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The Hon Dr Sharman Stone
Parliamentary Secretary to the Minister for the Environment and Heritage
Federal Member for Murray

Speech at ENVIRO 04
Convention Centre, Darling Harbour, Sydney
Tuesday 30 March 2004

Impact of retail pricing on NRM - from farm to consumer

I would like to commend the Enviro 04 conference because it is all about having businesses understand that we have moved well beyond simply saying that environmental sustainability is a ‘feel-good'. It is something that we like to do because we all love koalas and acknowledge that fresh water is important.

If you look at the exhibits out there and the range of people participating, you can see that it is also about how to be economically sustainable in your business. It is no longer an optional extra to be involved in the total life cycle of your product, in managing your energy use and inputs of every description and looking after your costs when it comes to those inputs, especially energy and water and so on. It is actually a part of your political advantage these days if you are managing your natural resource inputs or if the way you impact on the environment is conserving and sustainable in the long-term. There is just no option any more.

Now I want to talk to you particularly today about a topic that is very near to my heart on a number of fronts. Russ [Russ Martin C4ES – afternoon session chair] has implied that I am passionate about it. I guess at this time of the day, I will not so much read a speech to you but rather talk to you about where I am coming from as the Member for Murray, which is the food bowl of Australia and as Parliamentary Secretary to the Environment where our Commonwealth Government's brief is to try and have this nation undo a lot of the damage that previous generations inadvertently did when they didn't understand the landscape or the fragility of the continent.

They went ahead and farmed it in a way that was fine back in Europe. They cleared the trees, ploughed the country, poured the water on top, shot the indigenous species that weren't compatible, added a few rabbits and foxes for a bit of hunting on the weekend and “Bob's your uncle” we thought. But we know differently now. So what we have to do to survive as a nation and to have a sense that we also have a decent place and a decent life to live, is to focus on our natural resources, on remediation, rehabilitation and understanding and on sustainability.

I will go back to the area that I come from, Murray, for a minute, which I will describe to you briefly. We have a number of wonderful people here today from the Murray electorate who have been sponsored by some marvelous local businesses, like Tatura Milk, Murray Goulburn Dairy and the Goulburn Valley Water Authority. I will describe to you this food bowl as having some of the densest food manufacturing in Australia in terms of numbers of companies in a very small area, Nestle, Kraft, Bonlac, Murray Goulburn, Tatura Milk, Unilever, Heinz, SPC Ardmona and Simplot. These are the food manufacturers that are clustered around the oldest irrigation system in Australia and some of what we will benchmark as Australia's best practice primary production. This is dairy, fruit growing, horticulture and now aquaculture as well. So I would hope you would feel fairly impressed by that, just two hours drive from Melbourne. You probably think this sounds a fantastic sort of region to live in and to grow in where a lot of investment would be attracted to. But if I also told you that the incomes of the primary producers in that region are some of the lowest in Australia perhaps you would be surprised. But perhaps you wouldn't be if you understood what is going on in Australia.

What is going on of course is that we have a situation where costs for primary producers are spiraling up. In recent times, over the last three to five years, that has been compounded by the worst drought on record and responses to that drought of course have added huge costs to water prices, fodder prices and so on. But if you in fact remove the drought impacts for a minute and still look at the costs for production in Australia you will see that they have been spiraling up. If you talk about farm chemicals, if you are talking about the genetics you need to use, veterinary bills of every description. If you are talking about labour inputs into your farm, your equipment, your water prices indeed, you will see an extraordinary increase in the costs of farming. And you will see a very significant decline in terms of trade, in terms of the prices paid back to farm produce over most of the commodity or industry sector types in Australia.

Now you might say well you know that's life, that's the way it is. It is a bit like internal migration in Australia. In the party room this morning one of my Western Australia colleagues got up and complained bitterly about a loss of population from places like Broome and the back of the Pilbara region. And people said that has gone on since 1788 or perhaps more realistically 1888 so what's new? But the point I want to make about primary producers is that they are not earning sufficient to entice another generation onto the farm. They are not earning enough to cover their costs of production.

Too often we expect, we demand in fact, that primary producers will be the remediators, the investors, the workers in maintaining the natural resource base because 70% of Australia's land is in the hands of private individuals who basically farm. I will give you a couple of examples to emphasise what I mean.

If you look at the supply chain, analysis of the dairy industry shows that a very large proportion of the environmental impacts on the whole dairy supply chain occur on-farm rather than in the upstream supplies or downstream processes. Work on the life cycle impacts of pasteurised milk done by the industry concluded that almost 99% of all the water required to pasteurise milk is used on-farm, 99% of the water, 93% of the eutrophication is associated with the work on the farm, 63% of the greenhouse emissions derived from the activity on the farm. And if you go and look at some other parts of the dairy industries, CSIRO has done similar work, they have come up with similar results - 95% of the water used in producing in the dairy cattle industry was on-farm, 78% of the greenhouse emissions came from on-farm, 81% of total water use was from on-farm.

So a major environment impact of the dairy industry are in fact on-farm compared to manufacturing and processing on through the logistics system to retailing where the product is put into cardboard cartons that need to be disposed of and the whole waste stream associated with retailing. So if we are not serious about the environmental work that goes on on-farm then we cannot expect any serious or significant improvement in our natural resource funds in Australia.

So my whole dilemma as the Member for Murray and Parliamentary Secretary to the Environment is how can we address the $100 billion food industry in Australia's current situation and this has gone on for quite a while, where in the whole value chain of food production from paddock to pallet there is a growing value indeed that is being delivered to the retail sector or sometimes to the wholesalers. But it is being squeezed perpetually and continuously when it comes to the supply end of the chain, the primary producers.

I will give you a few statistics in case you don't believe me, but I am sure most of you do. These numbers come out of the very recently report that was done for AFFA, the Federal Department of Agriculture, Forestry and Fishery. This looked at the derivation of prices to farmers and it is a comparison of 2000 and 2003 prices for some very common supermarket products. It compares prices paid to farmers with the actual prices that retailers charge for the product at the end of the day.

Take frozen peas. In 2000 farmers were receiving 40 cents a kilogram for their frozen peas and in 2003, three years later, they were receiving the same 40c a kilo, no change, although their costs of production had gone up significantly over those three years. The retailers though, were getting $2.60 in 2000 and their price went up to $3.10 for the same kilo in 2003, a significant increase to them.

If you compare another product, take eggs for example, where in fact the egg farmers were lucky as they were being paid $1 a dozen in 2000 and $1.20 a dozen in 2003. But the retailers were getting $2.90 for that $1 for the dual supply price. And remember the retailers do no value adding, they simply take the carton from the egg producers in its finished state and plonk it upon the shelf. So they have gone from $1 a dozen paid to the farmer, to $2.90 for the retailers. The price to farmers went up an extra 20 cents in 2003 but the price for retailers had virtually doubled to $4.00 a dozen in 2003. So if the retailers have been able to charge from $2.90 to $4.00 a dozen over the same period how come the farmers only got an extra 20 cents when things on the farm have been very difficult for producers over that same period?

You will be aware that the costs of grain and other inputs to producers of eggs are very similar. With pineapples for example, farmers in 2000 received 17 cents for a 450 gram can – that's 17 cents of the input, yet in 2003 the price went down to only 16 cents, while the retail price went from $1.20 for the same can in 2000 to $1.40 in 2003.

Let me say to you that the problems we have then, is how can we deal with an industry sector that in the case of the primary producers has very little bargaining power, very little leverage, they're price takers. If you are in the export market and are an Australian dairy manufacturer, you typically export a significant proportion of the product. There is not much value adding at the end of the product so we are sending a lot of powders, a lot of bulk cheeses, and so on. Unfortunately we compete against subsidised exporters in Japan and Korea – and South Korea is just starting to emerge as a dairy destination of some of our products. And we compete with European and American product with significant subsidised alternatives. We also have of course a situation where dairy products are often used as food aid trade type products, so even when you think we have a superb product we are very much a price taker on the export market. And when our dollar is at the value it is at the moment it is extraordinarily difficult to do well on the export market.

So is there any joy in the domestic market? I have just read you some examples of how the prices haven't significantly increased for the primary producer, and we need to ask why haven't they? There is a whole range of reasons. One is the 77% duopoly that the two major supermarket chains have in terms of retail cover. This is the Coles Myer and Woolworths supermarket chains and between the two of them they cover about 77% of all supermarket grocery retailing sales in Australia. It is a saying and some of you might have heard it, that there is only one thing worse for a primary producer than a contract with Coles Myer or Woolies and that is no contract.

The problem is complex. We have the outright head-on competition between the two big supermarkets on price – not on growing the market but on price and on the lowest price possible and best quality. We do not have a significantly growing population in Australia but we do have an extraordinary variety of food product on the market, clean green superb food and it is extraordinarily cheap comparatively.

There are a number of other pricing strategies that our supermarkets choose to use which make it more and more difficult for primary producers to innovate to put something back into the natural resource base. One of those is the relentless trial by supermarkets to introduce their own home brands. This is an international phenomenon in other supermarket chains elsewhere too. If you have a home brand, what that means is that you require your manufacturers, who have their own brands on the shelf, to also supply you their home brand, even a premium home brand. And if you are a premium brand competitor you are required and requested and asked will you or will you not supply to our home brand? Yes, it will compete with your own branded product, but think seriously about that market power. So when you are finding your own branded product having to compete against the home brand good quality product, that's difficult for our Australian manufacturers.

There is also the everyday low price strategy that our supermarkets like to advertise and stress. If you are a tomato producer or strawberry producer, or a sweet corn producer in Australia, you will know that there are seasonal gluts and there are seasonal dips in terms of supply, even though the country has different versions of the seasons up and down the Eastern seaboard. There are gluts and there are periods when you have less of that product available to sell. How do you handle that? In the past you used a special in the supermarket. You shifted some of last year's stock into a special and it was great. The buyers liked it, it was a bit of excitement in the supermarket and it helped you manage your own supply of production and the seasonality of your enterprise. But the food sector and beverage sector is increasingly not being able to offer specials any longer. It is now everyday low prices that they have to conform to and that means the same low prices year in year out. And then if there is an extraordinary event, like a drought, where something might have happened that is significant, those everyday low prices become a problem.

There is of course too the issue in the way our supermarkets choose to display the fruit and vegetables which means that there are significant losses. You have probably seen the huge bins of oranges, apples or other fresh product that invite the buyer to sniff, squeeze and pick over the product. A lot of it is not trayed-up it is loose. That means that there could be up to 20 per cent loss of that product at the end of a number of days when what is left in the bottom of the bin or container. And of course, that comes off what is paid to the primary producer. That loss is factored in yet the product is delivered in a very good condition, it has to be otherwise the supermarket wouldn't accept it.

There are alternatives to that - significant alternatives, but they just require more money and more costs at the retailing end. For example retailers could have smaller lots of product trayed-up and if they decide to do that, who do you think ends up having to bear the cost of the poly trays and the branding – that goes back to the primary producer. But another alternative that is being trialed by one of the big supermarkets is to have just a small lot, for example a couple of cardboard cartons of fruit out on display. It comes more quickly then from the cool storage area and doesn't get handled by hundreds of buyers. It has to be replaced more often as the product is sold. But it reduces spoilage by a very significant percentage.

All round it costs a bit of extra labour in re-filling the cartons, but I would certainly argue that I would be prepared to pay more for fruit that I knew hadn't been squeezed or pinched by lots of people over a number of days. In some countries in Europe, you have to put on gloves before you start handling fruit in the fresh fruit section of your supermarket.

There are ways around these issues and I am going to talk about some of the other solutions that I think we have to start looking at and some of the similar things the Australian Government is trying to do. As you know we have the Trade Practices Act, which looks at unconscionable behaviour and the use and abuse of market power. The recent Boral decision brought into the debate a discussion on what the phrasing of market power actually means. We have tended to talk and concentrate on competition between value chains rather than intra value chains. We tend to say has Woolworths' for example, acted in a non-competitive way with another smaller IGA chain. Or has Boral acted in an improper way with one of its other smaller competitors. Rather, the Act itself has not tended to look hard at the asymmetrical power relationship in the value chain that is being used to squeeze others in that value chain. That is very important for us to consider.

One of the ways we came up with to deal with the retail squeezing of suppliers in the grocery industry was to develop the Grocery Ombudsman. It began a couple of years back. You won't be surprised to know that there has been very, very few – in fact you could count it on one hand – cases where a primary producer has tried to take on a retailer. Why? Because of retaliation potential, the Ombudsman was told. What has happened is that numbers of merchants or agents had been tackled by suppliers because of a lack of transparency and the inappropriate behaviours that had been used in the fresh wholesale market, so the Grocery Ombudsman was put into place.

The other thing that happened was that under the Trade Practices Act, Section 46 will allow primary producers, in particular dairy farmers in the first instance, to collectively bargain with manufacturers and then perhaps further on with retailers if they've got direct relationships. The trouble with collective bargaining is when it comes to a significantly less powerful section of a chain for example, primary producers. Take the tomato farmers in the Murray electorate as a classic example. There are only about 27 of them left and these are tomato-manufacturing producers and they supply four manufactures only and they are also all in the electorate of Murray. The problem is if these primary producers of tomatoes collectively bargain together and agree to a set price and then head off to their manufacturer, the manufacturer says, “umm, that's fine, I'll just check the price of tomatoes from Mexico”. And so the only way you can effectively bargain is if you have control of all of the elements of supply. But if your competition is offshore and I'm talking about tomato paste or other semi-processed products coming in, then I'm afraid you don't have much to argue with at the end of the day. So collectively bargaining is out there and if you get authorisation it is not against the law and it is not called collusion any more. And that's just moving through now.

But I think there is another way we need to go and this is the ethical investment issue. As a lot of you will know, we are now in Australia in the developed world getting more concerned about the ethical investment scene in terms of shareholders. For example, is the company using child labour? Are they exploiting a developing nation? Are they using appropriate forestry practices? Are they environmentally sustainable?

According to the Ethical Investment Association, socially responsible investment in Australia is worth about $13.9 billion. And the growth in this reflects a willingness among consumers and investors to look to investments that are ecologically sound and socially just. Since its introduction in 1996, the Ethical Investment Association of Australia has found that ethical investments have grown by 700 per cent, from 11 to 74. And the Down Jones Sustainability Index has shown that the SRIs – socially responsible investments - outperformed the conventional index for global stock performance. So this is also good business.

I know for a fact that groups such as Vic Super are looking at some of their investments in supermarkets – the big businesses that have done extraordinary well in recent times. We need to be saying to shareholders, are you able to be convinced by the management that the full value chain involved in delivering the retailers profit has been environmentally sustainable? Can you be assured that your pricing strategies have delivered a reasonable level of return to the suppliers' primary producers so that they can re-invest back into the landscape? Can you assure us as shareholders, that this is the case? And I know that there are numbers of shareholders who are interested now in these issues.

We had one CEO boasting that he was able to take $500 million out of the dairy suppliers pockets and transfer that into cheap everyday prices and shareholder profits a short time ago and he was applauded. I say back to you that that $500 million out of the dairy industry's returns cost this country significantly. In the newspaper that actually reported the CEO's great business acumen to announce those results, the same newspaper, The Australian , reported that dairy farmers in South Australia could no longer do their salinity drainage work because it simply was beyond their ability to pay for the nutrient management and salinity works that they had previously agreed were necessary. This was the same newspaper that reported the glory of the shareholders benefit in taking $500 million out of the dairy farmer's pockets.

I think it is a significant change for Australians. We have other examples in developed countries, like Canada, who are tackling the same concentration of ownership in manufacturing and retailing and the impacts on primary producers and the environment. These include a number of strategies, such as regulatory strategies that bring about a more conscionable behaviour - more caring of the value that can be derived through the value chain. I just think that we've got to make sure that we have this problem acknowledged. I'm sure our consumers delight in having cheap lettuces, cheap vegetables and fruit – and cheap milk. My argument is it is costing us the earth.


Commonwealth of Australia