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PRIMARY INDUSTRIES LEVIES AND CHARGES COLLECTION AMENDMENT REGULATIONS 2001 (NO. 6) 2001 NO. 261
EXPLANATORY STATEMENTSTATUTORY RULES 2001 No. 261
Issued by the Authority of the Parliamentary Secretary to the Minister for Agriculture, Fisheries and Forestry
Primary Industries (Excise) Levies Act 1999
Primary Industries Levies and Charges Collection Act 1991
Primary Industries (Excise) Levies Amendment Regulations 2001 (No. 10)
Primary Industries Levies and Charges Collection Amendment Regulations 2001 (No. 6)
Section 8 of the Primary Industries (Excise) Levies Act 1999 (the Excise Levies Act) provides that the Governor-General may make regulations prescribing matters required or permitted by that Act to be prescribed or necessary or convenient to be prescribed for carrying out or giving effect to that Act.
Section 30 of the Primary Industries Levies and Charges Collection Act 1991 (the Collection Act) provides that the Governor-General may make regulations prescribing matters required or permitted by that Act to be prescribed or necessary or convenient to be prescribed for carrying out or giving effect to that Act.
The purpose of the regulations is to implement a marketing, and research and development (R&D) levy scheme for the Agaricus mushroom industry. The levies would be imposed on Agaricus mushrooms based on the quantity of mushroom spawn sold, purchased or used in growing Agaricus mushrooms. They will be payable by Agaricus mushroom growers but, for ease of administration, the levies would be collected by the mushroom spawn providers who will, in turn, pay these moneys to the Commonwealth.
Horticulture Australia Limited (HAL) is the industry services body, and it co-ordinates marketing and R&D programs for many other horticultural industries. It will be the body to manage moneys for the levy scheme for the Agaricus mushroom industry. HAL is funded by statutory levies and export charges, voluntary contributions and Commonwealth Government matching funding for R&D.
Subclause 4(1) and subclause 4(3) of Schedule 15 of the Excise Levies Act provide that regulations may fix a rate of levy for marketing and for R&D respectively.
Subclause 6(4) and subclause 6(5) of Schedule 15 of the Excise Levies Act provide that before the Governor-General makes regulations to respectively fix rates of marketing levy and R&D levy the Minister must take into consideration any relevant recommendations made to the Minister by HAL.
Subclause 6(7) and subclause 6(8) of Schedule 15 of the Excise Levies Act respectively require HAL to consult with the body that is the eligible industry body for the relevant horticultural product before recommending rates of, and exemptions from, marketing levy and R&D levy to the Minister.
Subclause 6(9) of Schedule 15 of the Excise Levies Act requires that a recommendation made by HAL to the Minister be accompanied by a written statement of the views of the industry body consulted in relation to the recommendation. The Regulations specify the Australian Mushroom Growers Association Limited (AMGA) as the eligible industry body with which HAL must consult in relation to Agaricus mushrooms. HAL recommended the initial operative rates of levy to the Minister after consultation with the AMGA. The Regulations give effect to the recommendations of HAL, which are consistent with the Agaricus mushroom industry request.
The Regulations:
• As outlined above, prescribe AMGA as the eligible industry body to be consulted;
• Impose a statutory levy on Agaricus mushrooms, based on the presumed yield of mushrooms from mushroom spawn;
• Set an initial operative levy rate of $2.00/kg of spawn sold, purchased or used in growing Agaricus mushrooms to go to HAL for marketing;
• Set an initial operative levy rate of $0.161kg of spawn sold, purchased or used in growing Agaricus mushrooms to go to HAL for R&D. The Commonwealth would match eligible expenditure by HAL on R&D on a $1 for $1 basis;
• Provide for a maximum quantity of spawn upon which levy is to be paid by any one grower in a levy year (i.e. a financial year). This upper threshold is 250,000 kilograms of spawn sold, purchased or used in a levy year. Based on the proposed initial levy rates, this means that no producer would be required to pay more than $540,000 in any levy year; and
• Provide for the manner of payment of levy, the provision of returns by persons who must lodge returns for mushroom levy and the keeping of records.
Details of the regulations are contained in attachments 1 and 2.
The Office of Regulation Review was consulted in the preparation of the Regulations. A regulation impact statement is attached.
The Regulations commence on 1 January 2002.
ATTACHMENT 1.
PRIMARY INDUSTRIES (EXCISE) LEVIES AMENDMENT REGULATIONS 2001 (No. 10)
Regulation 1 provides for the name of the regulations to be the Primary Industries (Excise) Levies Amendment Regulations 2001 (No. 10).
Regulation 2 provides for the commencement date to be 1 January 2002.
Regulation 3 provides that Schedule 1 amends the Primary Industries (Excise) Levies Regulations 1999.
SCHEDULE 1 AMENDMENTS
Item 1 inserts an additional note in Schedule 15, clause 17.1 after note 2. This note advises that Agaricus mushrooms are dealt with in Part 18 of Schedule 15.
Item 2 inserts a new part 18 about Agaricus mushrooms into Schedule 15 of the Primary Industries (Excise) Levies Regulations.
PART 18 AGARICUS MUSHROOMS
Clause 18.1 provides that Agaricus mushrooms are leviable horticultural products for the purposes of the definition in clause 1 of Schedule 15.
Clause 18.2 provides that levy is imposed on Agaricus mushrooms that are: (a) produced in Australia; and (b) sold by the producer or used by the producer in the production of other goods.
Clause 18.3 provides that the amount of Agaricus mushrooms presumed to be produced in Australia is to be determined by reference to the number of kilograms of mushroom spawn produced or purchased for use in the production of the Agaricus mushrooms.
Clause 18.4 provides that if a producer purchases or produces more than 250,000 kilograms of mushroom spawn in a levy year, then the mushroom spawn purchased or produced in excess of 250,000 kilograms are exempt from levy in that levy year. For example: if a producer purchases or uses say 300,000 kilograms of mushroom spawn in the levy year ending 30 June 2003, then levy would be payable on 250,000 kgs only. The excess 50,000 kgs would be exempt from levy. If the same producer purchases or produces only 200,000 kgs of spawn instead in the same period, levy would be payable on the full 200,000 kgs.
Clause 18.5 sets the initial operative rate of the marketing component of the levy at $2 per kilogram.
Clause 18.6 sets the initial operative rate of the research component of the levy at $0.16 per kilogram (i.e. 16 cents per kilogram). The note provides a reminder that levy is not imposed on mushroom spawn exported from Australia.
Clause 18.7 is intentionally not used.
Clause 18.8 provides that the Australian Mushroom Growers' Association Limited (ACN 001 491461) is the eligible industry body for Agaricus mushrooms.
ATTACHMENT 2.
PRIMARY INDUSTRIES LEVIES AND CHARGES COLLECTION AMENDMENT REGULATIONS 2001 (No. 6)
Regulation 1 provides for the name of the regulations to be the Primary Industries Levies and Charges Collection Amendment Regulations 2001 (No. 6).
Regulation 2 provides for the commencement date to be 1 January 2002.
Regulation 3 provides that Schedule 1 amends the Primary Industries Levies and Charges Collection Regulations 1991.
SCHEDULE 1 AMENDMENTS
Item 1 inserts a new part 18 about Agaricus mushrooms into Schedule 22 of the Primary Industries Levies and Charges Collection Regulations 1991.
PART 18 AGARICUS MUSHROOMS
Clause 18.1 provides that the part applies to Agaricus mushrooms.
Clause 18.2 provides definitions for use in the part.
. "buyer" means a person who buys mushroom spawn from a seller. Usually this will be the mushroom grower.
. "Agaricus mushroom," means the fruiting body of the Agaricus genus of cultivated fungi.
. "mushroom spawn" means a medium containing Agaricus spp. mycelium used for the inoculation of phase 2 substrate, including (but not limited to) grain spawn, casing inoculum and inoculated supplement.
. "overseas seller" means a seller who sells mushroom spawn outside Australia. This is the person, from outside Australia, who would sell mushroom spawn to an Australian producer for the production of Agaricus mushrooms in Australia.
. "seller" means a person who sells mushroom spawn.
Note 1 cross-references to the definition of 'producer' in the Collection Act. It notes that for paragraph (hb) of the definition of producer in subsection 4 (1) of the Collection Act, the producer is taken to be the person who is the grower of the Agaricus mushrooms from the spawn.
Note 2 cross-references clause 18.3 of Part 18 of Schedule 15 to the Excise Levies regulations which refers to the amount of Agaricus mushrooms presumed to be produced in Australia being determined by reference to the number of kilograms of mushroom spawn purchased for use in the production of the Agaricus mushrooms.
Note 3 gives another cross-reference to Part 18 of Schedule 15 to the Excise Levies regulations, where Agaricus mushrooms are defined as leviable horticultural products.
Clause 18.3 defines what is a levy year. The initial levy year will take in the period from 1 January 2002 to 30 June 2002. Thereafter, a financial year (i.e. from 1 July to 30 June) will be a levy year.
Clause 18.4 provides that the time of purchase for mushroom spawn is when the purchase price is due to be paid. (See also clause 18.7, which provides when an amount on account of levy is due for payment by buyers).
Clause 18.5 specifies that mushroom spawn are prescribed goods or services for paragraph (b) of the definition in the Collection Act. This means that mushroom spawn are identified as goods used to produce Agaricus mushrooms.
Clause 18.6 provides details of the due time for amounts on account of levy for sellers. The period is 28 days after the end of the quarter in which the seller receives the levy or penalty. The note explains that this is the period within which a mushroom spawn seller, who receives amounts on account of levy or penalty from buyers of spawn, must pay those amounts to the Commonwealth.
Clause 18.7 provides details of the due time for amounts on account of levy for buyers. Subsection 9 (2A) of the Collection Act provides that person to whom prescribed goods or services (in this case mushroom spawn) are sold must pay to the seller, within a prescribed period after the purchase of those goods, an amount on account of levy and any penalties for late payment. The intention is that the levy be paid with and at the time that the first payment for the mushroom spawn is due. (See also clause 18.4).
Clause 18.8 provides for the due date for payment of levy by producers.
. For a producer who produced and used mushroom spawn to produce mushrooms: 28 days after the end of the month in which the mushroom spawn is produced and used.
. For a producer who purchased mushroom spawn from an overseas seller and used that mushroom spawn to produce mushrooms: 28 days after the end of the month in which the mushroom spawn is used to produce mushrooms.
Clause 18.9 provides that a seller must include in each sale docket (be it an invoice or other note) for mushroom spawn to a producer a notice advising:
. that the buyer must pay the seller an amount on account of levy (plus penalties for late payment, if any); and
. the amount payable; and
. the date by which the amount must be paid.
Clause 18.10 provides that a seller of mushroom spawn must lodge a quarterly return. A producer of Agaricus mushrooms who:
. produces mushroom spawn; or
. purchases mushroom spawn from an overseas seller; and
. uses that mushroom spawn to produce Agaricus mushrooms,
must lodge a monthly return. (See also clauses 18.6 and 18.8 for the due dates for payments by sellers and producers).
Clause 18.11 provides for when a return must be lodged. A quarterly return must be lodged within 28 days of the end of the quarter to which it relates. A monthly return must be lodged with 28 days of the end of the month to which it relates.
Clause 18.12 stipulates what must be included in a quarterly return.
Clause 18.13 stipulates what must be included in a monthly return.
Clause 18.14 stipulates what sellers must keep as records. A penalty of 10 penalty units is provided for breaches of this regulation. As at 1 September 2001 a penalty unit equals $110.
Clause 18.15 stipulates what buyers must keep as records. A penalty of 10 penalty units is provided for breaches of this regulation. As at 1 September 2001 a penalty unit equals $110.
Clause 18.16 stipulates what producers must keep as records. A penalty of 10 penalty units is provided for breaches of this regulation. As at 1 September 2001 a penalty unit equals $110.
Office of Regulation Review number: 2328
REGULATION IMPACT STATEMENT
MUSHROOM RESEARCH AND DEVELOPMENT AND MARKETING LEVY
Background to the mushroom industry levy proposal
There are 116 mushroom growers in Australia. They are located in all states, generally on the outskirts of large population centres, owing in large part to the highly perishable nature of fresh mushrooms.
For almost forty years a voluntary levy scheme has operated whereby mushroom spawn (seed) suppliers have collected a levy on their sales of spawn to mushroom growers. Although two minor suppliers have recently sought to gain a competitive edge over other suppliers by not including the levy in the selling price of their spawn, the voluntary scheme worked satisfactorily as they both remitted spawn levy to the Australian Mushroom Growers' Association (AMGA) when paid to them by growers. Nevertheless, the cheaper, levy-free spawn offered by these companies has attracted an increasing number of growers who avoid paying the levy while benefiting from research and development (R&D) and marketing and promotion (M&P).
Compounding the increasing free rider problem in the mushroom industry, one of Australia's four spawn suppliers and its dominant mushroom producer, Chiquita Brands South Pacific Ltd, advised the AMGA in March 2000 that it would no longer include the voluntary spawn levy in the price of its spawn. Chiquita South Pacific, part of a multinational company and listed on the Australian stock exchange, caused considerable change to the structure of the industry in June 1998 when it bought out the Australian company Campbell's mushrooms. Chiquita also has interests in other horticultural production including blueberries and bananas.
Chiquita initially remitted the voluntary mushroom levy to AMGA, and indicated that it would be willing to participate in a voluntary levy scheme arrangement but only on the condition that all four spawn producers agreed to do so.
Chiquita, which believes further generic promotion of mushrooms in Australia is not worthwhile because the market has matured, also intends to promote its own brand of mushrooms. Further information on Chiquita's opposition to the levy is provided below.
Given Chiquita is Australia's largest mushroom producer, accounting for 28% -30% of production, its policy change with regard to levies has placed untenable strains on the current voluntary levy system by providing significant added opportunity and incentive for growers to avoid paying the voluntary levy.
This has led to market failure in the provision of R&D and M&P, with increasing numbers of mushroom producers gaining the benefit of the R&D and M&P activities financed by the voluntary contribution while failing to contribute. This phenomenon is commonly known as 'Tree riding."
It is highly likely that the levy leakage problem will continue to increase under the voluntary levy as, with more growers free-riding, the levy rate must be increased on those who do pay in order to maintain a functional level of funds. This would in turn create greater incentive for levy payers to defect to the free-riding group. AMGA has proposed a statutory levy, which would effectively stop the leakage, thereby maintaining a flow of funds for R&D and M&P.
Despite negotiations with those spawn producing companies refusing to collect or remit the voluntary levy, the mushroom industry has not succeeded in restoring the efficacy of the system. It is therefore seeking Government intervention in the form of a statutory levy on the industry in order to continue to realise the considerable potential to improve production and marketing of fresh mushrooms, and thereby maintain or increase the competitiveness of the industry.
A complicating factor in the structure of the mushroom industry is that Chiquita's production methods are different from those of other producers in the industry. According to Chiquita, it requires more spawn than other growers to produce the same number of mushrooms. Chiquita produces 26 kilograms (kg) of mushrooms per kg of spawn whereas the industry average is 28kg per 600 grams of spawn. The higher spawning rates that Chiquita requires for production would result in the company incurring an excessively and inequitably high levy contribution using the average industry spawning rate formula. The levy proposal addresses this difficulty (see page 9, paras 5 and 6 under heading Impact Analysis).
We understand that Campbell's Mushrooms, whom Chiquita bought out, paid the voluntary levy until sometime in 1996, at which time it was beginning to ease out of the industry (selling farms etc), and knew that it would not benefit greatly from R&D and M&P.
Chiquita is by far the largest producer in the industry; the others in the "top 20" list of producers are not nearly as large. However, the top 20 companies account for 75% of mushroom production. (The top 7 companies account for 50% of production.) The top 20 companies, therefore, are significantly larger than the rest, many of which are very small or part-time growers.
Issue/ problem to be addressed
Voluntary levy arrangements in place for almost 40 years to fund research and development (R&D) and marketing and promotion (M&P) of fresh mushrooms have recently broken down. This has resulted in market failure whereby insufficient funds can be collected to support a desirable or optimal level of R&D and M&P to benefit the mushroom industry and the community/consumers. This form of market failure is often referred to as non-excludability; ie, those who do not pay the voluntary levy cannot be effectively excluded from benefiting from its consequences.
Even those producers least willing to pay the voluntary levy probably understand that there are benefits to be gained from R&D and M&P. They can also see, however, that others are currently willing to fund enough of this to meet their needs, so they can further their own private interests by diverting their contributions to alternative activities.
Industry consultation process
The proposal conforms to the Government's levy principles and guidelines. AMGA has conducted a thorough consultation campaign within the industry, which is relatively compact compared with most other horticulture industries. AMGA has advised the Government that all known potential levy payers (numbering 116 at the time of consultation) were provided with detailed information on the proposed levy through printed material in the mail. According to AMGA, every potential levy payer was given an opportunity to vote in a postal ballot.
Consultation meetings were held around the country, together with telephone discussions and personal visits. AMGA staff claim they contacted all but four growers personally.
Consultation meetings attracted attendance by almost 50% of commercial mushroom growers. AMGA advised in August 2000 that 91 (or 78.4%) of the 116 eligible voters voted in the postal ballot on the level proposal, with 72 of those who voted supporting the introduction of a statutory levy and 19 opposed. This represents a 79% support level for the levy. A significant majority (85%) of the industry's largest growers voted in support of the levy. AMGA's submission clearly records Chiquita's opposition to the levy. The industry advises that almost all the "no" votes, other than that by Chiquita, Australia's largest single mushroom grower, were from very small growers.
As at August 2000 AMGA represented 84 out of 116 growers, and 18 of the top 20 growers. Chiquita is not a member. The other "top 20" producer which is not a member withdrew from AMGA on the basis that it could not accept Chiquita's "free riding" on the voluntary levy. This producer had previously been an AMGA board member.
AMGA advises that, a year after the vote, the industry has shrunk to about 106 participants. Those who dropped out in the past year were mostly small part-time growers.
There has been no campaign of letters to either the Minister or Horticulture Australia Ltd (HAL) opposing the levy. However, Chiquita made a submission to the Government on 11 August 2001 proposing an independent assessment of the effectiveness of generic promotion and the deferral of the decision on the statutory levy until the outcome of this assessment is known. Chiquita has offered to commit $12,000 to this study.
HAL, the horticulture services company that undertakes R&D and promotion on behalf of horticulture industries, supports the mushroom industry in its application for a statutory levy.
Opposition to the proposed levy
Prior to its proposal of 11 August 2001, Chiquita had prepared a position statement on the AMGA levy proposal for a meeting on 9 August 2001 with the Parliamentary Secretary to the Minister for Agriculture, Fisheries and Forestry, Senator Troeth.
According to that statement, Chiquita's main arguments for opposing the levy are that:
l.) the Australian mushroom market is approaching maturity and Chiquita therefore contends that the market can only be increased through specific innovation (not through generic marketing campaigns);
2.) Chiquita disagrees with the AMGA view that Australia's mushroom market is unsuitable for branded promotional activities;
3.) although Chiquita considers there is under-investment in R&D in the mushroom industry, it believes this is not necessarily a result of market failure; and
4.) Chiquita believes the vote for implementation of a statutory levy does not meet the Government's Levy Guidelines.
Discussion of the arguments outlined in Chiquita's position statement is set out below.
A total of 19 voters opposed the proposed levy. An analysis of the opposition to the levy indicated that (other than Chiquita) it stemmed from very small growers. Of the 19 growers who opposed the levy, AMGA estimates (August 2001) that five or six have since left the industry
AMGA received written comments from only 4 growers opposed to the levy (excluding Chiquita whose submission has emerged a year later). Two of these actually supported the levy, but at a rate of $1.99 per kg spawn as opposed to the proposed $2.16 per kg spawn. The other two growers, who were involved in the mushroom industry on a part-time basis, opposed the levy on the grounds that they did not want Government interference in their business. One of these part-time growers has since left the industry.
Research and Development
The industry has made a strong case for a mandatory levy to address the free rider problem, noting that it is not feasible to quarantine the benefits of some R&D to only those paying the voluntary levy.
We understand from the AMGA that a number of recent and current R&D projects either have benefited or will benefit the industry as a whole, including:
• research into cool chain management which could lead to improved industry supply chain management;
• research into occupational health and safety issues which should result in lower insurance premiums for all growers;
• food safety and quality assurance project:
• substrate production technology to improve productivity; and
• chemical registration research for the pesticide Benlate that should reduce production costs for growers.
Approximately 10% of the annual voluntary mushroom levy which has been collected to date has been spent on R&D. This amounts to about $150,00 a year or just under $2,000 per levy payer on average.
The mushroom industry can point to tangible benefits from R&D conducted under its voluntary levy. For example:
. its occupational health and safety project, which was completed this year, has resulted in recommended OH&S practices. If widely adopted, these could provide cost savings of $1.8 million to the industry in reduced insurance premiums and fines, as well as benefits to workers and the community in general;
. its food safety and quality assurance project has confirmed the safe food status of mushrooms and has meant savings on individual consultancy costs of at least $8,000 per grower for 60 growers ($480,000 industry savings) during the implementation phase. The program has been estimated to provide ongoing savings in auditing costs for the industry of approximately $30,000 per year. Advice from AMGA in August 2001 is that over 95% of mushrooms are now produced under QA systems as a result of this project (Chiquita did not participate);
. its substrate production technology has resulted in mushroom yield increases of up to 50% over the decade 1991-2000.
The net returns to industries from investment in R&D have generally been shown to be highly positive. In 1994 the Commonwealth Government Industry Commission's Report, concluded that:
... the estimated aggregate rates of return to Australia's R&D, range widely but are generally high.
It also found that the evidence up to 1994 on experience with rural research corporations was "very favourable." According to the 1994 Industry Commission Report, case study estimates of rates of return to agricultural R&D have frequently been in excess of 100%. For the horticultural industries case studies of R&D projects have also revealed high benefit-cost ratios of the order of 10:1 for investment in R&D (Leveraging R&D Investments, D Richards, Australian Society of Horticultural Science Conference, 1996).
Chiquita has indicated on several occasions that it is more favourably disposed to an R&D levy than to an M&P levy.
Marketing & Promotion
The mushroom industry's M&P program has also resulted in tangible benefits to its members. AMGA considers that generic M&P of mushrooms between 1975 and 2000 has contributed significantly a complete change in Australian mushroom consumption patterns. Whereas in 1975 approximately 90% of mushrooms consumed in Australia were processed (canned), fresh mushrooms represented about 90% of the Australian market in 2000. This turnaround in consumption overcame the threat to the Australian mushroom growing and processing industry from Taiwanese canned mushroom imports.
Similarly, a decline in summer time consumption of mushrooms in the late 1980s which caused supply problems for the industry was addressed by AMGA promoting the use of mushrooms in salads. According to AMGA this has resulted in almost constant demand for mushrooms year round.
In the last 15 years the mushroom industry has trebled in size from 14,233 tonnes in 1984-85 to 46,206 tonnes in 1999-2000. Per person consumption has increased from 0.6 kg in 1974-75 to 2.78 kg in 1999-2000. Throughout these periods AMGA undertook substantial investment in M&P. While the whole of these increases cannot be claimed to be attributable to M&P, AMGA has provided evidence that a significant drop in promotion expenditure in 1996-97 was echoed by a drop in mushroom prices and a levelling off in consumption. Regional M&P projects have also resulted in tangible benefits. For example
. a fully integrated $14,000 marketing and promotional campaign undertaken from 19 April to 13 June 1998 in Mildura, Victoria, whose results indicated increased market growth of nearly 12% or 4,400 kg extra sales over the eight week period compared to the corresponding period a years earlier. Average weekly sales during the campaign increased by 115 kg compared with the preceding period but dropped back to an additional 9 kg following the campaign;
. a similar campaign conducted from 8 March to 4 April in Mackay, Queensland, generated an increase of 24% in sales during the promotion campaign and 34% in the three weeks after the campaign. Average weekly sales before the campaign were 1638 kg, increasing to 2030 kg in the three weeks following the campaign. Even seven months after the campaign, the Mackay market maintained all the growth that occurred and remained 36% larger than before the campaign period.
AMGA considers that M&P also provides insurance for the industry against the risk of losing market share to competing products.
M&P has evolved to match the increasing sophistication of the consumers, from education on storage and handling of mushroom, to nutritional eduction in the 1990s, and more recently to recipe ideas to cater for time-poor but sophisticated consumers.
Generic versus brand M&P
The mushroom industry has considered this issue carefully. It has concluded that, while brand promotion is technically feasible, the undifferentiated nature of the product and nature of the marketing system, dominated by supermarkets, means that generic M&P is more feasible and efficient at least in the foreseeable future.
Contrary to Chiquita's view, the industry believes that, despite Australia's relatively high per capita consumption of mushrooms, consumption could be further stimulated by generic M&P -and more effectively than by brand M&P. In its view, therefore, generic promotion remains a worthwhile activity. AMGA has proposed that $1.8 million of the almost $2 million to be raised by the levy should be focussed on generic marketing/promotion. Clearly, therefore, the majority of growers in the industry and the AMGA support generic M&P as a worthwhile activity that increases their returns. All mushroom growers (including Chiquita) would benefit from effective generic promotion in so much as such promotion would generate expansion in consumer demand.
While branded promotion by Chiquita is likely to have some "spill-over" benefits for the rest of the mushroom industry, it may not provide the same degree of benefit to the rest of the industry that generic promotion could provide for Chiquita. However, benefits are difficult to substantiate as the case is at this stage hypothetical.
Proposal's compliance with Levy Guidelines
AMGA's consultation process (detailed above) meets the requirements of the Government's levy guidelines.
The Government's Levy Guidelines help it to assess whether a proposal complies with its Levy Principles, for example by defining what would be accepted as a "significant majority" under various circumstances.
• Generally, where it is clear that the net industry benefit and market failure tests have been met, the required level of support for the proposal is 50%.
• Where it is not clear that the net industry benefit and market failure tests have been met, then the required level of support is 75%. The AMGA has met this requirement, having advised 79% support for the proposed levy.
Chiquita appears to be incorrect in its conclusion that the industry vote for implementation of a statutory levy does not meet the levy guidelines. The Levy Guidelines state that a majority of potential levy payers who vote are needed to support a levy, not a majority of all potential levy payers.
Government policy on levies
The Government's policy on agricultural levies is clear: that there is a place for levies in the case of market failure. This agreed and publicised policy sets the framework within which this Regulation Impact Statement (RIS) is written. This RIS focuses, therefore, on the impact of the proposed levies regulation for the mushroom industry.
The case for a statutory levy on the mushroom industry is consistent with Government policy on agricultural levies.
Objective of the Regulations
AFFA's objective in seeking regulation is to assist the mushroom industry to correct a perceived market failure in funding its R&D and M&P activities.
The industry's objective is to increase consumption of mushrooms and to improve its efficiency in production, handling, storage and transport.
Financial resources are required to undertake such activities on an efficient and effective basis. (R&D and M&P cannot be ad hoc if they are to provide useful results.) Financial resources must come from the industry. Given the breakdown of voluntary industry provision of funds for R&D and M&P, a statutory levy would seem the best way to provide the means to undertake such activities for the long-term competitiveness of the industry. A statutory levy has the bonus of attracting matching Commonwealth funding for R&D activities (as did the voluntary levy).
The industry has already benefited from R&D and M&P conducted with the resources garnered from its voluntary levy - the benefits have been quantified as far as possible above, though it is not easy to calculate such benefits.
A statutory levy would be intended to reinstate and formalise the arrangements that existed before the breakdown of the voluntary system.
Options
There are three possible course of action for the mushroom industry:
1) to leave in place an increasingly ineffective voluntary levy, resulting in insufficient funds to adequately resource R&D and M&P;
2) to revoke the voluntary levy and put nothing in its place, the end result being no funds for R&D or M&P;
3) to establish a statutory levy to replace the now ineffective voluntary one.
In the case of the first scenario, that of continuing with the voluntary levy, AMGA does not have effective sanctions to deter the free-riding currently occurring. Thus there will always be a sufficient incentive for growers to opt out of paying the levy in order to maximise their personal benefits, despite the risk that the arrangements will break down, and despite the fact that everyone would be better off if contributions were comprehensive across the industry.
We consider the risk of voluntary levy-paying producers dwindling to zero to be quite high, as producers will want to be able to compete with those who are not paying the levy and therefore not factoring its cost into their mushroom sale price.
If, however, the largest growers that still support the levy continued to do so, investment in R&D and M&P would still be reduced by up to 25% from the amount contributed when the voluntary levy was stable (ie with almost all industry players contributing). The reduction in R&D and M&P funds would be greater if those still paying the voluntary levy contributed at a reduced level. Such a scenario seems unlikely in any case, as continuing to contribute to a voluntary levy when 'Tree riding" on that levy is increasing may not appear a sensible economic decision to these producers in the longer term. In looking at this scenario it is worth remembering that 79% of growers who voted supported a levy rate that would raise up to 1% of GVP, not up to 0.75% or less.
Having no levy at all would mean no investment in R&D and M&P to benefit the industry as a whole.
As proved by its 79% support for the statutory levy, the industry largely considers the above scenarios as non-feasible because they do not meet its objective.
The industry argues that R&D and M&P are essential to its continued profitability and competitiveness, and the beneficial effects of these activities have been documented above. Other horticulture industries with statutory levies in place have also confirmed the benefits of these arrangements for their long-term viability and competitiveness. Their decisions to continue their statutory levies over the longer term also provide evidence of the advantages of this course.
Impact analysis
The regulations will effectively formalise existing voluntary arrangements, and, as such, will have a minimal impact on those businesses continuing to pay the voluntary levy. At $2.16 per kilogram of spawn, the statutory levy will be 28% lower than the current voluntary levy, which is $2.99 per kilogram of spawn.
For mushroom producers who are not currently paying the voluntary levy, implementation of the statutory levy will increase their costs, as a proportion of GVP, by about l %. In effect, this will return their cost structure to what it was before they opted out of the voluntary system.
The current voluntary levy includes a proportion that goes to AMGA. AMGA will maintain this voluntary levy and will collect it independently of the statutory levy. The voluntary AMGA levy will be collected at a rate of $0.34 per kilogram of spawn. For mushroom growers the effective reduction in the total rate of levy, ie both statutory and AMGA voluntary levy, will not be the full 28% indicated above for the purposes of levy collected for R&D and M&P.
There is to be an upper threshold on annual spawn usage by any one mushroom grower. A grower will only pay the levy on the first 250,000 kilograms of spawn purchased or used in any financial year. This cap effectively limits the maximum annual levy payment by any one grower to $540,000. A similar arrangement operated under the macadamia industry levy, though in the case of that industry the "Cap" existed for a specified period of five years, between 1995 and 2000.
The only grower currently large enough to benefit from this cap is Chiquita.
The mushroom levy will be charged to mushroom producers and collected by spawn suppliers. This point of collection for the statutory levy is unchanged from that for the voluntary levy. This is the most equitable and efficient collection point, owing to both the correlation between spawn usage and yield of fresh mushrooms and the fact that there are currently only four spawn suppliers. It is estimated that 0.25% of the total amount of levies collected will be spent on that process of levy collection.
At an industry average wholesale selling price of $4.50 per kilogram of good quality mushrooms, the proposed levy represents just under 1% of gross value of production (GVP) for the industry. The industry's current GVP is calculated at just over $200 million and the new levy is expected to raise about $2 million a year. Approximately $2.00 per kilogram, or 92.5% of funds will be allocated to M&P and $0.16 per kilogram of spawn, or 7.5% of levy funds, to R&D.
The growth of the mushroom industry over and above current consumption levels means that it must expand consumption through M&P. Its strategy is to increase the market for mushrooms by educating consumers on more innovative ways to use mushrooms in dishes and enticing them to buy more mushrooms at retail or in the food service sector.
While brand promotion is technically feasible, the undifferentiated nature of the product and the nature of the marketing system, dominated by supermarkets, means that generic M&P is more feasible and efficient in the foreseeable future.
It is not possible to quarantine the benefits of either R&D or generic M&P only to levy payers, hence the need for a compulsory levy to eliminate the problem of "free riders" and market failure.
Small businesses (ie those with fewer than 20 employees) would not be disproportionately affected by the levy compared with larger businesses, except perhaps in the sense that the producer which meets the cap on the levy will be effectively contributing less to the levy per kilogram of spawn than small businesses. The largest producer would still, however, be contributing a great deal more in total to the levy than small producers, and will therefore be contributing a great deal more to benefits gained from R&D and M&P than they. (In this context it is perhaps worth noting that the industry chose that all producers should have one vote on the levy proposal, regardless of their size.)
The impact of the levy regulations on the industry as a whole should be small, as the statutory levy retains many of the procedures of its voluntary predecessor. Those businesses currently failing to pay the voluntary levy would be most affected by the introduction of a statutory levy. The impact of a statutory levy on those businesses currently paying the voluntary levy would be minimal.
It should be noted, however, that, under a statutory levy mushroom producers cannot allocate resources as they would prefer, owing to their not being able to choose their own level and mix of R&D and M&P investment. Nevertheless contributors have tolerated for many years similar limits of flexibility imposed by the voluntary levy.
The choice of a statutory levy therefore largely represents a choice between the value of collective investment and private flexibility. The advantages of collective investment include its purchasing power and the economies of scale in R&D and M&P that it provides, Collective investment is, however, less effective at meeting individual producers' R&D and M&P requirements. Again, the decision by the mushroom industry, together with those 16 other horticulture industries that have chosen the statutory levy course, supports the argument that the advantages of a statutory levy outweigh its disadvantages.
Competition Policy
The levy will be applied equitably to all mushroom growers, and the R&D and M&P activities are designed to assist the industry as a whole. The proposed levy will therefore have no impact on competition within the industry, except on those businesses which have opted out of collecting and remitting the voluntary levy. Continued funding for R&D and M&P will enhance the industry's efficiency.
Implementation and review
The levy is to be implemented as soon as practicable, depending on the legislative process. The industry is to review the levy rate and the performance of the R&D and promotion programs in two years to determine whether the levy is to remain in place, be adjusted, or be removed.
A revocation or "sunset" clause has been considered for the mushroom levy, in line with Office of Regulation Review recommendation, but is considered unnecessary given the review arrangements. A revocation clause would not be consistent with the levies regulations already in place for 15 other horticulture industries, and would make it difficult to plan for R&D or M&P projects, many of which run over a number of years.
Conclusion and recommended option
The proposal for a statutory compulsory levy for mushroom R&D and M&P
• conforms to the Government's levy guidelines and principles,
• does not restrict competition, and
• has clear potential to benefit the industry.
It is therefore recommended for implementation.
Horticulture Policy, Food Business Group
Agriculture, Fisheries and Forestry - Australia
30 August 2001
Hort 2/levies/mushroom: "RIS - final"