Report on the Review of the Administrative

Review of EU Sheepmeat and Goatmeat Quota

Report on the review of the administrative

arrangements for

EU sheepmeat and goatmeat quota

July 2013

Contents

Page

Executive Summary...... 4

Review Terms of Reference ...... 9

Stakeholder Consultation ...... 9

Principles of Quota Management ...... 10

Use of EU Sheepmeat and Goatmeat Quota ...... 11

Administrative Arrangements ...... 13

Industry Perspectives ...... 15

Recommendations ...... 24

Appendix A: Terms of Reference ...... 29

Appendix B: Discussion Points ...... 30

References ...... 34

Abbreviations/Definitions

AMICAustralian Meat Industry Council

DAFFDepartment of Agriculture Fisheries and Forestry

EUEuropean Union

FCFSFirst Come First Served

GATTGeneral Agreement on Tariffs and Trade

HQBHigh Quality Beef

RMACRed Meat Advisory Council

WTOWorld Trade Organisation

Entitlement Transfer:where an exporter transfers its quota entitlement amounts to another exporter.

Performance Transfer: where an exporter transfers its record of shipment to another exporter.

Account D:shipments in-quota to the EU.

Account I:shipments out-of-quota or to non-EU countries.

Quota Year:1 January to 31 December.

Executive Summary

In March 2013 the Department of Agriculture, Fisheries and Forestry (the department) initiated a review of the administrative arrangements for Australia’s country specific European Union (EU) sheepmeat and goatmeat quota (Australia’s quota).

The department examined the effectiveness and efficiency of the current arrangements and was guided by:

• The terms of reference (see Appendix A).
• The set of principles developed from previous quota reviews.
• The administrative rules operating in other Australian managed quotas.
• Client and stakeholder views.

Findings

The review found that:

• The current arrangements met all quota management principles.
• Exporters were overwhelming in favour of continuing with the existing arrangements.
• No areas were identified where significant changes were required to improve quota management.

The only changes requested were in relation to:

• The 12 tonne minimum rule.
• The deadlines for when entitlement and performance transfers are disallowed.

About 47 per cent wanted the minimum rule to remain at 12 tonnes, 19 per cent wanted the amount increased, 14 per cent wanted it reduced and19 per cent wanted it removed all together. In relation to transfer disallowance dates about 52 per cent wanted a change and 38 per cent wanted to retain existing dates.

Quota Usage

Access to Australia’s quota is through an allocation system that distributes entitlement to exporters based on record of shipment. The allocation is made in two tranches: an interim that covers 70 per cent of the total quota available and a final that covers the remaining 30per cent. The quota is traditionally fully utilised with an average fill rate of 99 per cent. However, in 2012 the fill rate fell to 89 per cent, most likely due to the difficult trading environment brought on by the Euro Zone debt crisis and drought driven competition from New Zealand.

Australia’s quota trade to the EU is dominated by chilled and frozen lamb (roughly in a 50:50 ratio) that make up 72 per cent of shipments, followed by frozen mutton (28 per cent of shipments) and frozen goat (less than one per cent of shipments). About 98 per cent is exported using sea freight. The remaining 2 per cent is done by air, of which 99per cent is lamb and translates into about 420 tonnes a year.

Administrative Arrangements

In 2011 Australia’s quota access amount increased from 18786 tonnes to 19186tonnes. The 400tonne increase was granted by the EU as compensation for Bulgaria and Romania becoming EU members in 2007.

The EU introduced a new tariff-free global sheepmeat and goatmeat quota of 200 tonnes in 2011. Known as theerga omnesquota, management rights have been retained by the EU and access to it is on a first-come first-served (FCFS) basis.

Key features of the current administrative arrangements for Australia’s country specific quota are:

• The allocations are based on record of shipment in the previous quota year.
• The allocations are calculated using a formula weighted in accordance with record of shipment in two performance accounts.
• The two performance accounts are categorised by shipments either to the EU (Account D) or shipments elsewhere (Account I), both using EU accredited facilities.
• Minimum allocation is 12 tonnes.
• Eligibility is open to any licensed exporter with performance for the previous quota year.
• The interim allocation is made in November and the final in early February of the quota year.
• Unused or uncommitted quota is recalled late October in the quota year and redistributed to eligible exporters on a first-come-first serve basis.
• Quota allocated from the uncommitted pool is not transferrable.
• Quota entitlement and performance are transferrable anytime up to October and November respectively in the quota year.
• Access to annual entitlement is subject to the payment of a set fee, which is based on the volume amount allocated.

• Fees are not charge for FCFS allocations.

Review Participation

The number of participants in Australia’s quota averages about 36exporters a year, with about 23 receiving an annual quota allocation. In 2012 there were 24 Australia quota holders, of which nine were processors and 15 were agents (non-packers).

Thirty-four licensed exporters who participated in the EU sheepmeat and goatmeat market during the past five years and four industry bodies were approached to provide input to the review. Although exporters were provided with focus points (see Appendix B) they were free to discuss any other points they thought relevant. Five processors, 16 agents and the Australian Meat Industry Council provided comment on matters surrounding but not limited to:

• Access
• Calculation of entitlement and performance
• The allocation process
• Transfer arrangements
• Uncommitted quota
• New entrants
• Fees
• Unallocated quota
• Erga omnes quota.

Four new matters were raised during discussions, which were:

• Access to uncommitted quota should be offered to quota holders in the first instance, followed by non-quota holders.
• Fees should be charged for allocations from the uncommitted quota pool.
• If quota is unallocated or rejected during the annual allocation process, the unallocated amount should be offered as a supplementary allocation and rejected amounts should be redistributed amongst interim quota holders when the final allocations are made.
• Shipments under erga omnes quota should continue to be counted as Account I performance.

Recommendations

The review recommendations are detailed in chapter 7 of this report. The reviewer applied the quota principles when considering the current arrangements and exporter views. Specific recommendations are:

Recommendation 1: access

Access to the quota should continue to be through an allocation process.

Recommendation 2: allocating entitlement

Quota entitlement should continue

a)to be based on the previous 12 month’s record of shipment

b)with a minimum allocation of 12 tonnes

c)to be issued as a 70 per cent interim allocation and 30 per cent final allocation.

Recommendation 3: calculating performance

a)Performance recognition should continue to have an 80 per cent weighting for shipments to the EU (Account D) and a 20 per cent weighting for shipments to the EU and elsewhere (Account D and Account I).

b)To provide for new entrants, entitlement should continue to be available for those who only have a record of performance under Account I.

Recommendation 4: transfers

a)No limits should continue to apply on how much entitlement or performance an exporter can transfer.

b)The existing deadline dates after which transfers are disallowed should remain.

Recommendation 5: fees

a)Fees should be paid on reallocation of uncommitted quota.

b)The department to determine the volume at which the fee will not apply.

Recommendation 6: uncommitted quota

Access to uncommitted quota under first-come-first-served conditions should continue to be offered to current quota holders in the first instance. However, non-quota holders should also have access after the needs of quota holders have been met.

Recommendation 7: unallocated quota

In the event a quota allocation is rejected in the interim phase, the rejected quota amount should be redistributed to interim quota holders when the final allocation is made.

Recommendation 8: erga omnes quota

For standard quota entitlement purposes, exports under erga omnes quota should continue to be counted as Account I shipments.

1. Review Terms of Reference

The current arrangements for the EU sheepmeat and goatmeat quota (Australia’s quota) were established in 1998. The Department of Finance and Deregulation’s Best Practice Regulations Handbook recommends that legislative arrangements be reviewed every five years.

The terms of reference are set out in Appendix A. It provides for an assessment of the effectiveness and efficiency of the arrangements and identification of areas that may require improvement.

The review considered:

• recent quota fill outcomes
• commercial requirements of quota holders
• administrative deadlines
• quota allocation mechanisms
• quota transfers and level of usage
• minimum allocation levels
• management of unallocated and uncommitted quota
• management of shipments made under erga omnes quota.

2. Stakeholder Consultation

The review was undertaken by the Department of Agriculture, Fisheries and Forestry (the department) and commenced on 8 April 2013. Users of Australia’s EU sheepmeat and goatmeat quota and other stakeholders were invited to discuss issues directly with the department or lodge submissions. The closing date for written submissions was 17 May 2013.

Licensed exporters who participated in the EU sheepmeat and goatmeat quota market during the past five years were advised directly about the review. The Australian Meat Industry Council, the Sheepmeat Council of Australia, the Red Meat Advisory Council and Meat and Livestock Australia Ltd were also advised directly and a notice was placed on the department’s website.

A 20 minute questionnaire, covering the discussion points at Appendix B, was used during the telephone consultations. Of the 34 licensed exporters contacted, 21 took part in the interview, 5 declined, 2 referred the reviewer to head office, 2 were no longer licensed and 3 gave no response.

The Australian Meat Industry Council (AMIC) provided a written submission.

The department also took account of:

• The recommendations of the 1999 review of EU meat quota arrangements.
• The recommendations of the 2008 dairy review.
• The recommendations of the 2011 review of EU high quality beef arrangements.

3. Principles of Quota Management

The Council of Australian Governments established a set of principles for good regulatory practice. The principles provided a reference point for the reviewer and a basis for identifying changes that may improve the administrative system.

Principle 1: Optimise the commercial value and use of the quota

Optimising the value of a quota is related to considerations of the quota fill rate and the rents from using the access. The administrative arrangements should not seek to promote the full use of the quota access regardless of market signals, nor encourage discount pricing or constrain development opportunities.

This principle was applied in examining transfers, fees and unallocated quota.

Principal 2: Minimise regulatory intervention

The quota is effectively and efficiently used when market forces operate to the greatest extent possible, with minimal regulatory intervention. However, the requirements of the importing country have to be considered in applying this principle.

This principle was not applied during the review because the EU’s regulatory compliance requirements have not changed.

Principle 3: Consistent, transparent and efficient administration

A quota administration system should be efficient and transparent and aim for consistent management rules to underpin the integrity of the system. This principle is related to considerations of administration costs and rule clarity for facilitating business planning.

This principle was applied in examining rules applying to erga omnes quota.

Principle 4: Minimise barriers to exporting

Quota management should aim to minimise the barriers to market participation. This principle relates to considerations about the design of quota rules and conditions that can affect the cost of market entry.

Rules that may influence the capacity of exporters to use quota include:

• allocation process
• recognition of performance
• tradability of quota
• process and timing for reclaiming and distributing unused quota.

This principle was applied in examining access and uncommitted quota issues.

Principle 5: Consideration of commercial arrangements

The management arrangements need to recognise existing commercial relationships and past investments in developing a capacity for market participation.

This principle was applied in considering the methodology for calculating performance and access provisions for new entrants.

Principle 6: Reward for market development

Active market participants with commercial strategies to develop customer relationships are more likely to maximise the value of the quota rents. To optimise the value of the access the rules should reward market development.

This principle was applied when examining the allocation rules and EU accession issues.

4. Use of the EU Sheepmeat and Goatmeat Quota

Australia’s country specific sheepmeat and goatmeat quota access conditions were established in 1995. It replaced the GATT agreed Voluntary Restraint Agreement. The initial access amount was based on historical exports to the EU and quota management rights were given to exporting countries. A 1998 review of Australia’s administrative arrangements was conducted by the Red Meat Advisory Council and resulted in the refined arrangements that operate today.

In 2011, the EU sheepmeat and goatmeat quota access amount increased from 18786 tonnes to 19186tonnes. There is no distinction in the access amount between sheep and goatmeat. The 400 tonne increase was granted by the EU in compensation for Bulgaria and Romania becoming EU member states in 2007. Import duty is not paid on in-quota shipments. Out-of-quota tariff is 12.8per cent plus Euro 90.2 – 311.8 per 100kg/net. In general, the out-of-quota duties make it prohibitive for Australian exporters to supply sheepmeat or goatmeat to the EU outside the quota access arrangements.

In relation to other country-specific EU sheepmeat and goatmeat quotas, Australia’s is medium sized. There is unlikely to be any growth in the quota over the medium term as the Doha WTO trade negotiations are stalled. Any quota expansions that may emerge from the talks will most likely follow the non-discrimination principle. The prospects for country-specific access growth would seem negligible.

Australia has a relatively small sheepmeat and goatmeat trade with the EU compared to larger quota holders like Argentina and New Zealand. Of Australia’s global exports only 8per cent of lamb, 4 per cent of mutton and 17 per cent of goatmeat goes to the EU.

In recent years the value of the trade in percentage points for the majority of Australia’s quota holders were no longer greater in the EU than elsewhere.

Australia also has access to 200 tonnes of zero tariff global quota called erga omnes. Erga omnes is not allocated but certificates of origin are still required from exporting countries.In 2012, erga omnes inaugural year, Australian exporters used 93 per cent of the quota. However, in 2013 Australia managed to ship only 16 per cent (or 33 tonnes) before it was exhausted by early January. It would appear that in the future erga omnes may only operate as an opportunistic quota at the beginning of each quota year.

Shipments under erga omnes quota count towards performance, which is used to calculate entitlement to Australia’s country specific quota.

Australia’s sheepmeat and goatmeat trade to the EU is dominated by chilled and frozen lamb (roughly in a 50:50 ratio and make up 72 per cent of all shipments), followed by frozen mutton (28per cent of shipments) and frozen goat (less than one per cent of shipments). About 98 per cent is exported via sea freight. Shipments by air comprise 99percent lamb or about 420 tonnes a year. The six week shipping lag limits the shelf life of the landed chilled/fresh product. However, chilled lamb is often air freighted and comprises about 2.5 per cent of all sheepmeat shipments.

The trade is characterised by high and low value cuts and, in some cases branded product, composed of chilled and frozen lamb and frozen mutton for retail outlets and the food service trade.

The bulk of the chilled and frozen lamb shipments go to the UK and France and in recent times there has been growth in lamb shipments to the Netherlands.

Usage of Australia’s quota has remained static over the past 10 years averaging a 99percent fill rate. However, for 2012 the rate dropped to 89 per cent, possibly due to the difficult trading conditions surrounding the Euro Zone debt crisis, the continuing high Australian dollar and competition from drought affected New Zealand.

Most stakeholders felt that, for the near future, demand for quota would remain relatively weak as better prices are being offered elsewhere, particularly in the Middle East.

Some companies are not fully using their initial allocations. Table 1 shows a swing away from the need for more quota, to that of using less than was allocated, with a significant increase in the number of companies that are not shipping their allocations at all. On average about 76 per cent of entitlement is transferred and 41 per cent of performance. This suggests there is significant movement of quota after allocations are made.

Exporters attributed the 2012 under-use of allocations to difficulties in securing contracts due to the Euro Zone debt crisis, exacerbated by New Zealand off-loading drought affected product. Under these circumstances no amount of quota trading or stricter recall rules would improve the exporters’ capacity to fully use their quota.

Table 1 Quota Usage

*1 company, all shipments by parent.

** 2 companies, all shipments by parent.

***New entrant, not in EU market for previous 3 years.

The erga omnes quota has provided another avenue to access the EU sheepmeat and goatmeat market. However, while Australia enjoyed significant erga omnes access for the quota’s inaugural year of 2012, access was severely limited in 2013. It would appear that erga omnes quota may only operate as an opportunistic quota at the beginning of each quota year.