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Efficiency is key to cutting meat processors’ annual inspection costs

Jon Condon, March 28, 2021

WITH attention being drawn recently to the additional cost burden likely to be borne by live exporters if the industry is forced by government to move to full cost recovery in inspection services, it’s worth pausing briefly to look at the parallel path red meat processors have travelled over the past decade.

Despite strident opposition at the time it was implemented, Australian red meat exporters currently pay 100 percent cost recovery for meat export certification activity.

While there have been some movement towards efficiency trade-offs (discussed below) the process currently costs meat exporters, and ultimately the broader Australian red meat industry, around $100 million each year.

Meat exporters mounted a vigorous opposition to the implementation of 100 percent meat inspection cost recovery when it was first introduced in 1991, but to no avail. It was later reduced to a 60pc level, but re-introduced in full in 2011.

Crucially, in other major red meat exporting nations including the United States, Brazil and Argentina, meat inspection is 100pc paid-for by the Government, being seen as a food safety issue of ‘broad public benefit’. In the US, processors pay for overtime, but the US Government pays the rest of the meat inspection cost.

Some processors are concerned that current meat inspection-related costs could rise by another 20 percent, or around $20 million, over the next five years, under government plans.

Significantly, the meat inspection cost borne by beef and sheepmeat processors in Australia is widely perceived as being ultimately ‘passed back’ to livestock producers, being factored-in to slaughter cattle and sheep pricing decisions. International competition with other meat exporting nations (where export inspection is 100pc subsidised by government) means it is impossible to pass the cost forward, to the meat customer.

Only viable alternative

In its Cost Recovery Implementation Statement for 2019-20, the Australian Government argues that the only viable alternative to cost recovery for export certification is funding this activity through consolidated revenue (general taxation). However, in most circumstances general taxation is only appropriate for activities that are provided to the wider community, it says.

“For example, export certification activities are regulatory activities that are provided to a clearly identifiable group of individuals and organisations that participate in the food export supply chain. If it were not for the activities of this group, export certification would not be required,” the government argues.

There are additional benefits to funding export certification through cost recovery, government says. When a business pays for the activities it receives, the government has an obligation to justify the prices it charges. Cost recovery also increased the ‘cost consciousness’ of regulated entities of how much a government activity costs.

“For these reasons, government has determined cost recovery (regulatory charging) to be the most appropriate mechanism for funding export certification,” it says.

While meat inspection costs are only a small part of the overall cost structure faced by Australian processors – livestock price, labour costs and energy costs being some of the largest – it nevertheless contributes to Australia being the highest-cost beef processor on the world stage.

A 2018 report by respected economist, Selwyn Heilbron, identified and quantified the international comparative costs burden faced by the red meat processing industry in Australia, and compares them with key international competitors in North and South America. The study compared three main cost areas – labour inputs, utility costs (principally energy), and government inspection fees.

The results exposed an urgent need for government to recognise and respond to the excessive regulatory burden faced by Australian red meat processors compared with their main international competitors.

The report found that average costs per head (excluding livestock purchase) incurred in Australian beef processing were 24 percent higher than those in the US, more than twice the costs seen in Brazil and 75pc higher than those in Argentina (refer table below). Specifically, Australian processing costs were:

  • 1.32 times that in the US, based on grainfed cattle (A$93.35 a head in dollar terms)
  • 1.73 times the cost of that in Brazil for grassfed cattle (A$125.42 in a dollar terms), and
  • 1.45 times that in Argentina for grassfed cattle) (A$91.74 in dollar terms)

Of the costs incurred in Australian processing, the report estimated that more than 54pc were due to some form of government regulation, significantly higher than any of the three comparison countries.

Australia’s regulatory cost burden was estimated to be 2.75 times that of Brazil, 2.4 times that of the United States and 1.89 times more Argentina.

Click here to view earlier report on the cost to operate study.

Seeds of inspection reform

Steve Martyn’s excellent processing industry history book, “World on a Plate” published in 2005 captures much of the early genesis of cost recovery for meat inspection in Australia. Here is a passage of interest:

Several issues coalesced to drive meat inspection reform and industry adoption of quality assurance systems, which underpinned the recovery of some elements of control over export plant operations from government. They included the escalating cost of meat inspection itself, new inspection models and the need to respond to major food safety incidents.

AQIS started recovering costs from the meat industry in 1979, charging 50pc of the cost of export inspection plus registration fees based on size and scale of operations. The formula for registration fees was complex and to processors, the fees seemed arbitrary with considerable impact on smaller firms.  The cost recovery rate rose to 60pc in 1986 and to 100pc in 1991, with AQIS charging industry ona fee-for-service basis for each inspector and veterinary officer employed.  In 1992-1993 it was charging $69,169 for each full time meat inspector and $98,314 for each veterinary officer – high even by today’s standards.

Next, in response to meat inspection union unrest, the federal government introduced the Meat Inspection Staffing Standards (MISS) in 1992. The standards were a ‘time and motion’ approach to meat inspection post mortem activities, from the number of steps an inspector walked to the hand wash basin to thinking time and the number of staff needed at the offal table or retain rail.  Ultimately they determined the number of inspectors per chain at various chain speeds.  Inspectors would no longer prepare items for inspection or perform even basic trimming, as these were considered outside their duties .  The standards added cost and inefficiency at the price of industrial calm. 

In 1993 the meat industry’s bill for AQIS charges totalled around $80 million, representing two to five pc of each operation’s production costs, accelerating the push for change. In August of that year Primary Industries Minister Simon Crean proposed restructuring AQIS.  Various studies identified the conflict of interest between regulation and service delivery.  AMEFC proposed competition for the provision of inspection services.  AQIS accepted the logic of separating regulation from service delivery, but implementation would involve substantial redundancy costs.  Government provided %54 million to help the process along.

Debate between AMC and AQIs over the charging schedules had risen to breaking point when the Coalition government took power in 1996. New Primary Industries Minister John Anderson opened the AMC conference in Adelaide shortly afterwards and met a group of exporters, reportedly led by Roger Fletcher, who convinced him to seek an independent review of AQIS costings to resolve the issue.  That review confirmed inadequacies in AQIS pricing, especially in the marginal costing of services and provided a strong platform for arguing the industry case.

By the late 1990s government was applying the ‘user pays’ principle widely, mirroring a worldwide trend. However Australia was somewhat unique in applying it to export industries competing with subsidised competitors.  AMC lobbied the federal government to recognise the Productivity Commission’s arguments in the cost recovery inquiry and balance ‘user pays’ principles with recognition of the higher cost environment of export processing.  That argument included a legitimate contribution from government to cover the community benefits from a national food safety system and the high costs of delivering it with a monopoly government service.  After extensive lobbying, economic studies by Dr Selwyn Heilbron and others, a Productivity Commission inquiry and recognised cost increases from the newly introduced Goods and Services Tax in 2000, the government agreed to a 40pc government contribution to costs in 2001.  The decision was justified publicly by echoing the meat industry’s argument, supported by research that full cost recovery inhibited the industry’s competitiveness.

In early 2008 the Australian Government commissioned an independent review of quarantine and biosecurity arrangements to identify potential areas for improvement in Government’s biosecurity regulatory activities.

The government released the panel’s final report, “One Biosecurity: a working partnership”, in December 2008. The review panel recommended a significant package of reforms to Australia’s biosecurity system including the recommendation that AQIS’ Export certification functions should return to 100 percent as scheduled, from July 2009.

The fees went back to 100pc after the Export Certification Reform Program developed a number of efficiency options for the export processing sector in October 2011.

While the current cost to industry is variously estimated at between $90 million and $110 million annually, processors also acknowledge the significant efficiency savings that have been made in meat inspection services along the way.

Drive for efficiency through ‘Congestion Busting’

Australian Meat Industry Council chief executive, Patrick Hutchinson, agreed that red meat processing’s cost recovery bill was currently around $100 million on an annual basis.

Patrick Hutchinson

“At this stage, there is no discussion with government about again lowering those costs, but what is being discussed is making the current system work more effectively,” he said.

“Work is well underway under the Federal Government’s ‘Congestion Busting for Agricultural Export’ program, which could deliver greater efficiencies, offsetting some of those costs.”

In last year’s Federal Budget, the Government introduced the package of reforms for the Australian agricultural sector as part of the Economic Recovery Plan to rebuild the economy and recover from the COVID-19 recession.

The Busting Congestion for Agricultural Exporters package, worth $328.4 million over four years, was designed to slash unnecessary red-tape to get products to export markets faster and support jobs in rural, regional and remote Australia. Click here to access the government’s original statement about the program.

“Agriculture Minister Littleproud has put his money where his mouth is, with the department and AMIC looking at a range of areas where Australia’s meat regulatory system may be modernised,” Mr Hutchinson said.

The Minister is very keen to ensure this is going to work, and work effectively, for both industry and government

“This most definitely will deliver some upside for industry,” he said.

“The minister has seen the issues and the potential impacts, and he’s keen to look at what can be done to improve. A lot of this is around restructuring staffing in the delivery of the meat inspection program for greater efficiency, upgrading implementation and technology, and reviewing and streamlining of regulation.”

“Working with government more broadly, this would then put these structures in place, while talking with our international trading partners about what the changes mean, and the positives around the impact of these changes.”

“It potentially means a lot of efficiency gains, a lot of streamlining, and a lot of implementation of technology,” Mr Hutchinson said.

“We’re into the implementation process now,” he said. “We’re working hand-in-glove with the department, working around all the key areas that need to be done. David Littleproud is a patron of all that, and justifiably deserves credit for where it is heading.”

“The Minister is very keen to ensure this is going to work, and work effectively, for both industry and government.”

Mr Hutchinson said the ‘obvious’ objective was looking at the reduction of, or offsetting current inspection costs borne by industry, through greater efficiencies.

“Exactly how big that is going to be, we’re still working through. We have really only just started this process,” he said. “But there was certainly an expectation in industry circles that the net result would be very positive.”

“This process is also about streamlining the systems we already have in place – and making maximum use of technology. We’re in 2021 – we really should be working harder to use technologies in this way, and this regulatory/inspection/documentation field is a good target for that.”

While there was no current dialogue with government about cost recovery on meat inspection, and the comparative disadvantage it placed Australian exporters under, Mr Hutchinson said what the government was obviously willing to acknowledge was the need to make the current system work far more efficiently and effectively.

“We’re approaching that through the Meat Modernisation Framework – one of the outcomes from the Congestion Busting in Export initiative,” he said.

Mr Hutchinson said as an industry, Australian processors were increasingly looking at total carcase value (TCV).

“We try to extract TCV from a range of different things we can do, and as such we need to be looking at any and all ways and efforts we can achieve that. Part of that is through looking at all of the input costs that deliver value, as well as those that contribute to losing value.

Greater efficiency in the inspection process was a part of that solution to minimising negative impacts on Total Carcase Value.

“When the raw material (livestock) prices are at record levels, as they are right now, processors really have to be working hard to try to extract that TCV, in order to remain competitive on the world stage,” he said.

 

 

 

 

 

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