SUBMISSION RURAL AND REGIONAL AFFAIRS AND TRANSPORT REFERENCES COMMITTEE INQUIRY EFFECT OF MARKET CONSOLIDATION ON THE RED MEAT PROCESSING SECTOR

SUBMISSION RURAL AND REGIONAL AFFAIRS AND TRANSPORT REFERENCES COMMITTEE INQUIRY EFFECT OF MARKET CONSOLIDATION ON THE RED MEAT PROCESSING SECTOR June 2015

TABLE OF CONTENTS Terms of Reference... 3 Executive Summary... 4 Background... 6 Government Support for Food Industry... 6 Food Processing Policy... 7 Meat Processing Sector... 8 Issues... 13 CASE STUDY Galloway Meat... 17 CASE STUDY Mobile Slaughter Units... 18 CASE STUDY Tablelands Premium Meats... 19 Attachment A Major Meat Processor Market Share and Brand Names... 20 Attachment B Meat Processing Process... 21 Attachment C Mobile Slaughter Facilities... 22 2

Terms of Reference On 18 March 2015, the Senate moved that the following matters be referred to the Rural and Regional Affairs and Transport References Committee for inquiry and report by 12 August 2015. The effect of market consolidation on the red meat processing sector, and in undertaking the inquiry, the committee consider: a. the potential for misuse of market power through buyer collusion and the resultant impact on producer returns; b. the impact of the red-meat processor consolidation on market competition, creation of regional monopolies and returns to farm gate; c. the existing selling structures and processes at saleyards, particularly pre- and postsale weighing, as well as direct sales and online auctions, and whether they remain relevant; d. the regulatory environment covering livestock, livestock agents, buyers and meat processors; and e. any related matter. 3

Executive Summary The Department of Industry and Science (the department) makes the following submission to the Rural and Regional Affairs and Transport References Committee inquiry into the effect of market consolidation on the red meat processing sector. The department does so as the Australian Government department with portfolio responsibility for food processing policy. The department has endeavoured to provide information on the food processing industry, and knowledge and observations relating to consolidation in the red meat processing sector. The meat processing sector has seen good, consistent growth and weathered challenging economic conditions. The sector is currently in a prime position to consider whether changes could be made to improve the competitive environment so that all existing and new businesses can contribute to continued growth. This will be important as global demand for red meat continues to rise, particularly in the new and emerging international markets as well as domestic niche markets. While the meat processing sector is largely stable and mature, there is scope for red meat supply to expand so that increasing consumer demand is captured by Australian businesses. Feedback to the department from large meat processing businesses suggests that cost minimisation and obtaining skilled labour are important to ongoing growth of their large scale businesses. 1 Larger companies have been highly successful at vertically integrating, which enables them to spread costs across a larger scale of activities. Smaller company vertical integration is also proving successful, but for different reasons, including that it allows control over produce and its quality and enables businesses to target niche consumer markets. Feedback from smaller meat processing sector businesses suggests that the sector might benefit from investigating and implementing ways to enable new entrants to the sector who are then enabled to compete on price so that they can become sustainable in the long term. Doing so is likely to have positive impacts for the overall cattle production and red meat producing supply chain. The meat processing sector has for some time followed a fairly repetitive cycle of new entrants, followed by exits from either price competition or acquisition. Of course, other factors such as drought, disaster, international herd sizes, and the Australian dollar play a role. Despite these broader economic influences, the department has found that there is demand for more meat processing businesses, and there is significant interest from people wanting to enter the meat processing market, particularly to meet those non-export niche markets which are not the target of large meat processors. Our consultation reveals that mobile slaughter units, small scale slaughter facilities in regional areas, and small scale meat processing and packaging facilities could provide the avenue for more innovation, new entries and competition within the sector. They also have the potential to service a part of the meat processing supply chain not currently engaged to its full potential. Such innovative practices have the potential to establish Australia as a food processing innovation leader and a highly competitive and leading red meat producer, particularly when combined with our significant red meat export success. A system which enables new entrants into the domestic meat processing sector is likely to increase profitability of the overall supply chain, contribute positively to the Australian beef brand, and increase the contribution that the red meat sector makes to Australian GDP. The department s consultation and research found that red meat processors are generally of the view that existing regulation for the sector ensures that Australia remains a producer of safe and top quality red meat. 1 In 2014 the Department of Industry and Science participated in industry consultations as part of a Council of Australian Governments project to investigate opportunities for deregulation in the beef and dairy industries. 4

That said, parts of the red meat processing regulatory environment may be stifling innovation and inhibiting new entrants to the supply chain, particularly small to medium enterprises. Despite there being an Australian Standard for the production of meat and establishing meat processing facilities, there is a range of other relevant regulatory requirements for establishing a meat processing facility relating to: food safety and hazard control, and other operational hygiene requirements; waste disposal and management; access to potable water; necessary qualifications of slaughter staff; and other environmental considerations such as biodiversity protection or development activities determined to be environmentally significant. Each state and territory government has its own regulations, guidelines and/or procedures and responsibility crosses a number of portfolios including: health; environment; and agriculture; along with an agency charged with day-to-day enforcement of primary production and processing regulation, typically named Safe Food or something similar. Additionally, the level of assistance and guidance offered by state and territory authorities to any person wanting to establish a red meat processing businesses also varies. Local council planning requirements also need to be met and can include a variety of measures relating to noise, odour, urban encroachment, and transport considerations. The complexity of this regulatory environment along with variability across jurisdictions can prove difficult to navigate and understand for new entrants to the meat processing sector. The complexity can become a cumulative time impost and can be the deciding factor not to pursue the idea of establishing a small meat processing facility, particularly where the person pursuing it is doing so as an additional vertical integration to their existing business of producing and managing livestock. In the case of mobile slaughter units, it is unclear whether meat processing regulations specifically prohibit such activities or whether in fact the legislation is just silent, that is, it does not actively support or permit mobile slaughter units operating. Even if it could be established that state and territory and local council regulation did allow mobile slaughter units; crossjurisdictional regulatory differences would prove a significant cumulative compliance burden that would inhibit such innovative business practices and act as a significant barrier to entry. Ideally, regulation should facilitate innovation and build the competitiveness and productivity of Australian industry. The existing red meat processing regulatory environment appears to be inhibiting innovative processing solutions from entering the market. Additionally it is apparent that innovative processing solutions are in demand and would improve the competitive environment of the sector. It would be helpful to facilitate expansion of the red meat processing sector by better enabling innovation and new entrants. The sector would benefit from investigation into the types of sectoral adjustments (regulatory and non-regulatory) that could facilitate new and innovative entrants, and the cross-jurisdictional implications of any changes. The department welcomes the opportunity to make a submission to the Committee and we have taken this opportunity to highlight some issues that would benefit from further investigation as they may provide the means to improve competition in the sector. 5

Background The Australian Government s vision is for an agile economy, capitalising on Australia s commercial and scientific strengths. Central to this vision is the need for strong and selfreliant innovative businesses. The Department of Industry and Science (the department) consolidates the Australian Government s efforts to drive economic growth, productivity and competitiveness by bringing together industry, science and skills. The department is committed to developing policies to provide lasting economic benefits designed to ensure Australia s competitive future. The Industry Innovation and Competitiveness Agenda (Agenda) announced in October 2014 is increasing Australia s international competitiveness and creating jobs, by focussing on our areas of strength. This will help Australia transition to smart, high-value and export focused industries. The Agenda has refocused industry policy with an emphasis on science to foster innovation and research. It aims to build a culture of entrepreneurship that helps Australian industry and the science community work together to commercialise new products, processes and services. Government Support for Food Industry The Industry Growth Centres Initiative (the Initiative) is the centrepiece of the Government's new industry policy direction. It will lift competitiveness and productivity by focusing on areas of competitive strength. This will help Australia transition into smart, high value and export focused industries. The Initiative will enable national action on key issues such as deregulation, skills, collaboration and commercialisation. It will drive excellence, not dependence and create an economy that ensures Australia s ongoing prosperity. The Initiative is ongoing with $188.5 million in Australian Government funding. Industry Growth Centres will be established to deliver the Initiative in five growth sectors in which Australia already has a competitive advantage, these are: Advanced Manufacturing; Food and Agribusiness; Medical Technologies and Pharmaceuticals; Mining Equipment, Technology and Services; and Oil, Gas and Energy Resources. The Food and Agribusiness Growth Centre will leverage experience and expertise across the sector to catalyse the formation of collaborative partnerships between industry, research and government to develop practical pathways to grow, boost productivity, reduce regulatory burden and create jobs. The Food and Agribusiness Growth Centre may, for instance, assist food manufacturers to work with packaging companies and researchers to consider packaging solutions to extend the shelf life of products, especially into regional export markets where the lack of refrigeration is a problem. Other key Government programmes supporting the food industry are: the Entrepreneurs Infrastructure Programme which provides tailored support for small and medium businesses including: advice from professionals with private sector experience; co-funded grants to commercialise new products, processes and services; funding to take advantage of growth opportunities; and connection and collaboration opportunities; the Single Business Service streamlines the way businesses access government information and services through one website (business.gov.au), one contact centre (13 28 46) and one face-to-face facilitation network (AusIndustry). The Single Business Service also provides access to targeted support programmes like the Entrepreneurs Infrastructure Programme; the R&D Tax Incentive which provides a targeted tax offset designed to encourage more companies to engage in research and development in Australia; and 6

the Cooperative Research Centres (CRC) Programme which supports research partnerships between publicly funded researchers, business and the community to address major long term challenges. As at July 2014 there are 35 active Cooperative Research Centres operating across four broad Australian and New Zealand Standard Industry Classification codes including agriculture and manufacturing. For instance, the Dairy Futures CRC is a large scale partnership between dairy farmers, pasture and cattle breeding companies, government and researchers, and is the largest single research programme for the Australian dairy industry. Dairy Futures CRC is working to address the challenge of operating in a production environment that is economically and climatically volatile by inventing improvements to pastures and cattle that reduce the cost of production, reduce farmers exposure to external price shocks, and allow for greater levels of production. The CRC will assist the dairy industry to expand to meet the expected increasing global demand for dairy products, and increase export earnings for Australia. It is through these programmes and our role in food processing policy that the Government is working to maximise competitive strength and resilience in our food processing industry. That said, there is always room to improve and this submission will highlight some areas of the meat processing sector where its competitive strength could potentially be improved. Food Processing Policy The department has policy interests in various aspects of food processing including labelling of food, trade facilitation, and innovation in the food processing sector. Specific responsibilities include: general responsibility under the Administrative Arrangements Orders (AAOs) for country of origin labelling and food industry policy ; administrative responsibility for provisions in the Competition and Consumer Act 2010 covering Made in (country) and Product of (country) claims (sometimes referred to as safe harbour defences); policy advisory responsibilities in relation to trade / trade barriers / impacts of originbased preferential duties and restrictions on Australian industry; policy advisory responsibilities in relation to preferential treatment under Free Trade Agreements, other tariff concessions where origin may be an issue, and international rules of origin for non-preferential purposes; and policy advisory responsibilities in relation to food industry policy. The department is a focal point for the development and consideration of food processing industry policy issues within Government. In addition to providing policy advice and support to portfolio Ministers on the food processing industry, the department is responsible for promoting and maintaining links across the Australian Government departments and agencies responsible for implementing elements of the Government's food industry policies. The parts of the meat processing supply chain that the department considers as part of its food processing policy responsibility are from slaughter facility to the point of purchase. Other Commonwealth Government departments have responsibility for areas outside these points of the supply chain. While the Department of Agriculture has portfolio responsibility for matters relevant to the farm gate exit to slaughter facility, the Department of Industry and Science maintains a watching brief over these issues and consults with the Department of Agriculture as needed. The effect of farm gate prices on competition along the red meat processing supply chain fall outside of the department s portfolio responsibility and we, therefore, make no comment on this aspect of the inquiry. The department will not address each point in the Terms of Reference, but rather will make comment on a number of issues that are relevant to points B. (the impact of the red-meat processor consolidation on market competition, creation of regional monopolies and returns to 7

farm gate); D. (the regulatory environment covering livestock, livestock agents, buyers and meat processors) and E. (any related matter). Meat Processing Sector A general definition of the meat processing sector is that it is composed of businesses engaged in: slaughtering livestock; boning, freezing, preserving or packing meat; canning meat (except poultry, bacon, ham or corned meat); manufacturing meal from abattoir byproducts, or rendering lard or tallow. 2 Major products from this industry are: beef and veal; lamb and mutton; and pig meat. The activities of the related sector, cured meat and small goods manufacturing, is typically categorised separately from the meat processing sector for the purposes of data analysis. The sector manufactures bacon, ham, small goods (where meat is formed into a new product like sausages, salamis, or dried and roasted meat products) and other prepared meat products. The meat processing sectors products go towards four main domestic markets: retailers (12.5 per cent); food service industries (9.4 per cent); wholesalers (8.4 per cent); and food manufacturers (4.9 per cent). The remainder (64.8 per cent by value) goes to export markets. 3 Australia s meat exporters compete with the United States of America (USA), Brazil, New Zealand, Canada and Argentina to meet consumer demand in the largest export markets of Japan and South Korea, along with new export markets in the Middle East and China. Column1 Key products of the industry 2014-2015 8% 3% Beef and veal Lamb and mutton Pig meat Other 23% 66% Data IBISWorld Australia Industry Reports: Meat Processing, 2015 Key inputs to the meat processing sector are: sheep, beef and pig farming; meat processing itself for value added production; electricity supply due to mass processing and refrigeration requirements; water supply; and paper or plastic for product packaging. 2 IBISWorld Australia Industry Reports: Meat Processing, 2015 3 IBISWorld Australia Industry Reports: Meat Processing, 2015 8

In 2013-2014 the meat processing sector revenue was $14.2 billion and is predicted to grow by 1.4 per cent annually in 2015-2020. 4 In the years to 2020, employment and wages are expected to remain steady. 5 Anecdotally, meat processors report that wages are a significant component of their operating costs. A slight decline in employment might flow from technological advancements replacing manual labour. Although butchering and slaughtering currently still largely rely on manual input, there is increasing automation. Other parts of the process that are the subject of technological research and innovation include production line cost reduction, animal welfare, genetics and biology (for instance in meat cut quality and consistency), and environmental management. FOOD PRODUCTS * MEAT PROCESSING INDUSTRY VALUE ADDED ($m) 18, 451 2012/2013 2, 779 2012/2013 EMPLOYMENT (number) 210, 940 2012/2013 34, 411 2012/2013 R&D EXPENDITURE ($m) 463 2011/2012 60 2011/2012 * Food product manufacturing consistent with ABS definitions. SOURCE: ABS Catalogue 8155.0 - Australian Industry, 2012-13; and ABS Catalogue 8104.0 - Research and Experimental Development, Businesses, Australia, 2011-12. In December 2014 total red meat production was 941,000 tonnes, an increase of 2 per cent from the previous quarter. Of that, beef (including veal) and lamb (including mutton) production was 666,300 tonnes (71 per cent) and 182,900 tonnes (19 per cent) respectively, with both demonstrating 1-2 per cent increases on the previous period. 6 Australian meat consumption between now and 2020 is expected to rise after a brief and small decline during 2014-15. The organic, grass-fed (or other products with certifications or claims targeting certain consumer preferences) and high-value meat market will also continue to grow. SOURCE: IBISWorld Australia, reproduced with permission. 4 IBISWorld Australia Industry Reports: Meat Processing, 2015 5 IBISWorld Australia Industry Reports: Meat Processing, 2015 6 ABS, Catalogue 7215.0 Livestock Products, Australia, December 2014 9

Column1 Meat product export destinations 2014-2015 11% 10% 41% Other Japan United States 17% Republic of Korea China 21% Data IBISWorld Australia Industry Reports: Meat Processing, 2015 Meat product import origins 2014-2015 14% 8% 33% United States Denmark Canada Other 16% New Zealand 29% Data IBISWorld Australia Industry Reports: Meat Processing, 2015 Australia imported $540m of processed meat in 2012-2013 7, mainly pork used in small processed meat goods. The export market is the primary outlet for Australian processed meat. Calculations suggest that in 2013 Australia exported over 65 per cent of its beef production, accounting for 17 per cent of global exports, and exported around 50 per cent of its sheep meat production. 8 According to the ABS, in December 2014 boned beef (including buffalo meat) exports were 366,928 tonnes or more than 50 per cent of total production, and lamb/mutton exports were 129,572 tonnes or more than 70 per cent of total production. 9 Meat and Livestock Australia suggest that Australia exports: 70 per cent of its beef production; 57 per cent of its lamb production; and 96 per cent of its mutton production. 10 7 Department of Agriculture, Australian Food Statistics 2012 13 (2014), Table 6.1 Australian imports by level of transformation. 8 Calculations from Department of Agriculture, Australian Food Statistics 2012-13 (2014) and MLA Statistical Review 2014. 9 ABS, Catalogue 7215.05 Exports of Fresh, Chilled, Frozen and Processed Meat, Australia, December 2014 10 Meat and Livestock Australia cattle fast facts 2014, Meat and Livestock Australia sheep fast facts 2014, 10

While the reported statistics vary slightly, they all confirm that export markets are key to the ongoing success of the red meat processing sector. Japan, USA and South Korea have been the major export destinations for Australian beef in the past, with growth in exports to China predicted to occur. The meat processing sector has small numbers of large businesses that account for almost 40 per cent market share. These larger firms are typically able to charge higher consumer unit prices owing to high throughput of feedlot cattle, consistent application of industry quality standards, and the ability to target markets with higher prices through exports. The Australian Meat Processor Corporation represents more than 97 per cent of Australia's red meat processing and reports that their 124 members operate in 150 meat processing establishments. 11 According to IBISWorld, the overall number of enterprises in the sector has remained relatively steady at 586 (2005-2006), 595 (2010-2011), and 581 (2014-2015). 12 Although, anecdotal industry reports suggest there to be some regularity to new processors opening and either becoming unsustainable or being acquired by larger processors. When the Australian Competition and Consumer Commission investigated competitiveness of retail prices in 2008, they observed that the meat processing supply chain was starting to see an increasing number becoming vertically integrated, producing cattle and owning feedlot facilities, as well as performing processing and wholesaling. Concentration in the sector is expected to rise as a result of strategic acquisitions and exits, with the number of enterprises expected to decline to 571 in 2019-2020. 13 The supply of red meat is a global business with the major players focusing on being a reliable supplier to their customer. Consequently, red meat is globally sourced to manage supply risk that can be caused by declines in supply from a particular country due to, for instance, biosecurity concerns (such as Bovine Spongiform Encephalopathy (BSE)) or market access issues (quotas and tariffs). Market concentration is driven by the need to be competitive in a global market and it is scale that reduces costs to drive competitiveness. The major meat processing companies are: JBS Australia; Teys Australia and Cargill Joint Venture; NH Foods; and Midfield Meat International. Attachment A provides further information on market share, subsidiaries and commonly seen brands for the major meat processors. Column1 Market share of major meat processors 2014 17% 12% JBS Teys NH Foods Midfield Other 64% 4% 3% Data IBISWorld Australia Industry Reports: Meat Processing, 2015 11 Australian Meat Processor Corporation, http://www.ampc.com.au/about-ampc accessed 21 April 2015. 12 IBISWorld Australia Industry Reports: Meat Processing, 2015 13 IBISWorld Australia Industry Reports: Meat Processing, 2015 11

Location of major meat processing facilities BUSINESS LOCATION % REVENUE QUEENSLAND 31.9 NEW SOUTH WALES 23.4 VICTORIA 22.9 WESTERN AUSTRALIA 9.8 SOUTH AUSTRALIA 7.3 NORTHERN TERRITORY 2.7 TASMANIA 1.9 AUSTRALIAN CAPITAL TERRITORY 0.1 Data IBISWorld Australia Industry Reports: Meat Processing, 2015 Map data from company websites and IBISWorld Australia Industry Reports: Meat Processing, 2015. Major meat processors are concentrated along the eastern seaboard and, where possible, strategically placed in close proximity to animal producers. Being in close proximity to ports and transport infrastructure helps lower costs and there is also a desire to be close to animal producers to manage animal welfare and minimise livestock bruising during transport which can affect meat quality. A number of the large meat processors have interests in animal producing and livestock transport businesses to further improve efficiencies in their supply chain. 12

Issues In preparing this submission, the department consulted selected businesses in the sector. We particularly sought out some smaller meat processing sector participants to gather a better understanding of potential barriers to entry to the supply chain, and scope for greater innovation in the supply chain as a means to improving the competitive landscape. Since the department has policy responsibility for food processing, it will limit its observations to issues for businesses participating in the supply chain from slaughter facility to the point of purchase. While some issues highlighted here are broadly relevant to all businesses within the sector, some have a greater relevance for smaller processors, for example, mobile slaughter units (MSUs) or greater relevance for larger processors, for example, export competition. The meat processing sector is characterised both by large vertically integrated businesses operating across the supply chain and smaller processors with more targeted and singular operations. Competitive pressures, regulatory considerations and strategies for growth for businesses within the sector will differ depending on the size of the business, the range of their activities and geographic location. Attachment B provides an illustrative explanation of the structure of the meat processing supply chain. It also, for instance, demonstrates how meat processors can be competing with major supermarket chains (MSCs) at various levels in the supply chain, whether it is access to slaughter facilities or further along the supply chain in production of value added product, with super market chains also undertaking in-store production. The meat processing sector is highly fragmented with the industry s four largest enterprises holding almost 40 per cent of total market share and the remainder composed of small and medium sized enterprises. 14 Larger companies have shown a propensity to vertically integrate 15 as they have the financial and other resources to do so and, consequently, have can spread their overhead costs across a larger scale of activities. However, smaller companies are also vertically integrating their operations, albeit on a smaller scale, particularly producers branching out into processing as a means of exerting control over their produce, capturing niche consumer markets, and ensuring quality of the end product. 16 Consolidation of the sector has occurred, and new entry for small to medium sized operations is considerably risky and relatively costly 17 18 so that, currently, the main remaining area for opportunity in the sector is in targeting a niche or gap in the market. Overall outlook and exports Recent global financial pressures (the global financial crisis and the value of the Australian dollar), poor agricultural conditions (such as availability and cost of animal feed) and unfavourable weather conditions have resulted in high cost inputs to Australian livestock producers and the need for producers to liquidate or slaughter Australian herds. Consequently, red meat processors have had a readily available supply of inputs. Combined with Australia s reputation for disease-free beef, good market access arrangements, and competitor countries being restricted from trade due to disease concerns (such as BSE), this has resulted in the Australian red meat processing sector remaining competitive in global markets despite the high value of the Australian dollar, to the extent that beef exports peaked to record levels in 2014. 19 The livestock end of the Australian red meat supply chain appears to be recovering from the difficult circumstances as livestock producers begin re-stocking resulting in a significant 14 IBISWorld Australia Industry Reports: Meat Processing, 2015 15 IBISWorld Australia Industry Reports: Meat Processing, 2015 16 IBISWorld Australia Industry Reports: Meat Processing, 2015 17 Central Highlands Development Corporation: Central Highlands Meat Processing Plant Feasibility Study 2015 18 Tablelands Premier Meats 19 Meat and Livestock Australia, Australian Cattle Industry Projections 2015 13

contraction in Australian slaughter rates. 20 Similarly, USA livestock producers are recovering from their difficult conditions, resulting in the global supply of beef becoming tight. It is noteworthy however, that the predicted 2015 decline in slaughter rates in the USA (1.7 per cent in weight value) is much smaller than the predicted 2015 decline in slaughter rates in Australia (19 per cent in weight value), largely a reflection of Australia s record export rates in 2014. These factors, in addition to an already heavily liquidated Australian herd 21 and stable or moderate increases in domestic consumer demand for red meat, are expected to result in the red meat processing sector facing some relatively unusual conditions in the next year to two years. These conditions are likely to: reflect positively on farm gate prices; result in a slight reduction in Australian slaughter and export numbers; and may result in increased costs to Australian meat processors. The lamb market is also expected to increase in value but decline in production, due in most part to the fact that farmers are replenishing their herds as they experience some relief from drought conditions which forced them to slaughter large numbers of animals. 22 Overall, Australian exporters are expected to face stronger competition in international red meat markets, with predictions that the USA will reclaim its lost market share, particularly into Japan and South Korea, and that low-cost beef suppliers in Brazil and Argentina will present greater competition. 23 Low-cost producers, such as those in Brazil, are experiencing comparatively favourable livestock prices, domestic demand and cattle availability conditions, which improve their competitive position in the global market. While Australian red meat exporters are facing greater competition and the destinations for Australian exports are changing 24, some trade opportunities remain reliable. In Japan, the demand for high-quality Australian beef currently remains strong. Compared to other international markets, China has a low beef consumption rate, but as more people enter middle class status, beef consumption is expected to almost double by 2030. 25 Australia supplies more than 50 per cent of China s beef, with large volumes also entering China from USA and Brazil. Declining Chinese domestic beef production provides Australia with an opportunity to increase its supply of beef to China. 26 Demand for Australian beef from emerging markets, like the Middle East, has helped red meat exporters to withstand a high Australian dollar, as has the 2010 tariff-free quota from the European Union. 27 Trade agreements with China, Japan and South Korea are also expected to boost export growth along with depreciation of the Australian dollar. Industry consultation has indicated that smaller processors are less likely to explore export opportunities due to the cost, regulations and demand involved. 28 Exporting red meat requires complying with considerable regulatory requirements, including licensing and inspection, which would result in sizable costs to small producers. Red meat exporters are also expected to be consistently reliable suppliers (both in volume and meat quality/cut) to meet a level of demand which far surpasses that of domestic and niche market demand. These factors would tend to preclude small processors from exporting. Imports Since Australia is a large-scale producer of processed meat, it tends to import a small quantity of meat (mostly pork for processing from USA and Denmark) and this is estimated to decline marginally over the next five years, consistent with historical trends. 29 Imports are estimated to account for 10.4 per cent of domestic demand in 2014-15. 30 20 Meat and Livestock Australia, Australian Cattle Industry Projections 2015 21 Rabobank Beef Quarterly Q1 2015 22 IBISWorld Australia Industry Reports: Meat Processing, 2015 23 IBISWorld Australia Industry Reports: Meat Processing, 2015 24 Meat and Livestock Australia, Australian Cattle Industry Projections 2015 25 ANZ, BlueNotes: Ten top steers on the Chinese beef market 26 ANZ, BlueNotes: Ten top steers on the Chinese beef market 27 IBISWorld Australia Industry Reports: Meat Processing, 2015 28 Departmental consultations with Tablelands Premier Meats and Galloway Meats 29 IBISWorld Australia Industry Reports: Meat Processing, 2015 30 IBISWorld Australia Industry Reports: Meat Processing, 2015 14

Innovation and efficiency gains The department notes that cattle and sheep production is intrinsic to the highly competitive downstream activities of processing and export. Achieving productivity growth needs to be a high priority for the entire supply chain. While price and farm-gate returns remains important, non-price differentiation along the supply chain; such as quality improvements; innovation in process and in business model; and demand drivers, will be a key to growth in the next five to ten years. These issues, amongst others, may become areas of focus for the Food and Agribusiness Growth Centre. Domestic meat products and brands are well established. Any future significant demand increases will come from value-added products, the organic (or similar clean meat claims) and high-value segment, quality improvement innovations, and exports. Opportunities exist in the expanding packaged fresh meals segment which is being driven by consumers desire for convenience foods. Meat Standards Australia and the Pasturefed Cattle Assurance System are examples of innovating in meat quality certification systems to improve quality. In the long term, the sector will need to confront new biotechnology innovations, such as the cultivated laboratory beef burger which uses stem cells to grow beef and was developed by Maastricht University Professor Mark Post. This is not expected to become a reality for another 20 to 30 years, although industry participants speculate that such innovations will change traditional farming and meat processing methods. Currently, some processors are adopting robotics in meat processing as a means of mitigating high labour costs within the industry. 31 Industrial robotics has the potential to reduce production costs and occupational injuries while improving process efficiency and hygiene. The strength of robotics, particularly in boning rooms where labour costs can be high, is in their ability to perform required repetitive tasks more efficiently, accurately and consistently than is currently possible. Integration of robotics into meat processing is also likely to be assisted over the next few years with the development of more sophisticated customisable technology where carcass dimensions are measured by x-ray technology to optimise cutting accuracy and meat cut selection. Such technology would enable increased animal throughput 32, but could further standardise allowable animals and restrict room for variability in animal production. Implementation of robotics is, therefore, more likely to benefit larger meat processors looking to produce standardised cuts of meat. Increased uptake of such technology will have implications for: the meat processor and producer negotiating relationship; the overall Australian cattle herd in terms of standardisation; and may have flow on impacts to the demand for alternative meat processors as an outlet for non-standard animals. Although, the latter will depend on the ease with which small and alternative meat processors are able to enter and remain in the meat processing sector. A small decline in the number of meat processing business establishments by 2020 will be driven by acquisitions, tight livestock supply, labour shortages and export competition. 33 Statistically, meat processing businesses will tend to move towards larger, more efficient plants that can support economies of scale and processing innovation. Vertical integration of large meat processors into farming, feedlots, transport, wholesale and retail, will continue to support large scale quality and value add innovations along the supply chain. At the same time, with most meat processing businesses being large and exports focused, there is a gap in the supply chain. Small, innovative processors are emerging in the sector and becoming successful at carving out niche markets or integrating with their own existing businesses to compete with the top four big meat processors. The basis upon which they are proving to be successful revolves around targeting consumer desires for local meat, products with certifications or claims targeting certain consumer preferences, and to know the production system and origin of their food. A major trend in recent years, which is also likely 31 http://www.beefcentral.com/processing/bordertown-robotics-technology-window-to-processings-future-video/ 32 Informal consultations with Scott Technology Limited www.scotttechnology.com.au 33 IBISWorld Australia Industry Reports: Meat Processing, 2015 15

to continue, is increased and targeted consumer marketing by the livestock producer or small/medium processor, who are often vertically integrated themselves. 34 The department has met with both small and large meat processers and, anecdotally, the largest operating costs for large meat processors, apart from purchases, are wages/labour and utilities, as well as cross-jurisdictional inconsistencies in utility costs. Australian slaughter facilities also tend to operate on a single-shift basis compared with double shifts used by overseas facilities. The department s consultations also confirmed that food safety related regulation is not problematic to businesses, rather, that the regulations support and maintain the brand of Australian red meat as a safe and high quality product which is so crucial in generating demand. SOURCE: Image used with permission from IBISWorld Australia based on ABARES and ABS statistics. Barriers to entry Barriers to entry for businesses within the meat processing sector will depend on which part of the supply chain a business is seeking to enter. There are high barriers to entry in establishing a slaughter facility. However, on-site meat processing has become more accessible in recent years through greater availability of processing equipment which can be purchased online. Producers have been able to take advantage of the accessibility of processing equipment to branch out into processing, albeit at a smaller scale, increasing the number of entrants in this part of the supply chain. On the other hand, the cost of constructing slaughter facilities is high and a large portion of the construction costs are sunk with and there can be uncertainty surrounding the returns on initial investment costs. Slaughter facilities also require a number of regulatory approvals (for example, environmental, planning and development) which 34 IBISWorld Australia Industry Reports: Meat Processing, 2015 16

may take a long period of time to comply with, and lengthen the time from commencement of construction until the facility is established and running. This can have an impact on the return on investment. CASE STUDY Galloway Meat Galloway Meat is a family owned farm located north of Newcastle breeding cattle and processing beef which they sell direct to the public. In 2010, Galloway Meat established a NSW Food Authority approved on-farm meat processing facility. The processing facility enabled the business to vertically integrate with a point of differentiation. When the department spoke with the business owner, he acknowledged that construction costs were significant but were offset by being able to carve out a niche product in the meat processing sector and enabling him to have complete control of quality and output. The business owner established the on-farm processing facility to address what he saw as the largest problems for small cattle producers: limited access to processing facilities; larger processing facilities controlling the market; and smaller processing facilities closing or being acquired. The biggest advantage for Galloway Meat has been the freedom to control the processing methods and technology and, therefore, costs which has enabled it to direct time and money towards differentiating itself using direct marketing and good strategy. Utilities, such as energy and water consumption, in slaughter facilities are high due in part to food safety standards. Refrigeration and sterilisation of equipment is especially important for ensuring meat safety and quality. Large volumes of water are also necessary to wash incoming livestock, carcasses after slaughter, equipment and work areas. Environmental laws govern effluent discharge from such activities and can vary according to the local government jurisdictional requirements. For example some local governments may allow recycling of effluent whereas others may not. Cost can also be a major barrier to a meat processor increasing their scale of operations. Export certification and licensing, and obtaining animal inputs consistently enough to establish production economies of scale are main barriers to establishing a meat processing business capable of producing meat products at a low cost. However, economies of scale are less crucial in businesses that can target highvalue/high price consumer markets where the production process and content of the end consumable matters, or that can target smaller animal producers with low infrequent slaughter needs who would otherwise be rejected by large meat processors. Large upfront spending on plant and machinery, as well as establishing distribution chains can prove difficult, especially when the larger more established competitors have existing relationships with all parts of the supply chain and can cope with temporary price reductions as a means to defend market. The department participated in industry consultations recently as part of a Council of Australian Governments project to investigate opportunities for deregulation in the beef and dairy industries. The consultations revealed that the areas of regulatory impacts on competitiveness are not specific to the beef and dairy industries, and aligned with the experience of the wider business community and other manufacturers. Further, it found that workplace laws, work health and safety, environmental approvals, and national road transport are all significant contributors to business costs, but are for the most part being examined through existing government reviews or processes. The department notes that regulatory requirements for the establishment of either a slaughter facility, meat 17

processing and packaging facility, or mobile slaughter unit facility, be they on-farm or off-farm, largely fall within the legislative jurisdiction of state and territory governments and local councils. In the course of preparing this submission the department set out to understand the legislation to support a person establishing a mobile slaughter unit. Investigations suggest that regulations covering establishment of mobile slaughter or processing facilities are state and territory regulations and relate to food safety, waste disposal, access to potable water, qualifications of slaughter staff, and any other environmental considerations. Local council planning agendas are also likely to be relevant. The department has been unable to verify with state and territory governments the complete range of legislation that applies to such a business endeavor, and whether the legislation specifically prohibits such activities or whether in fact the legislation remains silent, that is, it does not actively support mobile slaughter units operating. That said, it appears that a key issue is that all regulatory requirements would need to be met on each site that a slaughter occurs and that, to date, this has proven a difficult process to understand from a cross-jurisdictional regulatory perspective and difficult for any prospective business entrant to undertake. CASE STUDY Mobile Slaughter Units The George Alexander Foundation and the International Specialised Skills Institute published an investigative report into mobile processing systems for the Australian livestock industry in 2010. The study, undertaken by Annabelle Coppin, a cattle farmer from the Pilbara in Western Australia, examined the potential for mobile slaughter units (MSUs) to operate in regional and remote Australia with particular interest for northern Western Australia. The study drew from the experience in the USA and concluded that MSUs would address the challenge of remote producers gaining access to local processing facilities, but also would enable producers to independently vertically integrate their business and improve their profitability by reducing costs and reducing bruised product common in well-travelled animals post-slaughter. They provide the potential for lower capital investment compared to establishing new non-mobile slaughter facilities, with flexibility in slaughter location and niche marketing avenues by processing perhaps a portion of cattle herds either not fit for export or desirable to niche gourmet/high quality consumers. The study concluded that MSUs could add to the Australian red meat supply chain profitability, but that the nature of the regulations could be problematic, in that Australian regulations do not actively support MSU development. Attachment C contains more information on mobile processing operations. Since the meat processing sector is capital intensive and large processors have proportionately large ongoing costs in accordance with their mass production, anecdotally there appears to be a tendency for large slaughter facilities to dictate the size of the order they take, and the type and animal conformity they take. This is consistent with the economies of scale necessary to remain viable at the large end of the meat processing sector, and with the standardisation of red meat cuts and quality that is now being expected by both domestic and export consumer markets. In consulting with small and medium meat processors, the department found that this tendency has been preventing small and medium livestock producers from entering and competing in the meat market, and has forced some to establish their own animal processing facility. 18

CASE STUDY Tablelands Premium Meats Tablelands Premier Meats is an on-farm slaughter facility and meat processor located in Central West NSW. The facility was established initially to process the owners animals for wholesale and retail. Challenged by finding a facility that would process its small orders and to its specifications, the business set about constructing their own to meet the growing demand for flexible slaughter facility relationships with producers. The owners built the custom slaughter and processing facility from scratch and provide service slaughters with no minimum numbers and guaranteed own-animal return. It provides full butchery and packing and is planning further expansion. Establishing the facility took nine months and the owner viewed the regulatory requirements as necessary and valuable to the continued quality of the Australian meat sector. The facility has innovative waste management procedures, as well as a focus on methods and technology which allows it to produce clean products. It has had inquiries from international and domestic communities, including those in regional Australia who do not have adequate access to or feasible quota conditions from larger slaughter facilities, wanting to establish similar operations. The high cost of production relative to global competitors remains a challenge and the owner of the business believes it is essential to enable innovative tools, processes and manufacturing technologies that provide efficiencies and value in the process. The department recognises the limitations of consulting a small number of red meat processing sector participants. However, the consultations have served to confirm that there are opportunities for new entrants and innovative practices to succeed in the red meat processing sector, and that the sector would potentially benefit from systemic adjustments to enable such activities. 19