1676 LEGISLATIVE COUNCIL Wednesday 4 December 2002
The Hon. P. HOLLOWAY (Minister for Agriculture, Food and Fisheries) obtained leave and introduced a bill for an act to provide for the stabilisation of the chicken meat industry; to repeal the Poultry Meat Industry Act 1969; and for other purposes. Read a first time.
The Hon. P. HOLLOWAY: I move:
That this bill be now read a second time.
This bill repeals the Poultry Meat Industry Act 1969 and replaces it with a modern, more pro-competitive, regulatory scheme that will enable owner-farmers in the chicken meat industry to engage in collective negotiations with chicken meat processors supported by compulsory mediation and arbitration at the request of either party. The bill will also provide efficient farmers with a greater degree of security than under the present deregulated environment and, further, provides an exemption for the collectively negotiated agreements from the operation of the restrictive trade practices rules in Part IV of the commonwealth's Trade Practices Act 1974 and in the Competition Code that applies in South Australia by authority of the Competition Policy Reform (South Australia) Act 1996.
Before describing the scheme proposed by the bill and addressing the structural adjustment issues facing the chicken meat industry- and the political issues arising from the introduction of the bill, I will first traverse the history of legislation in this industry. Beginning in 1969 with the Poultry Meat Industry Act, there has been a long history of legislative intervention in the chicken meat industry. The basis of this intervention has been concern at the significant imbalance in bargaining power between growers and processors and, consequently, the power imbalance in the contractual and other ongoing relationships between those two sectors of the industry.
This imbalance in bargaining power exists because processors are able to obtain significant market power at the processor-grower functional level of the market through the strength they obtain through vertical integration and because there is no auction market for meat chickens. On the other hand, the growing sector of the industry is characterised both by a requirement for significant infrastructure investment and by sunk costs.
The nature of the industry is that growers are essentially ‘tied’ to a particular processor; that is, because of structural factors, biosecurity concerns and commercial factors in this industry, growers have traditionally had an exclusive relationship with one processor. A grower does not own any birds but simply agists the birds owned by the processor. A grower must be geographically located no further than two hours' drive from the processing works, or else the bird-loss factor becomes significant. Further, growers cannot use their beds for any other types of animal husbandry, and the last five-year period has seen a significant decline in the sale price and demand for chicken farms, making it very difficult for growers to sell their farms and exit the industry.
There have been several attempts by various governments to provide an appropriate response to this imbalance in bargaining power and the related issues in this industry, with significant amendments to the 1969 act in 1976 and, a decade later, in 1986. The 1969 act (together with its amendments) was essentially a model law that was in force in all Australian States that had a chicken processing industry. This model forms the basis for legislation still in force in New South Wales and in Western Australia. Victoria has a similar act, but has stayed its operation for a period of at least three years. Queensland has a more recent scheme; one that formed the starting point for the proposed South Australian bill.
In 1987, following a dispute concerning entry into the South Australian industry by a new grower, the then minister of Agriculture requested a review of the 1969 act. Green and white papers were released for comment in 1991 and 1994 respectively. The outcome of this process was a decision by the then South Australian government to repeal that act in 1996. However, the government of the day did not proceed with the repeal when, reacting to grower concerns at their exposure to the bargaining power of the processors, the Labor Party in opposition and independent MLCs signalled their intention to oppose the bill. In July 1997, the then minister convened a meeting of industry and parliamentary representatives, thus commencing a process to address growers' concerns that culminated in the bill before the house today. Since the mid-1990s, there have also been competition law and policy issues that have had an impact on the 1969 act. The Poultry Meat Industry Committee ceased to function from about 1996 and, since then, the 1969 act has essentially been moribund.
The main reason why the committee ceased to function was that, since the competition code commenced to apply to its members as individuals who were also industry participants and competitors, those members would have been at risk of contravening the restrictive trade practices rules in the competition code. Those rules have the same effect as the restrictive trade practices rules in part IV of the commonwealth's Trade Practices Act 1974, except that the Trade Practices Act itself is essentially restricted to trading and financial corporations.
Further, the South Australian government is obliged to conduct a legislation review of the 1969 act under clause 5 of the competition principles agreement, which is one of the national competition policy inter-governmental agreements. There are several elements in the 1969 act which are not considered capable of passing the scrutiny of the National Competition Council which assesses the states' compliance for the purpose of obtaining competition payments. Those elements are the function of the committee to 'approve' new farms and growing contracts, and the requirement that no new grower entrants will be allowed if there is spare capacity amongst existing growers.
Since 1997, the major processors have engaged in collective negotiations with growers under an authorisation from the Australian Competition and Consumer Commission (ACCC) pursuant to part VII of the Trade Practices Act. Steggles Enterprises Limited (now Bartter Enterprises Pty Ltd) has now ceased processing in South Australia, but Inghams Enterprises Pty Ltd has sought an extension of that authorisation for a further five years.
As part of the development of the scheme proposed by the bill, the Department of Primary Industries and Resources has undertaken a broad program of consultations with all industry parties. A consultation paper and consultation draft of the bill were made available for some 11 weeks. Ministerial meetings took place with both grower and processor industry leaders on several occasions, and departmental officers also had several meetings with them. There has been a continual flow of correspondence and submissions from both processors and growers, even after the formal consultation period ended, and that correspondence continues.
These consultations were part of the national competition policy legislation review that was completed prior to the introduction of this bill into parliament. The review concluded that there was a net public benefit from the bill. The review considered that there was little opportunity for either growers or processors to pass on costs to end consumers—
Given that growers and processors are mutually dependent, both have a vital interest in maintaining the efficiency and price competitiveness of the industry.
While the government is committed to the introduction of this bill, it will consider all reasonable submissions and propose amendments to the bill prior to passage if it believes that any such amendment is needed to advance the objectives of the bill or to assist the practical operation of the scheme.
Growers who fall within the ACCC authorisation have indicated that, while they are able to engage in collective negotiations with Inghams, in reality they have little leverage.
They describe the collective nature of the negotiations as of benefit only to Inghams and not to its growers. Growers use the expression 'take-it-or-leave-it' when describing the negotiations for a new contract. The current price paid to growers in South Australia per bird is between 5c and 7c lower than the price paid in other states. In fact, in real terms, the growing fee has declined over the past five years. However, growers' concerns go beyond the issue of price and extend to a number of non-price matters, including the nature of their relationship with the major processor.
For their part, processors consider that the scheme proposed by this bill is unnecessary and that, if it comes into operation, it will increase costs in the industry, resulting in a decline in processing in South Australia and, thus, also in the growing sector. Processors claim that the compulsory arbitration of unresolved disputes will result in less than 'best practice' outcomes, slower adoption of new technology, lowering of bird husbandry levels and delays while matters are progressed through arbitration. Processors object to compulsory arbitration and claim that it will force them to deal with growers with whom they no longer wish to deal. Processors described this as losing 'their ultimate right to determine the strict conditions that they need in place to protect their interests and to keep driving down costs' (from ie processor submission dated November 2002).
The government disagrees. In fact, the very reason for introducing this bill is to enable both sides of the industry, not just processors, to have a fair opportunity to negotiate appropriate growing contracts supported by the discipline provided by the prospect of compulsory mediation and arbitration. The bill is silent as to the content of growing contracts and does not require that any particular terms be adopted, although, in the interests of transparency, the contracts must be in writing. It leaves the terms of the contract to the parties and for matters that are unresolved or in dispute to be determined by a mutually agreed mediator or by an independent arbitrator.
Rather than address the processors' concerns in detail, I will outline how the scheme proposed by the bill will operate in practice, which, in the government's view, will provide a complete answer to the processors. However, it is appropriate, first, to refer to some of the difficulties facing this industry, difficulties that need to be managed through the processes established by the bill.
One of South Australia's major processors, Bartter Enterprises Pty Ltd (previously Steggles), decided in the late 1990s that, rather than invest in new processing facilities in South Australia, it would expand its facilities at Geelong in Victoria. That meant that, by early 2002, a considerable number of ex Bartter growers were without a contract, Anticipating that Bartter would lose retail market share in South Australia, other South Australian processors offered growing contracts of various duration to ex Bartter growers, contrary to expectations, Bartter appears to have maintained its 25 to 30 per cent share of the South Australian retail market. However, there has been a growth in production in South Australia because now some 30 per cent of South Australian processed meat is exported to the eastern states or overseas. Thus, processors in South Australia are sensitive to grower efficiency issues and price as well as to transport economics. It should be noted that Inghams is currently placing two older processing works in Queensland with a new $50 million facility near Brisbane.
Other structural adjustment issues concern the type of technology that should be adopted for growers' shedding and how the investment risk should be shared. Traditionally South Australian growers have had small farms of between two and three sheds. Now, the preferred size is between four and 10 sheds, with sheds being up to some 2 900 square metres and costing about $280 000 with appropriate tunnel ventilation. Farms should be located on suitable land in particular, not high value land or metropolitan land but land that can include an appropriate buffer zone and fencing for biosecurity reasons, access to appropriate water supply and three-phase power, and that allows compliance with zoning regulations.
The long-term health of the chicken meat industry in South Australia requires that these structural adjustment issues be addressed, together with the exit from the industry of the least efficient farms and the least competent growers until the supply of growing services is in equilibrium with the demand for those services by processors. The long-term health of the industry, however, also requires that efficient growers be given the security of contracts in writing for a reasonable term of years and a knowledge that, if they continue to perform and fit within their processor's required level of growing services, there will be a continued relationship with that processor to support the grower's investment.
On the part of the processor, there should be no impediment to the establishment of 'home farms' if they consider that to be efficient. There should be no impediment to encouraging and contracting with new entrants, even at the; expense of the least efficient of the growers with whom they were previously contracted. However, there can be no arbitrary and unreasonable refusal to deal with an efficient grower when there is a need for a level of growing services that can accommodate that grower. It is the least efficient grower, objectively assessed, who should be most at risk.
The bill establishes a scheme that achieves these outcomes. Arbitration under parts 5, 7 and 8 of the bill 'must take into account the need to promote best practice standards' and fair and equitable conditions in the chicken meat industry and the need for the industry to be dynamic and commercially viable' (clause 5(2)(b)). Clause 28(3) sets out additional factors that arbitration must take into account in relation to arbitrating a dispute between a processor and a grower. These requirements are expressly aimed at achieving the outcomes previously mentioned.
The government does not accept the processors' prediction that the scheme proposed by the bill will cause an increase in costs. If the decision to process in South Australia remains simply a commercial decision, the bill should have no adverse consequences for the industry in this state. The government does accept, however, that there will be structural adjustment, whether or not the bill comes into operation. The bill does not stand in the way of change in this industry. The government considers that, if the industry in South Australian is to remain healthy for the long term, it must be dynamic and growers as much as processors must be subject to competitive pressures, including the pressures provided by new entrants and requirements to adopt new technology and improved standards.
As stated previously, the bill does not set out any of the requirements that parties should include in their growing contracts, nor does it 'approve' contracts; it leaves that entirely to the parties. Instead, the bill establishes a structure within which the parties can negotiate on a more equal basis than at present, and within which an arbitrator is able to impose reasonable and commercially sound awards if the parties cannot resolve their own disputes. In that regard, all parties in this industry acknowledge that they are mutually dependent. There is no incentive for the grower community to seek more than the industry can reasonably bear.
The bill also supports growers by enabling them to seek advice from consultants and experts when engaging in collective negotiations with their processor. I shall now outline the structure of the scheme proposed by the bill. The critical factor on which the scheme depends is the requirement that each processor has a 'tied' or 'exclusive' relationship with particular growers for the term of their contract. Even if the contract does not specify an exclusive relationship, the nature of all but the most ad hoc of processor/grower arrangements will have that effect.
A 'tied' agreement includes the concept of 'switching' whereby a contracted grower is 'loaned' to another processor in order to balance capacity requirements between them. That should be regarded as an efficient outcome for all concerned. Exclusivity allows processors to manage their requirements for growing services over the longer term, ensures that the biosecurity (for example, cross-infection) of a processor's birds is not adversely affected, and ensures that the processor can adequately control the micro-management issues that arise during the growing cycle, such as shed maintenance, infrastructure standards and the supply of services such as medicines, feed, etc.
If the processor requires or will, in fact, achieve a tied relationship, the processor must give the grower a statutory notice inviting the grower to commence negotiations for a contract. The grower then has the option—
If the grower chooses to negotiate individually, that grower is essentially unregulated (except for the transparency requirement that all growing agreements must be in writing). There is a penalty included in the scheme for the purpose of requiring a processor to comply with the process of giving the statutory notice. That then allows the grower to choose whether to negotiate collectively or individually. Part 6 of the bill provides for an exemption under section 51 of the Trade Practices Act and under the Competition Code of South Australia for the giving by processors of the statutory notice, and for certain specified activities concerned with the collective negotiations, and the making of, and the giving effect to, growing agreements.
The exemption relates to activities between each individual processor and those growers who are recorded on the register as members of that processor's collective negotiating group. The activities include—
A place of the previous Poultry Meat Industry Committee, the proposed scheme simply has a registrar appointed by the minister, whose task is to maintain the register and undertake certain functions in relation to the number and election of growers' representatives, the calling of meetings of the negotiating group to vote on a contract, and in relation to referring a dispute to mediation or arbitration. In this way, it is intended to keep the administrative costs of the scheme to a minimum. Those costs may be recovered by a fee levied on industry participants.
As previously indicated, the terms of any growing agreements are left to be negotiated by the relevant parties, the processor and the growers. Compulsory arbitration at the election of either the processor or the growers is available if any dispute cannot be resolved. At any time, a grower may elect to leave a collective negotiating group and deal individually with a processor. Mediation and arbitration are available at the election of either processor or grower during the term of a contract if there is a dispute as to the obligations of either of them under a collectively negotiated growing agreement.
This would include a dispute on the terms to be agreed on a variation of any contract under a previously agreed variation clause. Part 8 of the bill provides a mechanism to ensure that a grower is not arbitrarily and unreasonably excluded from a future contract. As described above, there are factors that an arbitrator is required to take into account that preserve the commercial interests of the processor, while protecting the efficient grower at the expense of the less efficient grower. In particular, a grower cannot be excluded simply because that grower has a profile as a grower negotiator, or more generally, as a grower representative.
The bill contains the usual administrative provisions relating to the conduct of arbitration, provision for the appointment of a registrar and consequent delegations, a requirement for an annual report and provision for an annual fee to recover the cost of the registrar's operations. There is also a requirement for the minister to review the operation of the act, and to lay a copy of the report before parliament within six years of the commencement of the act. This will allow a period that reflects the traditional five-year contract and the negotiation of the next round of contracts.
The bill contains a scheme for transitional arrangements that deems all existing growing agreements, whether oral or written, as being arrived at through the collective negotiating process and, hence, includes all growers initially in collective negotiating groups. While these existing contracts will continue to operate according to their terms, disputes arising as to their operation and disputes as to the exclusion of any of the growers from further contracts are subject to the mediation and arbitration provisions of the scheme. Without the deeming transitional provision, many growers would not come within the scheme for up to five years.
Once a grower is a member of a negotiating group, the grower may at any time elect to leave and thus become unregulated. The transition arrangements do, however, allow the registrar, on application from either processor or grower, to exclude growers with certain types of contracts from each processor's negotiating groups. First, growers with 'probationary' contracts may be excluded. These are contracts that operate from batch to batch and do not follow on from a fixed-term contract between the grower and the same processor. A batch to batch contract may specify a single batch or a small number of batches, such that it is not, in effect, a contract for a fixed term.
Secondly, 'individual' agreements may be excluded. This is a contract that is of such a nature that it would be unlikely that it would have been negotiated collectively if the bill had been in operation at that time; that is, if the grower had been given a choice of collective or individual negotiations following receipt of the statutory notice, the grower would have chosen individual negotiations. Such a contract will show significant differences from all other growing agreements with the relevant processor in relation to its period of operation or other principle terms and conditions.
For example, it is anticipated that a long-term contract (say, for 10 years) to support a new entrant with new investment with a pricing formula that was considerably different from the usual price range offered by that processor, reflecting the size and efficiencies of the new infrastructure, would usually be negotiated individually, not collectively, under the proposed scheme. However, contracts that have been signed recently which are artificially differentiated by period or other factors but which essentially retain the core of a processor's standard terms will not be regarded as 'individual' and thus excluded from a negotiating group whether or not the contract was in fact individually negotiated.
Prior to the scheme coming into operation, it is entirely predictable that growers desperate for a contract will be 'picked off' by processors anxious to exclude as many of their growers as possible from the operation of the scheme. Finally, it should be reiterated that there has been a considerable consultation program to support the development of this bill. While significant changes have been made to the scheme, the government considers that compulsory mediation and arbitration (even though opposed by the processors) is central to ensuring that the collective negotiations are genuine negotiations and not the present style of 'take it or leave it' negotiations under the ACCC authorisation.
That is not, of course, the fault of the ACCC; it is simply the fact that there is such an imbalance in bargaining power between processors and growers that collective negotiations per se do not provide growers with any significant counterweight to the processors. Without that right to mediation and arbitration there would be, essentially, no difference between the effect of the bill and the effect of the ACCC authorisation and no justification for the bill. I commend the bill to the council. I seek leave to have the explanation of the clauses inserted in Hansard without my reading it. Leave granted.
Clause 1: Short title
Clause 2: Commencement
These clauses are formal.
Clause 3: Interpretation
This clause contains definitions of words and phrases necessary for the interpretation of the legislative scheme proposed in this measure.
In particular, meat chicken means a chicken (a bird of the species Gallus gallus that is not more than 16 weeks old) grown under intensive housing conditions specifically for human consumption as meat after processing. A growing agreement is an agreement between a grower (ie a person who grows meat chickens under a growing agreement) and a person who carries on a business of processing meat chickens (a processor) that provides for the growing in SA by the grower of boiler chickens owned by the processor and the return of the chickens to the processor for processing in SA.
A growing agreement is a tied growing agreement if it has the effect of tying the grower to the processor by restricting the grower's freedom to grow meat chickens for processing by a processor other than the processor party to the agreement.
Clause 4: Exemptions
The Governor may exempt a person or a class of persons from the operation of the whole or particular provisions of the measure.
Clause 5: Intention of Act
This measure is in response to—
Clause 6: Appointment of Registrar
A Public Service employee will be appointed by the Minister to be the Registrar for the purposes of this measure.
Clause 7: Registrar's functions
This clause sets out the Registrar's functions.
Clause 8: Delegation
The Registrar may delegate powers or functions under this measure.
Clause 9: Fee for Registrar's operations
Each processor and grower must pay the fee (to be prescribed and which may be differential) to the Registrar each financial year.
Clause 10: Annual report
The Registrar must, on or before 30 September in every year, forward to the Minister for tabling in the Parliament a report on his or her work and operations for the preceding financial year.
Clause 11: Interpretation
This clause provides for interpretation mechanisms for Part 4.
Clause 12: Registration
The Registrar must maintain a register containing certain information about processors and growers to allow for the legislative scheme proposed to be administered.
Clause 13: Notification of information required for register
A processor must provide the Registrar with certain up-to-date information about growing agreements and the growers with whom the processor has a growing agreement
Clause 14: Growing agreements to be in writing
A growing agreement made after the commencement of this clause is of no effect except to the extent that it is recorded in writing.
Clause 15: Offence to attempt to tie grower to processor
It is an offence for a processor who is negotiating or party to a growing agreement with a grower to, by words or conduct, attempt to tie the grower to the processor. (Maximum penalty: $100 000.): However, this does not apply to—
DIVISION 2—COMMENCING NEGOTIATIONS FOR TIED GROWING AGREEMENTS
Clause 16: Commencing negotiations for tied growing agreements
A processor must not commence to negotiate a tied growing agreement with a grower unless the processor has, within the preceding 3 months, given the grower a written notice, in the prescribed form—
DIVISION 3 – COLLECTIVELY NEGOTIATING TIED GROWING AGREEMENTS
Clause 17: Negotiating group’s role
A negotiating group may collectively negotiate (personally or through agents, advisers or other consultants) and agree with the processor a tied growing agreement, or a variation of a tied growing agreement, between the members of the negotiating group and the processor.
Clause 18: Grower negotiators for negotiating groups
The Registrar must appoint grower negotiators (not exceeding 4 in number) for a negotiating group to conduct collective negotiations on behalf of the group for a tied growing agreement with the processor. When determining the number of grower negotiators, the Registrar must take into account the size of the negotiating group, the varying interests of the members of the negotiating group and any other relevant factor.
A person appointed as a grower negotiator must be a member of the negotiating group determined in accordance with nomination and Election processes approved by the Registrar.
Clause 19: Decision making by negotiating groups
This clause sets out how agreements are reached by negotiating groups.
Clause 20: Arbitration
If a negotiating group fails to agree a tied growing agreement with the processor within a time fixed by the Registrar, the matter in dispute must be referred to arbitration if the processor or a majority of the members of the negotiating group vote in favour of the matter being referred to arbitration. A dispute referred to arbitration in accordance with this clause will be taken to have been so referred with the agreement of the processor and all members of the negotiating group. Schedule 2 applies in relation to the reference of the dispute to arbitration and the arbitration of the dispute.
DIVISION 4— OPERATION OF TIED GROWING AGREEMENTS
Clause 21: Operation of tied growing agreements
A tied growing agreement collectively negotiated between the members of a negotiating group and the processor under Part 5 expires on the fifth anniversary of the day on which agreement was reached or an earlier day specified in the tied growing agreement. However, a tied growing agreement collectively negotiated thus will continue to bind the processor and a grower for a further period (not exceeding 5 years) if the processor and the grower so agree before the expiry of the growing agreement. A provision of a tied growing agreement collectively negotiated under Part 5 prevails over any other agreement between the processor and a member of the negotiating group to the extent of any inconsistency.
Clause 22: Trade practices authorization
The following are authorised for the purposes of section 51 of the Trade Practices Act 1974 of the Commonwealth, as in force from time to time, and the Competition Code of South Australia:
Clause 23: Interpretation and application
Part 7 applies to a dispute between a processor and a grower or Miner grower if the dispute relates to the obligations of either or both under a tied growing agreement collectively negotiated under Part 5.
Clause 24: Mediation
The Registrar must, if asked by the processor or grower and subject to a number of considerations by the Registrar, refer a dispute to mediation.
Clause 25: Arbitration
Subject to certain considerations, the Registrar must, if asked by the processor or grower, refer the dispute to arbitration if, in the case of a dispute that has been referred to mediation under Part 5, the mediation has been terminated without resolution or. in any other case, the Registrar considers that it is highly unlikely that the dispute would be resolved through mediation.
Schedule 2 applies in relation to the reference of the dispute to arbitration and the arbitration of the dispute.
Clause 26: Interpretation and application
Clause 27: Mediation
Clause 28: Arbitration
Part 8 is very similar to Part 7 except that the mediation and arbitration procedures apply to a dispute between a processor and a grower or former grower if—
Clause 29: General penalty
The general penalty for a person who fails to comply with a provision of this measure is a fine of $25 000.
Clause 30: Prosecutions A prosecution for an offence against this measure cannot be commenced except by a person who has the consent of the Minister to do so.
Clause 31: Service
This clause provides for the service of any documents required to be served under this measure.
Clause 32: Regulations
The Governor may make regulations for the purposes of this measure.
Clause 33: Review of Act
The Minister must, within 6 years after the commencement of legislative scheme proposed by this measure, cause a report to be prepared on its operation and a copy of the report to be laid before each House of Parliament.
SCHEDULE 1: Repeal and Transitional Provisions
The schedule contains the repeal of the Poultry Meat Industry Act 1969 and a transitional provision.
SCHEDULE 2: Arbitration
This schedule contains provisions setting out the arbitration procedures for the measure.
The Hon. CAROLINE SCHAEFER secured the adjournment of the debate.