponder distribution to tag manufacturers No additional distribution cost to tag manufacturers (ie same as new transponder) Total 22.2 Total with contingency margin Contingency margin 15% Source: IDA Economics.

18 However, in a practical sense there would have to be specialist EID sorters or an agreement among manufacturers to tranship competitors used EIDs to the original manufacturer. On balance the current bounty rate is most likely at the higher end of the price needed to sort EIDs into original manufacturer lines. Analysis Leader Products have to date recovered over 2 million transponders from NLIS cattle EIDs nearly all of which have been reused in non-nlis uses. About 40,000 have gone back into NLIS (Sheep) EIDs. The basis of the cost estimates is Leader Product experience in transponder recovery, adjusted to a 500,000 batch of EIDs per annum. The cost estimates are scalable, although it is probable that there would be some economies of scale with a resulting lower unit cost per recycled transponder for volumes above 1 million. Also, with higher volumes (and certainty of recycling) greater mechanisation and automation would be commercially feasible. In considering the processes involved it is relevant to note that none of the processes are particularly complex nor does the recycling require the development of new technology. Significantly, the performance requirements for recycled transponders are exactly the same standards and equipment as that are applicable to new transponders: it poses no new risks in terms of transponder reliability or performance. This aspect of recycling has been borne out in the trails undertaken by Leader Products. Further, the recycling process involved is no different for cattle and sheep EIDs. Recycling costs may differ for other EID manufacturers depending upon the ability to extract responders from their respective EIDs. Implications of recycling Price of transponders Against the estimated cost of a recycled transponder of $0.255/transponder a new transponder typically costs a EID manufacturer $0.75/transponder for smaller sheep transponders. Larger cattle transponders are $1.25 each. This suggests a cost saving to EID manufacturers of around $0.50/transponder for sheep transponders and $1 for cattle transponders. A key issue is the extent to which this cost saving would flow through the supply chain and affect EID prices to livestock producers. Livestock producers have a keen interest in EID prices. Any cost saving in EID prices to cattle producers directly improves profitability: cattle EIDs have to be purchased since electronic tagging is mandatory under the NLIS. For sheep producers the same situation would apply if mandatory electronic identification for sheep and lambs was introduced. To date, the high cost of electronic identification of sheep and lambs has been cited as one of the major reasons for maintaining the current policy of allowing voluntary use of electronic identification under NLIS. The prospect of lower cost electronic identification for sheep and lambs could be expected to further interest in mandatory electronic identification for sheep and lambs.

19 The key issue is the extent to which lower cost transponders would flow through to lower EID prices. This issue has been examined from several angles. Current cattle and sheep EID prices Historical movements in cattle EID prices Probable technology development in EID design/manufacture to permit easier transponder extraction and thus transponder recycling Current cattle and sheep electronic device prices Currently there are a range of cattle and sheep electronic identification devices on the market. There are differences in device characteristics which presumably reflect real or perceived differences in performance for livestock producers. Device prices also differ, again reflecting attributes but also, it would seem other factors such as retail margins or distribution costs. Table 2 details indicative prices for cattle and sheep electronic identification devices. Several observations are pertinent. The prices of cattle identification devices (outside of Victoria) range from $2.70 to around $3.40. Prices differ between rural suppliers. Although not shown in the table significant prices differences are reported by producers. EIDs purchased through the Victorian DPI are cheaper than other sources Sheep electronic identification devices are significantly cheaper than cattle identification devices reflecting, primarily, the lower transponder cost ($0.75 as against $1.25/transponder) and also for Leader NLIS (Sheep) EIDs recycling transponders previously used in NLIS (Cattle) EIDs. Order volumes are much higher for sheep EIDs compared cattle EIDs, reducing business overheads and postage and handling costs per EID.

20 Table 2: Indicative EID prices: Cattle and sheep ($ per EID) Cattle Retail including GST Retail excluding GST Postage (excluding GST) Total delivered excluding GST National Allflex $3.60 $3.27 $0.10 $3.37 Rural supplier, NSW Leader: Envirotag $3.20 $2.91 $0.09 $3.00 Rural supplier, NSW Leader: Leadertronic HDX cattle tags $3.20 $2.91 $0.09 $3.00 Rural supplier, NSW Data source Chemvet: Datamars round tag (>25) $2.97 $2.70 $2.70 Chemvet Chemvet: Datamars NLIS tags(>100) $3.52 $3.20 $3.20 As above Victoria: DPI Allflex $1.40 $1.40 DPI ming-management/nlis Leader $1.20 $1.20 As above Sheep National Allflex $1.75 $1.59 $0.05 $1.64 Rural supplier, NSW Leader: Jumbo EID sheep tags (1 $1.70 $1.55 $1.55 Rural supplier, NSW piece) Leader: Leadertronic tamperproof HDX tags (triangular) $2.60 $2.36 $2.36 Rural supplier, NSW Leader: HDX tamperproof tags $2.60 $2.36 $2.36 Rural supplier, NSW (button) Leader: Leadertronic reusable HDX $2.85 $2.59 $2.59 Rural supplier, NSW sheep tag (Triangular) Victoria: DPI Allflex (Button) $1.00 $1.00 DPI ming-management/nlis Leader (Triangular) $0.90 $0.90 As above Shearwell (one piece, wrap around) $0.90 $0.90 As above Note: Retail prices for EIDs from rural suppliers indicative as prices vary between suppliers depending upon retail margin applied. Nonetheless, the retail prices are likely to be representative for present purposes. Source IDA Economics Observations re prices of NLIS cattle electronic identification devices It had been expected at the full implementation of the NLIS cattle (EID) program (2005) that the accreditation of more EID manufacturers would lead to a fall in retail EID prices. That is, additional suppliers would increase competition and drive prices down to production cost. A number of new EIDs have been accredited since 2005: there a now 10 NLIS fully/conditionally accredited EID devices for cattle (Table 3). There are four device manufacturers. Table 3: Accredited NLIS ID devices: Cattle Accredited Conditionally accredited Allflex NLIS button EID Leadertronic ear EID Leader ceramic rumen bolus Datamars Rumitag ruminal bolus Zee EID ceramic pellet Datamars round EID Drover's Ay-One NLIS EID Vizy Drover's Ay-One NLIS EID button Leader Envirotag EID Datamars Rumitag ET32 electronic Source: MLA, Accredited devices, September accessed 11 January 2012.