112 Cablegram from Department of Primary Industry to Duthie

Canberra, 8 December 1980

0.CH932130 CONFIDENTIAL

Australia - New Zealand CER-Joint Permanent Heads Meeting

For Duthie: (please deliver immediately).

In respect to trade in dairy products in the context of the CER, three possible options are set out below. They are:

  1. Granting of monopoly import powers to the Australian Dairy Corporation.
  2. Adoption of the formula approach.
  3. Year-to-year consultations between the Australian and New Zealand dairy industries.

(A) MONOPOLY IMPORTS POWERS (UNDERLINED)

Proposal (underlined)

To give the Australian Dairy Corporation (ADC) monopoly powers in respect of the import of dairy produce from NZ.

Advantages (underlined)

To give the ADC control over the quantity of product imported from NZ. Would be easily administered.

By fixing the 'resale' price of imported product the ADC could ensure that domestic pricing arrangements are protected.

Disadvantages (underlined)

Conferring such powers on a statutory authority would be criticised:
by consumers, fearful of losing freedom of choice of type of product,
by traders, who would lose present profitable business,
by supporters of 'free enterprise', who would see this as further government control of business.

Some difficulties could arise in conferring the powers on the ADC, the Commonwealth's powers over international trade would probably enable it to confer the monopoly import powers (possibly through the customs, prohibited imports, regulations) on the ADC.

However, the ADC's powers to trade intra-state in imported dairy produce could be called into question.

To circumvent this it may prove necessary to develop a system of importing product into one state for use in another.

The proposal would involve major changes to the Dairy Produce Act.

Likely NZAttitude (underlined)

NZ could fear that as Australian traders would remain free to import unlimited quantities from other sources to meet demand, the ADC would take the role of 'importer of last resort' thus limiting NZ access to Australian market, this would substantially reduce the attraction of the proposal to NZ.

Possible Modification to Scheme (underlined)

A modification which may be suggested in a scheme based on monopoly import powers coupled with guaranteed minimum purchases, at levels and prices to be negotiated.

This would have the advantage (underline one) of enabling the ADC to control the wholesale price in Australia of the product, would be easy to administer and would give NZ guaranteed access.

In addition to the disadvantages (underline one) listed above for the monopoly import powers the suggested modification would place the ADC in the position of a trader tied to a long term contract should losses be involved on imported product because of the compulsion to buy fixed or minimum quantities the cost would have to be met from industry funds.

(B) FORMULA APPROACH (UNDERLINED)

This would allow butter and cheese imports from NZ to grow at 10 per cent per year over the next 7 years from a base of dlrs 200,000 in the case of butter (currently no imports) and 4.9 kt in the case of cheese (agreed imports for 1980/81).

This approach would result in:

  1. Butter imports from NZ increasing from 0.160 kt in 1980/81 to 0.312 kt in 1968/87;
  2. Cheese imports increasing from 4.9 kt in 1980/81 to 9.5 kt in 1986/87.

On an aggregate basis these increases in imports would have only a marginal impact on the Australian dairy industry. In 1986/87 the above imports represent some 40ml of milk; representing the production from 1 per cent of Australia's dairy farms and being less than 1 per cent of current dairy production.

This formula would undoubtedly lead to NZ increasing its share of the Australian cheese market cheese consumption expected to grow only slowly in the 1980s, NZ imports under above formula likely to grow from 4 per cent of market currently to around 8 per cent by 1986/87.

In the case of butter the formulae would have imports growing from 0.160 kt in 1980/81 to 0.312 kt in 1986/87. Assuming the domestic butter market stabilises imports would represent less than 1 per cent of domestic consumption. Even if the market continued to contract to say 40,000 tonnes in 1986/87 imports would only represent 0.8 per cent of the market.

Taking WMP, SMP and casein together, application of the formula could result in NZ's share of the domestic market growing from less than 1 per cent currently to approximately 3 per cent. Recently, imports of condensed milk have risen sharply (406 kt worth dlrs 1.5m in 1979/80) and given the high unit value of the product market share likely to expand under the formula.

(C) YEAR-TO-YEAR APPROACH (UNDERLINED)

The proposal which is outlined below should be read in conjunction with the paper prepared by the Dairy Products Division (dated December 2, 1980) on the closer economic relations (CER).

Under this proposal the Australian and New Zealand dairy industries would meet annually with the aim of reaching agreement on the types and quantities of dairy products which would be traded between the two countries during the ensuing year. In the determination of the levels of trade, the two industries would take into consideration trends in the price, production and consumption (and hence growth) of dairy products in each country as well as the effects of such trade on each country's domestic marketing arrangements. The overall objective would be to increase the level of trade in dairy products between the two countries.

The machinery already exists for such consultations between the two industries in the form of the Australia- New Zealand Joint Dairy Industry Consultative Committee which was established in August of this year and which held its first meeting in Melbourne last week (December 3).

Backing would be given to the arrangements agreed upon between the two industries by each government giving an undertaking that it would not place any impediments in the way of such agreed trade and would in fact ensure that their respective industries carried out obligations under the arrangement.

If the two industries were unable to reach agreement in any year on the level of trade in the respective types of dairy products then it would be a matter for the two governments to decide upon the matter, the threat of government action should in itself act as a powerful force in encouraging the industries to come to an amicable understanding.

The year-to-year approach outlined above would be written into and form part of the CER agreement.

ATTITUDE (UNDERLINED)

Allowing increased imports of NZ butter and cheese as would occur under Option B would have a relatively minor influence on the Australian dairy industry over the next decade. Other economic and market developments are likely to be much more significant.

Option B also has the advantage of putting dairy trade on the 'common framework' being developed as part of CER.

However, political factors would likely cause problems in Australia if his option was pursued immediately. The political situation could change, however. As a result of impending negotiations on domestic dairy policy in Australia and the reconsideration of the market outlook that would be undertaken in the context of those developments.

This suggests that if at all possible, the dairy import issue should be deferred pending the outcome of our domestic negotiations.

If this is not possible, then the option of industry consultations is the only practical possibility and has the advantage of allowing flexibility in the future if the environment changes.

[NAA: Al838, 370/1/19/18, xx]