THE AUSTRALIAN APPLE INDUSTRY SQUEEZE by tam26166

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									THE AUSTRALIAN APPLE
INDUSTRY SQUEEZE                             F
    Current Practice versus Best
     Practice
                                             I
    Economic Impacts of Apple
     Juice Imports
                                             N
    Options to Improve Industry
     Competitiveness
                                             A
Prepared for
                                             L
Agriculture Forestry Fisheries - Australia



                                             R
                                             E
Prepared by




Hassall & Associates Pty Ltd
Level 4, 52 Phillip Street
                                             P
                                             O
GPO Box 4625
Sydney NSW 1004
Tel 02 9241 5655
Fax 02 9241 5684

AU1-034

JUNE 2001
                                             R
                                             T
                                                                 Contents

EXECUTIVE SUMMARY ............................................................................................. 6

1.     INTRODUCTION ............................................................................................... 24
     1.1     BACKGROUND .......................................................................................................... 24
     1.2     AN OVERVIEW OF THE CURRENT STATE OF THE AUSTRALIAN APPLE INDUSTRY ........... 24
     1.3     STUDY PURPOSE ..................................................................................................... 25
     1.4     METHODOLOGY AND REPORT OUTLINE...................................................................... 26

2.     DOMESTIC APPLE INDUSTRY OVERVIEW ................................................... 28
     2.1     DOMESTIC MARKET INDICATORS ............................................................................... 28
           2.1.1   Production ....................................................................................................................... 28
           2.1.2   Processing and Converting............................................................................................. 40
           2.1.3   Consumption ................................................................................................................... 41
           2.1.4   Summary of the Industry Profile ..................................................................................... 42
     2.2     REVIEW OF CURRENT DOMESTIC INDUSTRY ACTIVITIES.............................................. 43
           2.2.1   Export Market Development ........................................................................................... 43
           2.2.2   Marketing and Promotion Programs ............................................................................... 48
           2.2.3   Research and Development ........................................................................................... 51
           2.2.4   Summary......................................................................................................................... 52

3.     GLOBAL APPLE INDUSTRY OVERVIEW ....................................................... 53
     3.1     PRODUCTION ........................................................................................................... 53
           3.1.1   Global Production Forecast ............................................................................................ 58
     3.2     PROCESSING ........................................................................................................... 60
           3.2.1   Growth in Chinese Exports and US Anti-dumping Measures ......................................... 63
           3.2.2   Global Processing Forecast............................................................................................ 66
     3.3     SUMMARY OF GLOBAL APPLE INDUSTRY .................................................................... 67

4.     FACTORS AFFECTING THE AUSTRALIAN APPLE INDUSTRY ................... 69
     4.1     EFFECT OF GOVERNMENT SUBSIDIES AND PROTECTION ON COMPETITIVENESS ........... 69
     4.2     EFFECT OF PHYTOSANITARY RESTRICTIONS ON IMPORTS TO AUSTRALIA ..................... 73
     4.3     CHANGES TO RETAIL MECHANISMS FOR FRESH PRODUCE ......................................... 74
           4.3.1   Within Australia ............................................................................................................... 74
           4.3.2   Globally ........................................................................................................................... 75
     4.4     LIKELY CHANGES TO INTERNATIONAL TRADE FLOWS AND MARKET CONDITIONS .......... 77

5.     COMPARATIVE ANALYSIS OF THE AUSTRALIAN INDUSTRY ................... 79
     5.1     PRODUCTIVITY MEASURES ....................................................................................... 79
           5.1.1   Production Efficiency ...................................................................................................... 80
           5.1.2   Industry Infrastructure and Input Quality ........................................................................ 84
           5.1.3   Financial and Market Factors ......................................................................................... 85
           5.1.4   Overall Competitiveness Rankings ................................................................................. 87


       Hassall & Associates Pty Ltd                                                                                                                Page 2
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     5.2       COMPARISON OF COST COMPETITIVENESS ................................................................ 88
           5.2.1      International Comparisons .............................................................................................. 88
           5.2.2      Domestic Comparisons ................................................................................................... 92
     5.3       QUALITY .................................................................................................................. 94
     5.4       SUMMARY ................................................................................................................ 98

6.      ECONOMIC IMPACT OF APPLE JUICE IMPORTS ON THE DOMESTIC APPLE
        MARKET ........................................................................................................... 99
     6.1       CONCEPTUAL MODEL OF THE AUSTRALIAN APPLE INDUSTRY ...................................... 99
     6.2       IMPORTS OF CAJ: AN OVERVIEW ............................................................................ 100
     6.3       IMPACT ON DOMESTIC APPLE GROWERS ................................................................. 102
           6.3.1      Impact on Juice Grade Apples ..................................................................................... 103
           6.3.2      Impact on Fresh Apple Market - Domestic ................................................................... 104
           6.3.3      Impact on Fresh Apple Market - Export ........................................................................ 105
     6.4       IMPACT ON PROCESSORS ....................................................................................... 105
     6.5       IMPACT ON CONVERTERS ....................................................................................... 106
     6.6       IMPACT ON PROCESSOR/CONVERTER CONGLOMERATES .......................................... 107
     6.7       IMPACT ON JUICE EXPORTERS ................................................................................ 107
     6.8       IMPACT ON CONSUMERS......................................................................................... 108
     6.9       SUMMARY .............................................................................................................. 109

7.      OPTIONS FOR IMPROVED INDUSTRY COMPETITIVENESS ..................... 110
     7.1       ELEMENT 1 BUSINESS AND PRODUCTION MANAGEMENT SKILLS & SYSTEMS DEVELOPMENT
               111
           7.1.1      Business Planning/Benchmarking for Growers ............................................................ 111
           7.1.2      Production Systems Management ................................................................................ 113
     7.2 ELEMENT 2 ENHANCED AGRONOMIC AND PROCESSING PRACTICES TO IMPROVE
     PRODUCTION EFFICIENCY ................................................................................................ 115
           7.2.1 Enhanced Variety Breeding Program, Incorporating Product Licensing and Offshore Supply
           Agreements ............................................................................................................................... 115
           7.2.2 Improved Nursery Material (rootstock and varieties) .................................................... 117
           7.2.3 Orchard Intensification .................................................................................................. 119
           7.2.4 Farm Labour Training and OH&S ................................................................................. 120
           7.2.5 Improving Processing Sector Efficiency via Technology .............................................. 121
     7.3  ELEMENT 3 APPROACHES TO HANDLING AND PROCESSING THAT ACHIEVE IMPROVEMENTS IN
     THE QUALITY OF PRODUCT MARKETED ............................................................................. 122
           7.3.1      Improved Packout (Quality) .......................................................................................... 122
           7.3.2      Integrated Cold Chain Management ............................................................................. 124
     7.4       ELEMENT 4 MARKET PROMOTION AND DIFFERENTIATION .......................................... 125
           7.4.1      Cooperative Supply Arrangements and Enhanced Focus on International Markets.... 125
           7.4.2      Expansion of Fresh Chilled Apple Juice ....................................................................... 128
           7.4.3      Marketing Programs to Differentiate Australian CAJ Based on Quality ....................... 129
           7.4.4      Improved Labeling for Australian Juice Product ........................................................... 131
           7.4.5      Develop a Label to Indicate Apple Freshness .............................................................. 133
     7.5       ELEMENT 5 EXPLORING NEW MARKET OPPORTUNITIES ............................................ 134


        Hassall & Associates Pty Ltd                                                                                                         Page 3
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           7.5.1   New or Value Added Products...................................................................................... 134
     7.6     ELEMENT 6 TRADE MEASURES ............................................................................... 135
           7.6.1   Consider the Merit and Implications of Preparing an Anti-dumping Case .................... 135
     7.7     SUMMARY OF STRATEGY AND OPTIONS ................................................................... 137

8.      CONCLUSIONS AND STUDY RECOMMENDATIONS .................................. 138

9.      BIBLIOGRAPHY ............................................................................................. 141

10.PERSONS CONTACTED AS PART OF THIS STUDY ...................................... 143

11.APPENDICES .................................................................................................... 144
     APPENDIX ONE CITRUS MARKET DIVERSIFICATION PROGRAM ......................................... 144
     APPENDIX TWO PREPARING AN ANTI-DUMPING APPLICATION .......................................... 146




        Hassall & Associates Pty Ltd                                                                                              Page 4
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ABBREVIATIONS USED IN THIS REPORT

AAA            Agriculture - Advancing Australia (FarmBis Program)
AAPGA          Australian Apple and Pear Producers Association
ABARE          Australian Bureau of Agricultural and Resource Economics
ABS            Australian Bureau of Statistics
ACCC           Australian Competition and Consumer Commission
AFFA           Commonwealth Department of Agriculture, Fisheries and Forestry
AFFCO          Australian Fresh Fruit Company
AFJA           Australian Fruit Juice Association
AHC            Australian Horticultural Corporation
APFIP          Australian Pome Fruit Improvement Program
BA             Biosecurity Australia
CAJ            Concentrated Apple Juice
CAP            Common Agricultural Policy
DFAT           Department of Foreign Affairs and Trade
EEC            European Economic Community
EMS            Environmental Management System
EU             European Union
GAIN           Global Agriculture Information Network
GATT           General Agreement on Tariffs and Trade
HAL            Horticulture Australia Limited (old AHC and HRDC)
HMAC           Horticulture Industry Market Access Committee
HRDC           Horticultural Research and Development Corporation
IDO            Industry Development Officers
IFP            Integrated Fruit Production (to reduce reliance on pesticides)
IMC            Integrated Mite Control
IPM            Integrated Pest Management
IRA            Import Risk Analysis
LaRS           Levies and Revenue Service (of AFFA)
MD             Mating Disruption
MDTF           (DFAT‟s) Market Development Task Force
NAFTA          North American Free Trade Agreement
NPV            Net Present Value
PVR            Plant Variety Rights
SPS            Sanitary and Phyto-Sanitary (Arrangements for Importation/trade control)
UK             United Kingdom
US             United States
USDA           United States Department of Agriculture
WAA            Woolly Apple Aphid
WTO            World Trade Organisation




      Hassall & Associates Pty Ltd                                                        Page 5
The Australian Apple Industry Squeeze
EXECUTIVE SUMMARY
Introduction

In recent years, the Australian apple industry has been characterised by lower grower returns,
increased competition from low-cost imported concentrated apple juice and greater exposure to
global market developments. In addition, Australia's production has declined markedly relative
to its Southern Hemisphere competitors. The impact of these shocks has been significant, but
not catastrophic. The industry is responding, adjustment is occurring and movement towards the
adoption of international best practice is under way.

However, further improvement is urgently needed, and the pace of change must be increased, if
the industry is to survive in an increasingly tough global market. It is important that the industry
continue its drive towards improvement in production efficiency and cost competitiveness to
supply a healthy and nutritious product, on a sustainable basis, to increasingly differentiated and
selective domestic and export markets.

The development of an industry approach based on achieving global competitiveness and an
enhanced export focus is the most important objective for the industry at present. Such an
approach would involve:

       Benchmarking performance against international competitors;
       Striving to improve international competitiveness;
       Gearing domestic production towards export markets;
       Further developing and expanding overseas markets and committing to those markets for
        the long-term;
       Developing integrated supply alliances to facilitate efficient and effective exporting; and
       More generally, establishing an industry-wide approach that is focused on realising the
        opportunities that are presented in overseas markets (whilst simultaneously addressing
        domestic opportunities).

Without a commitment to global competitiveness and the development of an enhanced export
focus, the Australian industry will inevitably lose both export market share (particularly to our key
Southern Hemisphere competitors) and domestic market share (as import competition increases
over time). Opportunities for the industry to grow in future will be curtailed unless greater
emphasis is placed on exports and marketing of Australian exports.

This report identifies a strategic approach to guide the process of achieving global
competitiveness and the development of an export focus within Australian industry. The strategy
has components that provide a range of options for each of the key elements of the value chain,
namely: business planning; agronomic practices; handling and processing; promotion; market
opportunities; and trade measures.




       Hassall & Associates Pty Ltd                                                          Page 6
The Australian Apple Industry Squeeze
It is essential that the options be viewed as components of the process of achieving global
competitiveness and developing an export focus, rather than being viewed in isolation. Options
targeting each element of the value chain must be addressed together to ensure that a strong
commitment to global competitiveness is fostered throughout the industry. Failure to commit to
this process in one sector of the value chain will inevitably undermine the benefits that would
otherwise be derived from a focused, industry-wide commitment. Similarly, if the adjustment
process (embodied by the options) is undertaken with no commitment to export markets, the
opportunities garnered during the process will be significantly diminished.

A commitment to continuous improvement and benchmarking is essential to ensure that
Australia achieves competitiveness and remains competitive on world markets. In this report,
the Australian industry is compared against its competitors in terms of efficiency and
competitiveness. As such, the report could form a component of a future national education and
benchmarking program for the industry.

Australian Industry Practice Against International Best Practice

The Australian Apple Industry

A conceptual model of the Australian apple industry is shown in Figure E1. Key 1999-00 product
flows between sectors are also identified.

Figure E1       Conceptual Model of the Australian Apple Industry

    Local Consumer Juice                      Local Converters, (who                       Imports of Juice
           Market                           manufacture juice beverages)                     Concentrate

                                                                                 15.1 million litres
              5.7 million litres
         Exports of Juice                    Local Processors, (who crush
                     3
           Products                                Australian apples)

                                                                            2
                                                            71,400 tonnes
                                                  Local Growers


                            32,600 tonnes                                   215,600 tonnes

                     Export Fresh Apple Market                  Domestic Fresh Apple Market


Note:
1.        = flow of product indicating a supply and demand relationship
2. Local converters and converter/processor conglomerates also utilise this volume.
3. Includes both concentrated apple juice and retail juice products. Export data supplied by ABS could not
disaggregate juice products.



      Hassall & Associates Pty Ltd                                                                     Page 7
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Apple production in Australia is concentrated in distinct regions across all states. The major
growing regions are shown in Figure E2.

Figure E2      Australian Apple Growing Regions




Source: AAPGA (2001)

Total production of fresh apples in 2000 was approximately 320,000 tonnes. The farmgate value
of total production in 1998-99 (the most recent available data) was $266 million. Figure E3
shows the share of total production by state.




      Hassall & Associates Pty Ltd                                                    Page 8
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Figure E3       Proportion of Total Apple Production by State (%)



                                             QLD
                                             10%
                                        SA
                                                           VIC
                                        7%
                                                           31%

                                   WA
                                   13%



                                         TAS            NSW
                                         18%            21%




Source: ABS (2001)

The volume of total apple production for processing in 1999-00 was in excess of 71,000 tonnes.
Victoria and NSW accounted for the largest share of apple production destined for processing.

Converters (who manufacture beverages from apple juice concentrate) and processor/converter
conglomerates dominate the processing sector, accounting for up to 90 percent of total apple
juice beverage production. Processors, who crush fresh Australian apples for concentrate and
fresh juice, make up the balance of the industry.

The International Apple Industry

In the international apple industry:
       China has come to dominate world production, moving from less than 10 percent of world
        apple production to more than one third over the course of the 1990‟s. Other large
        producers of apples include the US, France, Turkey and Italy;
       Australia accounts for less than one percent of world production;
       Australia is ranked sixth in terms of production amongst major Southern Hemisphere
        producers (having ranked 3rd as recently as 1981);
       The major Southern Hemisphere producers (New Zealand, Chile, South Africa,
        Argentina, Brazil and Australia) compete to supply out-of-season European and Asian
        markets; and

       Over the last twenty years, Australia has suffered a major decline in production relative to
        other Southern Hemisphere producers, and now produces just over half that of its 5th
        placed competitor.




       Hassall & Associates Pty Ltd                                                         Page 9
The Australian Apple Industry Squeeze
Comparison of Production Efficiency

The World Apple Review (2000) ranks countries according to production efficiency. The criteria
used to measure production efficiency are:
       Percent change in total production;
       Relative variability of production;
       Percent of acreage non-bearing;
       Percent of production in new varieties;
       Planting density; and
       Average yield per hectare harvested.

The top 15 countries in terms of production efficiency are listed in Table E1.

Table E1        World Rankings According to Production Efficiency
  Rank                                              Country
     1                                               Austria
     2                                            New Zealand
     3                                            Netherlands
     4                                                Chile
     5                                            South Africa
     6                                               France
     7                                                Brazil
     8                                              Belgium
     9                                               Poland
    10                                                Japan
    11                                             Germany
    12                                             Australia
    13                                                 Italy
    14                                            United States
    15                                               Turkey
Source: World Apple Review (2000)

Underlying these rankings are the following results:

       China, Brazil and Austria had the greatest increase in production over the last decade;
       The US and Australia had the smallest relative variability of production;
       Poland and Australia had the highest percent of acreage non-bearing;
       Brazil, Belgium, Japan and New Zealand had the largest percentage of production that is
        new varieties;
       New Zealand and Belgium had the highest yield per hectare; and
       Austria and the Netherlands had the highest density of plantings.


       Hassall & Associates Pty Ltd                                                      Page 10
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Overall, Australia‟s production was well under world‟s best practice. At the time of survey
Australia was beneath the benchmark with regard to densities of plantings, proportion of new
varieties and yield. All three of these factors are currently being addressed by the Australian
industry, but much more needs to be done, and urgently, for Australia to maintain, let alone
improve, its competitive position.

Taking account of other factors in addition to production efficiency (including infrastructure and
inputs, financial and market factors) provides an overall indicator of a country‟s apple industry
competitiveness. Table E2 lists the rankings of overall competitiveness.

Table E2         World Rankings of Overall Competitiveness
                                             Production          Infrastructure &       Financial &
Country                   Overall                       1                    2                   3
                                             Efficiency               Inputs             Markets
New Zealand                   1                    2                      2                  1
Chile                         2                    4                      1                  6
Netherlands                   3                    3                    16                   3
France                        4                    6                      7                  4
United States                 5                  14                       3                  7
Belgium                       6                    8                    12                   2
Austria                       7                    1                    14                  15
South Africa                  8                    5                      6                 14
Argentina                     9                  16                       4                  8
Japan                        10                  10                     15                   5
Australia                    11                  12                       8                  9
Canada                       12                  19                       5                 11
Germany                      13                  11                     11                  12
Italy                        14                  13                     13                  10
Brazil                       15                    7                    10                  17
Source: World Apple Review (2000)
Note:
     1. Production efficiency measures were listed previously.
    2. Infrastructure and input measures include storage adequacy, packing facilities, transport and
       distribution efficiency, marketing effectiveness, availability and cost of suitable land, water
       availability, labour supply and cost of inputs.
    3. Financial and market measures include interest rates, inflation, capital availability, security of
       property rights, product quality control, percent of production exported and average export price.

Overall competitiveness results show:

        Australia ranks above some of its major competitors on the world market, especially
         relative to export market share and total production;
        However, in comparison to key Southern Hemisphere competitors, Australia was ranked
         fifth of six. New Zealand, Chile, South Africa and Argentina are ranked higher than
         Australia, with only Brazil ranked below;


        Hassall & Associates Pty Ltd                                                            Page 11
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       Australia ranks behind Chile, Argentina, New Zealand and South Africa on Infrastructure
        and Inputs; and
       Of the top five producing nations by volume, China, Turkey and Italy were all ranked
        below Australia in terms of overall competitiveness.

To realise the recovery the industry has set out to achieve, Australia requires a renewed focus
on regaining competitiveness relative to our key Southern Hemisphere competitors. In addition
to the goal of enhancing Australian industry‟s export focus, measures in the pipeline to improve
competitiveness include:

       The development and adoption of new varieties and rootstocks within orchards;

       Orchard intensification (i.e. dwarf trees grown on trellis systems with more trees per
        hectare); and

       Greater efforts aimed at improving product quality through the adoption of quality
        assurance-based programs such as Integrated Fruit Production.

Comparison of Cost Competitiveness

In addition to the overall production competitiveness ranking provided in Table E2, a
comparative analysis of on-farm costs reveals:

       Australian on-farm costs per hectare ($5,900/ha) are less than those incurred in South
        Africa ($6,900/ha) and New Zealand ($8,500/ha); however

       On a per tonne basis, Australia compares unfavourably to these key competitors ($380/t
        relative to $182-185/t).

The reason for this outcome is significantly lower average yields in Australia relative to New
Zealand and South Africa. Australia‟s reliance on traditional Delicious varieties lowers our
average yields, as does natural resource factors that favour high-yielding regions such as
Hawkes Bay in New Zealand. As recently planted new varieties mature in place of Delicious
varieties, Australia will improve on-farm cost competitiveness. Orchard intensification is an
important issue for the Australian industry.

Labour cost competitiveness is also important to Australian cost competitiveness. Compared to
many of our competitors, Australia has relatively high labour costs. The greatest potential for
reducing reliance on labour in the foreseeable future will be advances in technology associated
with sorting and grading. Prototype technologies, including in-line blemish sorters, are currently
being reviewed by the Australian industry.




       Hassall & Associates Pty Ltd                                                      Page 12
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Current Industry Activities

Export Market Development

Key apple industry (fresh fruit and juice) export market facts include:

       Tasmania (55 percent of total exports) and Western Australia (19 percent of total exports)
        are the major apple exporting states;
       Fresh apple exports exceeded 32,600 tonnes and $35.8 million in 1999-2000;
       The most important export markets for Australian fresh apples are Malaysia, Singapore
        and the emerging markets on the sub-continent (Sri Lanka, India, Bangladesh). These
        markets tend to be low cost high volume commodity style purchasers;
       Australia has a highly successful Pink Lady variety, fresh apple, export program to the
        United Kingdom. Pink Lady is a high unit value product;
       Exports of high value Gala from Tasmania to Japan have also been successful for the
        Australian industry;
       Juice product exports were 5.7 million litres in 1999-2000 with a free-on-board value of
        $7.8 million; and
       Japan is the most important market for apple juice exports, accounting for 37 percent of
        total exports. Other smaller markets include Hong Kong (15 percent), Singapore (12
        percent) and Indonesia (7 percent).

Despite Australia‟s historic role as an exporting nation, it has been difficult to secure commitment
from producers to supply export markets on an ongoing basis. Shortfalls in domestic production
result in fresh fruit being transferred from export markets to the domestic market. Examples of
this include:
       Transfer of Red Delicious from Singapore and Malaysia in 1998; and
       Transfer of Red Delicious from India in 2001.

Following the transfer of export fruit to the domestic market in 1998, Australia lost market share
in Singapore and Malaysia to China. Although the emergence of the Indian (and other Sub-
Continent) export markets provided a replacement outlet for Australian Red Delicious in
subsequent years, there is a risk that Australia‟s newly won export markets to the Sub-Continent
may be jeopardised by the current transfer of fruit away from export.

The future development of an enhanced export focus within the Australian industry will
encompass:
       Identifying and developing new export markets. In addition to markets in Asia and on the
        sub-continent, markets in the US and China provide potential to emulate the success of
        high value markets in the UK (Pink Lady) and Japan (Gala);




       Hassall & Associates Pty Ltd                                                        Page 13
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       Adequately addressing the decline in opportunities for counter-seasonal fresh apple
        supply into the Northern Hemisphere in the face of improved storage technologies and
        longer-life varieties;
       Enhancing Australia‟s exporting philosophy to encourage commitment to consistent
        supply of export markets, especially during times of domestic production shortfalls, in
        order to retain hard-won export markets; and
       Differentiating Australian juice concentrate exports on the basis of quality. Potential
        points of quality differentiation include clarity, cleanliness, chemical residues and flavour.

Development of New Varieties and Products

Traditional varieties continue to dominate total fresh apple production, although a major shift in
production has occurred in recent years towards newer, high returning varieties (Gala, Fuji, Pink
Lady, Sundowner) at the expense of traditional varieties such as Red Delicious. Last year alone
it was estimated that 20-30 percent of Australia‟s Red Delicious orchards were removed. Figure
E4 lists the share of total Australian apple production by variety for 2000.

Figure E4       Share of Total Apple Production by Variety, 2000 (%)




                                          Other
                                          17%
                                                                Red Delicious
                                                                    28%

                                Fuji
                                6%


                              Gala
                              8%


                       Golden Delicious
                             8%
                                                             Granny Smith
                                        Pink Lady                23%
                                           10%




Source: ABS (2001)




       Hassall & Associates Pty Ltd                                                          Page 14
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Adoption of new varieties by growers has been driven by:

        Shifts in consumer preference towards newer varieties;
        Higher yields being derived from newer varieties relative to older varieties; and
        Shorter post-entry quarantine requirements for imported rootstock and varieties, meaning
         Australian growers can access new international varieties in a more timely manner.

Far from completely replacing traditional varieties, the emergence of newer varieties will allow
Australia to be competitive in markets that demand these new products, whilst retaining both a
domestic and export business in the supply of traditional varieties (e.g. Red Delicious) to
markets that prefer this fruit (e.g. India).

Marketing and Promotion Programs

On an average year, Horticulture Australia Limited (HAL) spends $1.6 million on domestic
promotion and $650,000 on export market development. In 2001, a new domestic promotional
campaign, It’s Crunch Time, was launched. The promotion incorporates a mass media
campaign, public relations activities, research, state promotions and merchandising. The aim of
the campaign is to arrest a decline in fresh apple consumption linked to changes in lifestyle,
consumption of other fruits and competition from snack foods.

In addition to this domestic campaign, promotional campaigns in key export markets (Malaysia,
India, Hong Kong, Indonesia, Singapore and Sri Lanka) are in operation. The "AUSTRALIA fresh"
program is the central platform of much of this export marketing, with efforts aimed at sustaining
the trademark and maintaining its presence in export markets. Worldwide, demand for fresh
apples has been soft since the 1997 Asian currency crisis.

By comparison with other competitor snack food products, there is an under-investment in apple
promotion1. At present the promotion of apples is 1 percent of farmgate value, compared to
highly promoted snack products (e.g. Mars Bars) where the value of promotion is up to 7 percent
of retail product value. Furthermore, the industry has questioned the reliance on generic
promotion when competitors such as New Zealand have switched to product promotion based
on Plant Variety Right protected exports.

In 2000, a joint industry-retailer promotion was undertaken promoting 100 percent Australian
fresh apple juice. Although the promotion led to a doubling of 100 percent fresh Australian apple
juice sales, the distribution of benefits was narrow. Sales of fresh juice cannibalized sales of
long-life shelf product produced by the same company. A more effective campaign suggested
by HAL would be to promote 100 percent Australian juice, rather than concentrating on a single
fruit type. Worldwide demand for apple juice products is driven by consumption in first world
economies. China, India and the balance of the sub-continent have not increased juice
consumption with rising incomes and availability of fresh apples.



1
 However, the level of investment in apple promotion and marketing is similar to other fruit competitors
such as bananas.

        Hassall & Associates Pty Ltd                                                           Page 15
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A major benefit to emerge from combining the activities of HRDC and AHC into one body (HAL)
is that R&D and promotion and marketing activity can be better coordinated. It is important that
the industry make use of HAL to achieve the benefits associated with these changes in the
structure of industry organisations.

Factors Affecting Australian Industry

Effect of Government Subsidies on Competitiveness

Domestic support in competitor countries impacts on the Australian industry in two ways:
        It can greatly affect the market opportunities for Australian product in the subsidising
         country, even if there is relatively open access to markets; and

        It can lead to the generation of surpluses that subsequently compete on world markets
         against Australian product.

Both impacts result in a decline in the competitiveness of Australian products. A recent example
of the size of subsidies offered in competitor countries comes with the US decision to provide
growers with:
      $US100 million in assistance for market losses2; and
      An additional $US38 million for crop losses suffered over the last two years.

Despite being a small player in the world market with limited domestic resources, Australia
combines with other agricultural producers in the Cairns Group to lobby for trade
liberalisation/cessation of assistance in competitor countries. However, on a global scale,
progress on these issues remains slow. One mechanism available to Australia is the World
Trade Organisation Agreement on Subsidies and Countervailing Measures, which disciplines the
use of subsidies and regulates the action countries can take to counter the effect of subsidies.
Globally, the apple industry receives similar levels of subsidy to other comparable industries.
Among OECD countries, Australia and New Zealand provide the lowest levels of support for
agricultural industries such as apples.

Sanitary/phytosanitary restrictions, while lowering the level of trade competition from what it
might otherwise have been, provide essential quarantine protection for an importing country's
domestic industry. The Australian apple industry benefits from Australia's current quarantine
stance in relation to maintaining a high Appropriate Level of Protection (ALOP) against the risk of
apple pests and diseases such as fireblight. On the other hand, phytosanitary measures do slow
the uptake of imported propagation materials essential for industry development.




2
 “Caused domestically by a flood of unfairly priced apple juice concentrate from China and in the export
arena by unfair trade barriers and the recent financial crisis throughout Asia.” (The Fruit Grower‟s News,
2000).

      Hassall & Associates Pty Ltd                                                              Page 16
The Australian Apple Industry Squeeze
Changes to the Structure of the Australian Industry

Over the last few years, the Australian industry has been characterised by:

       Smaller family-farming entities exiting the industry and amalgamation of orchards into
        larger specialised enterprises;
       A greater adoption of newer rootstocks and varieties (as noted above);
       A capital squeeze, limiting the extent to which growers can re-invest in new technologies
        and orchards;
       Financial difficulties for Australian processors, particularly grower cooperatives, in the
        face of competition from low-cost imported concentrated apple juice; and
       Increased concentration of the retail sector (noted below).

Trends that are currently influencing the industry and/or will be an important consideration in
future include:
       Greater adoption of orchard intensification;
       Improved access to new rootstock and varieties as the time required for post-entry
        quarantine falls;
       Varieties with a low, or no, chill factor requirement;
       The continuing emergence of plant variety right protected trees;
       The establishment of sustainable production systems (Integrated Fruit Management);
        and
       The establishment of supply chain cooperatives and other alliances to supply fresh apple
        and juice markets, both domestically and in export markets.

Changes to Retailing Mechanisms for Fresh Produce

Within Australia, concentration of retail outlets into two or three major supermarket chains and a
limited number of large fruit and vegetable barns, is a major issue for apple growers. Growers
claim that they are effectively price takers and that fruit quality is diminished at the wholesale
and retail level as a consequence of failure to maintain the cool chain. Education and
awareness programs to address handling and storage issues have made some inroads here,
however further education and training, combined with retail/wholesale investment in additional
cold storage capacity, is required if apples are to reach consumers in a consistently acceptable
state.

Global trends in fresh produce retailing that either already impact on Australian industry or will do
so in the near future include:
       Supermarket internalisation/control of the supply chain, where supermarkets vertically
        integrate to control the entire fresh produce supply chain;
       Supermarket outsourcing of category management responsibilities, where supply
        responsibility is left to a contracted operator, with explicit specifications to be met;


       Hassall & Associates Pty Ltd                                                         Page 17
The Australian Apple Industry Squeeze
         Movement of European supermarkets into the Asia-Pacific region, bringing with them
          their current suppliers who are often Southern Hemisphere competitors;
         Supermarkets demanding evidence of grower cost structure, so as to justify margins paid
          to growers; and
         The emergence of Internet retailing, although this is likely to represent a small proportion
          of retailing activity for the foreseeable future.

Each of these trends has the potential to create or thwart opportunity for the Australian apple
industry.

Expansion of Global Apple Production and Likely Changes to International Trade Flows
and Market Conditions

Five key trends can be gauged with respect to likely changes to international trade flows and
market conditions:

    i)    Chinese production, which has not yet peaked, will drive further expansions in total world
          production. As a result, Chinese market share of total world fresh apple production is
          likely to expand;
    ii) China will emerge as a major exporter of fresh apples, continuing to be a competitor in
        Australia‟s key Asian markets;
    iii) In the absence of specific trade policy actions, it is unlikely that the price of imported
         concentrated apple juice into Australia will rise in the immediate future. China will be a
         key driver of this market;
    iv) Global trade in both fresh and processed apple products is likely to become even more
        competitive in future. Factors driving this development include:
              o   Excess supply in global markets for fresh and processed products;
              o   Improved storage technology and longer-life varieties will decrease the scope for
                  traditional counter-seasonal supply;
              o   Trade policy developments such as the US anti-dumping decision in effect drive
                  more Chinese CAJ onto world markets; and
              o   Continued liberalisation of global markets (e.g. likely to occur if Chinese
                  accession to the WTO is approved) will continue to free up barriers to trade.
    v) On the domestic front, the degree of influence that international trends have on the
       domestic industry will increase. Examples include the opening of the Australian fresh
       apple market to import competition from Japan3, and possibly other countries in the
       future, as well as future reductions in time required for post-entry quarantine for
       international rootstocks and varieties.




3
 Limited to Fuji apples from Aomori Prefecture only. No apples were imported in 1999-2000. Data not
yet available for 2000-01.

         Hassall & Associates Pty Ltd                                                        Page 18
The Australian Apple Industry Squeeze
Economic Impact of Apple Juice Imports on the Australian Industry

In 1999-00, Australia imported 15.1 million litres of CAJ with an equivalent customs value of
$21.9 million4. This represented a 20 percent increase in volume from the previous year. China
dominates total imports, accounting for 77 percent of volume and 70 percent of value.

Imported Chinese CAJ can currently be sourced in Australia at $1.20 per litre (landed value).
This compares with an estimated cost of around $2 per litre if converters were to source
equivalent domestically produced juice grade apples5.

The economic impact of low-cost imported CAJ on each Australian industry sector is
summarised in Table E3.

Table E3            Economic Impact of Apple Juice Imports

Industry Sector                               Impact of CAJ Imports
Domestic Apple Market                         Domestic prices for juice grade fruit are driven downwards. If
   - Juice Grade Apples                       juice grade fruit is shifted to the domestic fresh apple market (as
   - Domestic Fresh Apples                    is common), the fresh apple market price also declines, as does
   - Export Fresh Apples                      the quality of fruit on this market. Australian apple growers face
                                              lower prices under this scenario. Export markets are isolated
                                              from this impact.
Processors of Australian Apples               Lose price competitiveness. If they are unable to differentiate
                                              their product on quality or country-of-origin, this sector will
                                              decline.
Converters of Apple Juice                     Benefit from low-cost imported CAJ, however competitive market
Concentrate to Retail Products                pressures force cost savings to be passed on to the retail level
                                              (and hence to consumers and retail outlets).
Processor/Converter Conglomerates             Both win and lose, depending upon the relative proportion of
                                              product sourced from the domestic and imported markets. In
                                              time, it is likely that these operators will switch to use of imported
                                              product if they are unable to secure a market advantage from
                                              buying domestically.
Juice Exporters                               Benefit from lower domestic price by increasing international
                                              competitiveness.         Extent of benefit must be weighed in
                                              conjunction with impacts incurred in their domestic market
                                              activities (i.e. depends on how much of their domestic product
                                              uses domestically produced juice grade apples and the extent
                                              that low international prices for CAJ drives down the price of their
                                              own product).
Consumers                                     Benefit, as long as cost savings are passed down the value
                                              chain and quality is not affected.




4
    It is worth noting that Australia exported 5.7 million litres of apple juice with a f.o.b. value of $7.8 million.
5
    Accounts for all processing and mixing costs.

         Hassall & Associates Pty Ltd                                                                        Page 19
The Australian Apple Industry Squeeze
Overall, growers and processors of Australian apples lose from the importation of low-cost CAJ.
All other sectors remain unaffected, benefit or at least have the potential to benefit from
importation of CAJ.

While conclusive data on the cost of production of low-cost imported CAJ was not available
(investigations revealed little specific data exists for Chinese production costs), evidence
suggests that current import prices ($1.20 per litre) may be substantially less than the threshold
level for profitable production incurred by processing companies in China ($2.67 per litre).

Options to Improve Competitiveness Through the Adoption of Best Practice

Options to improve global competitiveness through the adoption of best practice were identified
in the study through stakeholder consultation as well as the analysis and assessment of
precedents in other industries. Each of the elements of the strategy is designed to assist in the
development of an industry-wide export focus, with each grouping of options representing a
critical step required to achieve the goal of enhanced global competitiveness and export focus.
A brief summary of options evaluated is presented in Table E4.

Table E4        Summary of Proposed Strategy and Outline of Options
Element 1:      Business and Production Management Skills and Systems Development
Option Description                      Option Objective
Business Planning/Benchmarking          To enable individual enterprises to improve their financial and
for Growers                             business management by supporting and promoting business
                                        planning skills and systems.
Production Systems Management           To promote the adoption of productions systems that can be
                                        demonstrated to be more sustainable, efficient and respond more
                                        comprehensively to community expectations about the manner in
                                        which consumer goods are produced and labeled.

Element 2:      Enhanced Agronomic and Processing Practices to Improve Efficiency
Option Description                      Option Objective
Enhanced       Variety    Breeding      To enhance returns to the Australian industry through the licensing
Program, Incorporating Product          of new Australian varieties to Northern Hemisphere growers and in
Licensing and Offshore Supply           so doing control the quality of the product, the volume of supply and
Agreements                              therefore the price received on a year round basis.
Improved      Nursery      Material     To promote greater production efficiency by providing Australian
(rootstock and varieties)               growers with access to nursery material of the highest international
                                        quality.
Orchard Intensification                 To promote greater operating efficiency by assisting growers to
                                        undertake orchard intensification, where this is an appropriate
                                        management option.
Farm Labour Training and OH&S           To further increase farm labour safety and decrease farm labour
                                        costs.
Improving      Processing   Sector      To improve the competitiveness and market acceptability of
Efficiency via Technology               Australian CAJ by promoting improvements in processing sector
                                        efficiencies.


      Hassall & Associates Pty Ltd                                                                  Page 20
The Australian Apple Industry Squeeze
Element 3:      Approaches to Handling and Processing that Achieve Improvements in the
                Quality of Product Marketed
Option Description                      Option Objective
Improved Packout (Quality)              To improve packouts or recovery of fresh market apples from the
                                        harvested crop, thereby reducing the quantity of apples diverted to
                                        processing outlets and, in turn, improving grower returns.
Integrated       Cold         Chain     To improve the quality (and market performance) of apples
Management                              available to customers at the retail level.

Element 4:      Market Promotion and Differentiation
Option Description                      Option Objective
Cooperative Supply Arrangements         To enhance market performance by establishing cooperative
and      Enhanced     Focus on          supply arrangements to improve the consistency and reliable
International Markets                   availability of product to domestic and current and prospective
                                        international markets.
Expansion      of   Fresh   Chilled     To expand the domestic fresh chilled apple juice market.
Product
Marketing         Programs        to    To promote the economic returns to the Australian industry by
Differentiate Australian CAJ Based      differentiating Australian CAJ based on quality.
on Quality
Improved Labeling for Australian        To assess the impact of modified labeling to create market
Juice Product                           opportunities for Australian juice producers, by clearly
                                        differentiating Australian product.
Develop a Label to Indicate Apple       To achieve improved market performance by encouraging retailers
Freshness                               to be more conscious of the need to sell only fresh apples and
                                        ensuring customers are aware of the freshness of the product
                                        before they buy and consume.

Element 5:      Exploring New Market Opportunities
New or Value Adding Products            To offset the impact of imported CAJ by identifying and promoting
                                        market diversification opportunities.

Element 6:      Trade Measures
Option Description                      Option Objective
Consider      the    Merit    and       To ensure the integrity of the domestic industry is not undermined
Implications of Preparing an Anti-      by unfair competition from imported CAJ.
dumping Case




      Hassall & Associates Pty Ltd                                                                Page 21
The Australian Apple Industry Squeeze
Summary, Conclusions and Study Recommendations

The study has addressed three key terms of reference, namely to:


       Analyse Australian industry performance against international best practice performance;
       Assess the economic impact of apple juice imports on the Australian apple industry; and
       Develop options to improve industry performance through adoption of best practice.

Comparative Analysis of Australian Industry

The Australian industry currently ranks twelfth on production efficiency and eleventh on overall
competitiveness according to the World Apple Review (2000) which analyses industry
performance for some twenty-seven countries worldwide. Notably, the Australian industry
performance was significantly behind key Southern Hemisphere competitors New Zealand,
Chile, South Africa and Argentina. At the time of data compilation for the World Apple Review,
Australia lagged in terms of best practice on planting density, adoption of new varieties, orchard
yield and infrastructure and inputs. Research as part of this study has revealed major industry
efforts on all three fronts.

Economic Impact of Apple Juice Imports

There can be no doubt from the study that low cost apple juice imports have a serious negative
impact on processors of Australian apples and the price they pay growers for juicing fruit. Apple
juice converters, who make up the bulk of economic activity in the apple juice beverage
production sector, are beneficiaries from low cost apple juice imports. The impact on other
sectors of the industry is less clear-cut. While economic theory would suggest that both
consumers and juice exporters benefit from increased competition and lower input costs, the
extent to which cost savings reach these sectors is unclear. From the limited data uncovered as
part of this study there would appear to be evidence that some imported apple juice is entering
Australia below the cost of production.

Strategy to Improve Industry Performance

The approach suggested to improve Australian industry performance is based on the
development of an industry culture of striving to be globally competitive and more export focused
across all sectors of the apple value chain.

Without a commitment to global competitiveness and the development of an export focus, the
Australian industry will inevitably lose both export market share (particularly to our key Southern
Hemisphere competitors) and domestic market share (as competition with other fruits and,
possibly, imported apples increases over time). Opportunities for the industry to grow in future
will be curtailed unless greater emphasis is placed on exports and marketing of Australian
exports.




       Hassall & Associates Pty Ltd                                                       Page 22
The Australian Apple Industry Squeeze
Elements of this strategy, reflecting critical steps in the process of developing an export focus,
were identified from consultation with study stakeholders. Recommendations for implementation
of options where industry initiatives supported by government programs could facilitate change
include:


       Business Planning/Benchmarking for growers;
       Production systems management;
       Enhanced variety breeding programs, incorporating product licensing and offshore supply
        arrangements;
       Improved nursery material and new varieties;
       Integrated cold chain management;
       Cooperative supply arrangements and enhanced focus on international markets;
       Expansion of fresh chilled product; and
       Marketing programs to differentiate Australian CAJ based on quality.

Government programs that will assist in facilitating the implementation of each option include the
FarmBis Australia Program, the Farm Innovations Program, the AusIndustry R&D Start Program
and the AusIndustry Technology Diffusion Program. The Commonwealth also assists industry
by administering the statutory levies system, by which funds are raised for both R&D and
promotion activities. The Commonwealth provides matching funding for R&D through HAL.

Although industry is currently acting upon many of these options, a greater uptake and
intensification of effort is required in order to achieve the aim of increased global
competitiveness and enhanced export focus. Furthermore, in addition to the specific options
identified above, ongoing efforts must be directed towards core industry initiatives, including
domestic and overseas marketing efforts as well as identification of new export markets.




       Hassall & Associates Pty Ltd                                                      Page 23
The Australian Apple Industry Squeeze
1. INTRODUCTION
1.1      Background
The Australian apple industry is increasingly exposed to developments in the global apple
industry. The recent limited opening of the domestic fresh apple market to import competition6
has accompanied best practice industry developments such as the adoption of new rootstocks,
new varieties and orchard intensification.

In addition, the dramatic rise of the Chinese apple industry to a position of dominance in the
global market has shaped the Australian industry outlook. An increase in the volume of low-cost
imported concentrated apple juice (CAJ) has depressed the domestic market for both growers
and apple processors (as distinct from juice converters, who manufacture using CAJ as a base).
The industry is presently in a position where renewed efforts must be made to develop new
products, processes and marketing arrangements.

1.2   An Overview of the Current State of the Australian Apple Industry
In 2000, total Australian apple production exceeded 319,000 tonnes. The bulk of this domestic
production is sourced from Victoria and New South Wales, whilst Tasmania and Western
Australia supply three quarters of Australian exports. Apple production is centered in distinct
regions across all states. The concentrated nature of the industry in specific regions ensures
that economic and social impacts affecting the industry are greatly magnified in these regional
centers relative to the average impacts incurred across Australia as a whole.

The farmgate value of total domestic production in 1998-99, the most recent available data, was
$266.2m. As a proportion of the total gross value of Australian agricultural production, the apple
industry accounts for approximately one percent of agricultural value7. Despite the small size of
the industry relative to other rural industries, such as the cropping and livestock industries, the
localized nature of production (noted above) ensures that the apple industry is of unique
importance to many regional areas in Australia.

Within Australia, apples are grown for three markets: the domestic fresh apple market; the fresh
apple export market; and the domestic and export processing (juice and peelers) apple market8.
The other significant market that directly affects Australian apple growers is the market for CAJ.

Imports of CAJ have increased from less than 6 million litres in 1993 to in excess of 15 million
litres in 2000. This rapid rise in imported CAJ has been driven by imports from China. China
accounts for 77 percent of the total volume of CAJ imports and 70 percent of total value. The
total value of imports in 1999-00 was $21.9 million.




6
  Limited to Fuji apples from Aomori Prefecture in Japan only. No apples were imported in 1999-2000.
Data not yet available for 2000-01.
7
  Preliminary estimate of the gross value of Australian farm production is $29.5 billion (ABARE, 2000a).
8
  Figure E1 shows that in 1999-00, 215,600 tonnes of fresh apples were diverted to the domestic market,
32,600 tonnes to the export market and 71,4000 tonnes to the processing market.

      Hassall & Associates Pty Ltd                                                             Page 24
The Australian Apple Industry Squeeze
The emergence of China as the most significant importer of CAJ into Australia has mirrored the
rise of China within the global apple market. Chinese apple production increased by 408 percent
over the 1990s, resulting in their share of total production increasing from less than 10 percent to
greater than 33 percent over this time. Similarly, global production and trade in CAJ is
increasingly dominated by China.

The emergence of China as the major international player in the global apple market has
important implications for world trade. In May 2000, the United States International Trade
Commission found that the domestic US industry was materially injured by imports from China of
certain non-frozen concentrated apple juice. As a result, the United States Department of
Commerce placed a 51.74 percent duty on Chinese concentrated apple juice imports (US
Information Research Centre, 2000).

The implications of this US decision for the Australian apple industry are significant. Firstly,
greater volumes of Chinese CAJ are now being re-directed from the US market to the world
market. Effectively this increases the supply of relatively low-cost Chinese CAJ, exerting
downward price pressure on world CAJ prices and making it more difficult for Australian
producers to compete with imported product. Secondly, the success of the US industry in
arguing for anti-dumping measures to be imposed against China establishes this course of
action as an option for other countries such as Australia. Preliminary analysis indicates that
China may well be supplying CAJ to Australia at prices below those considered as threshold for
Chinese processors (see section 3.2.1).

The increasing importance of trade and trade policy within the global apple industry places
renewed emphasis on competitiveness within the global context. The World Apple Review
(2000) ranked Australia eleventh overall in terms of international competitiveness, with sub-
component rankings of twelfth for production efficiency, eighth for infrastructure and inputs and
ninth for financial and market factors. Analysis of cost competitiveness indicates that Australia
has lower per hectare costs of production than key competitors South Africa and New Zealand,
but higher relative costs of production on a per tonne basis once yield differentials are taken into
account.

1.3       Study Purpose
The purpose of this study was to prepare a report suitable for presentation to the Minister for
Agriculture, Fisheries and Forestry and apple industry representatives. The Commonwealth
Department of Agriculture, Fisheries and Forestry (AFFA) commissioned the report and Hassall
& Associates Pty Ltd Economics and Policy completed the report in June 2001.

The report was to provide:

i.    An analysis of current practices within the Australian apple and apple juice industries
      against international best practice; including:

          A comparison of the production efficiency and cost competitiveness of the Australian
           apple and apple juice industries with that of major competitor countries;


          Hassall & Associates Pty Ltd                                                     Page 25
The Australian Apple Industry Squeeze
           A review of current industry activities in export market development; development of new
            varieties and products; and marketing and promotion programs;

ii.    An assessment of the economic impact of apple juice imports on the Australian apple
       industry, including:

            The impact on the fresh market, reduction in demand and price offered for second grade
             apples used for juicing, and the impact on processors who use Australian apples for the
             production of juice; and

iii.   Options for the industry to improve its competitiveness through the adoption of identified
       best practices, including:

            The potential for the Australian industry to differentiate its product in terms of quality.

In undertaking the study it was necessary to consider factors affecting the global environment in
which the Australian apple industry operates, including:

            The effect of government subsidies on competitiveness;
            Continuing changes to the structure of the Australian industry;
            Changes to retailing mechanisms for fresh produce within Australia and internationally;
             and
            The expansion of global apple production and likely changes to international trade flows
             and market conditions.

1.4        Methodology and Report Outline
The study was prepared in four distinct phases, i.e:

           Consultation;
           Industry analysis;
           Option appraisal; and
           Reporting.

Consultation was undertaken to gain the perspective of parties impacted by the import of apple
juice concentrate. It included face-to-face meetings and telephone/fax interviews with apple
growers, apple processors, apple concentrate converters, peak industry bodies such as the
Australian Apple and Pear Growers Association (AAPGA) and the Australian Fruit Juice
Association (AFJA), Horticulture Australia Limited (HAL) and various agencies of government. A
complete list of stakeholders consulted as part of the study is included as Chapter 10.




           Hassall & Associates Pty Ltd                                                            Page 26
The Australian Apple Industry Squeeze
Data gleaned from consultation was combined with the outputs of an extensive literature review
(see Chapter 9, Bibliography) to assist with the completion of industry analysis. An overview of
the domestic apple industry is provided in Chapter 2, which incorporates a review of key industry
activities with respect to industry structure, export market development, marketing and promotion
and research and development. A brief overview of the global apple industry, incorporating key
factors influencing production and processing trends was undertaken in Chapter 3.

Factors affecting the global environment in which the Australian industry operates were
assembled and reported in Chapter 4. Key factors include: the impact of protectionist policies on
competitiveness; changes to retailing mechanisms; and likely changes to international trade
flows and market conditions.

Relevant benchmarking data, including the AAPGA 1997 benchmarking report (domestic
benchmarks) and the World Apple Review (world benchmarks) were evaluated to assess
Australian industry cost and production efficiency. The results of this investigation are reported
in Chapter 5. An industry conceptual model was developed and the impact of CAJ imports on
each industry sector assessed (Chapter 6).

As part of industry consultation, questions were asked about potential options to assist the
industry in the face of competition from imported CAJ. These options together with suggestions
made by the consultant and AFFA are reported and evaluated in Chapter 7. Their relevance and
capacity to be incorporated in existing government initiatives is also reviewed.

Conclusions and study recommendations are reported in Chapter 8.




      Hassall & Associates Pty Ltd                                                       Page 27
The Australian Apple Industry Squeeze
2. DOMESTIC APPLE INDUSTRY OVERVIEW

2.1     Domestic Market Indicators

2.1.1    Production

All states in Australia produce apples. The most important growing regions in each state include
Stanthorpe in Queensland, Orange and Batlow in NSW, the Goulburn Valley and Southern
Victoria, the Huon Valley in Tasmania, the Adelaide Hills in South Australia and the Perth Hills
and the Donnybrook/Manjimup region in Western Australia. Overall, Victoria and New South
Wales are responsible for the bulk of domestic production.

Figure 2.1 shows the major growing regions in Australia.       Figure 2.2 shows each state‟s
proportional share of total production (refer to Table 2.1).

Figure 2.1       Australian Apple Growing Regions




Source: AAPGA (2001)




        Hassall & Associates Pty Ltd                                                   Page 28
The Australian Apple Industry Squeeze
Figure 2.2      Share of Total Apple Production by State (%)



                                                   QLD
                                                   10%
                                             SA
                                                                    VIC
                                             7%
                                                                    31%


                                       WA
                                       13%




                                             TAS              NSW
                                             18%              21%




Source: ABS (2001)
Note: NSW includes ACT

In 1999, there were approximately 1,600 growers and 25,000 hectares allocated for cultivation
within the Australian apple industry. The number of productive apple trees9 expanded slightly
between 1999 and 2000, from 5.9 million to 6.1 million trees (HAL, 2001). The Australian apple
marketing season starts in February and finishes in January.

Table 2.1 lists Australian fresh apple production by state for the period 1992-2000.

Table 2.1       Fresh Australian Apple Production by State, 1992-2000 (tonnes)
                                   1
   Season       VIC       NSW                      TAS      WA             SA       QLD         TOTAL
    1992      105,700    75,500                   50,400   37,400         21,600   25,500       316,100
    1993       97,200    81,000                   54,000   50,400         32,400   28,800       343,800
    1994       94,657    63,336                   54,954   44,579         23,089   26,305       306,920
    1995       98,971    79,267                   57,050   29,898         23,596   27,873       316,655
    1996       78,988    62,335                   52,398   38,200         20,314   28,361       280,596
    1997      118,968    83,324                   55,649   38,218         28,865   28,045       353,069
    1998       94,311    77,580                   46,692   34,173         24,849   31,249       308,856
    1999      107,291    68,175                   62,271   42,219         25,161   29,232       334,353
    2000       98,150    67,038                   57,537   40,665         23,431   32,831       319,652
Source: ABS (2001), AAPGA (2001)
Note:
1. NSW includes ACT



9
 Productive apple trees are defined as being trees aged six years or over. The total number of trees of all
ages in 2000 was estimated at 9.7 million (5 percent under one year, 32 percent aged one to five years
and 63 percent aged six years and over).

      Hassall & Associates Pty Ltd                                                               Page 29
The Australian Apple Industry Squeeze
Overall, for the nine years reported, there is no discernible trend in total Australian production.
Total production would appear to vary in response to the biennial bearing habit of traditional
varieties, rather than a solid trend in industry expansion or contraction. Most varieties of apples
have a tendency to biennial bearing and production in Australia reflects this pattern. Significantly,
Delicious and Fuji varieties are the worst for this bearing habit. Delicious represents about 30
percent of Australian production (see Table 2.2) but is in rapid decline 10. It is therefore expected
that this fluctuation in production will reduce over time as Delicious is replaced by varieties with
more regular cropping habits. The fluctuation of production due to seasonal influences is
relatively insignificant. As will be demonstrated in the chapters to follow, increased stability of
production has the potential to afford Australia a marketing edge, relative to other exporters.

In 2000, total Australian production declined by 4.4 percent. Queensland was the only state to
record an increase in production between 1999 and 200011. The yield of apples declined by 7
percent in 2000 to 52.3kg per tree. Yields are highest in Victoria (59.8 kg per tree), Tasmania
(55.2 kg per tree) and Western Australia (53.4 kg per tree). Yields in all these states as well as
South Australia declined in 2000. Adverse weather conditions (hail, drought and frost) were
identified as affecting growers‟ fruit sets (ABS, 2001).

In 1998-99, the most recent data set available, the farmgate value of Australian apple production
was $266.2m (HAL, 2001). In comparison to other rural industries, the apple industry is a fairly
minor player in Australian agriculture (ABARE estimated the gross value of agricultural
production at $29.5 billion in 2000 (ABARE, 2000a)). However, as illustrated in Figure 2.1,
production is centered in distinct regions, and these regions are far more concentrated than
other rural industries (such as cropping and livestock). Thus the fortunes of the industry have
important repercussions for particular regional centres, with economic and social impacts (both
positive and negative) being magnified in these regional production centers to a greater extent
than the average impacts felt across Australia as a whole.

Varieties Produced and Trends in Development

Australia‟s apple industry has undergone a decade of change in order to meet the changing
tastes of consumers at home and internationally. In an effort to capture premium prices at retail
level, a major shift in production has occurred towards newer, high returning varieties (Gala, Fuji,
Braeburn, Pink Lady, Sundowner) at the expense of traditional varieties such as Red Delicious.
The major varieties on the domestic market now include Gala, Jonathon, Bonza, Red Delicious,
Golden Delicious, High Early, Granny Smith, Fuji, Pink Lady, Braeburn, Lady Williams and
Sundowner. Table 2.2 outlines Australian apple production by variety for 2000.




10
   Significantly, recent grower projections have indicated that production of Red Delicious in Eastern states
this season has declined by up to 40 percent (ABC Rural News, Wednesday 9 May, 2001). This is due to
a combination of trees being replaced with other varieties as well as a low-bearing year in the biennial
production pattern. As a result of reduced supply, the domestic market price for Red Delicious has
doubled (pers. comm., Peter McClymont Chair, TOWAC Fruit Export Cooperative). This has important
implications for export markets and is discussed further in Section 2.2.1.
11
   Production in the ACT also expanded rapidly, however, this is included with NSW for analysis purposes.

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Table 2.2         Australian Apple Production by Variety (2000)
                                                                       Share of Total Production
        Variety            Production (kg)        Yield (kg/tree)
                                                                                  (%)
Red Delicious                 88,257,517                44.1                    27.6%
Granny Smith                  73,514,809                82.2                    23.0%
Pink Lady                     32,774,548                53.8                    10.3%
Golden Delicious              24,251,433                63.1                     7.6%
Gala                          23,917,817                41.7                     7.5%
Fuji                          19,135,748                34.1                     6.0%
Jonathon                       9,988,102                55.2                     3.1%
Ordinary Delicious             8,032,978                57.0                     2.5%
Lady Williams                  7,582,557                54.2                     2.4%
Bonza                          5,692,995                59.6                     1.8%
Sundowner                      5,630,747                51.0                     1.8%
Apples (NEC)                   4,584,234                54.3                     1.4%
Jonagold                       4,365,504                52.8                     1.4%
Braeburn                       3,805,266                41.3                     1.2%
Democrat                       3,120,822                76.6                     1.0%
Sturmer                        1,418,034                50.8                     0.4%
Summerdel                      1,026,647                45.7                     0.3%
Mutsu                            731,862                52.1                     0.2%
Crofton                          563,732                32.1                     0.2%
Akane                            482,417                23.5                     0.2%
Abas                             337,777                29.3                     0.1%
Goldina                          285,415                53.1                     0.1%
Gravenstein                      150,780                26.0                     0.0%
Total                        319,651,741                52.3                     100%
Source: ABS (2001)

Red Delicious dominates total Australian production along with Granny Smith. However, it is
estimated that between 20-30 percent of Australia‟s Red Delicious orchards were removed in the
last season alone (pers. comm., Jon Durham, CEO, AAGPA). Movement away from production
of traditional varieties such as Red Delicious has been particularly strong around Orange and
Batlow in NSW. Reasons for removal of Red Delicious orchards include its poor handling,
storage and colour and more importantly, in response to changes in consumption patterns in the
domestic market, including a consumer switch to newer varieties (pers. comm., Peter
McClymont, Chair, TOWAC Fruit Export Cooperative). Even with these trends to newer
varieties, the Tasmanian industry is still largely dependent on older varieties such as Red
Delicious and Granny Smith. Tasmania is able to continue to rely on Red Delicious due to their
strong export focus and the export opportunities for this variety, traditionally in Singapore and
Malaysia, and more recently in India and other parts of the subcontinent.




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HAL (2001) states that newer varieties have modern flavours and much-enhanced consumer
appeal. In addition, Jon Durham stated that not only are new Australian products superior to
older varieties, but, for instance, Western Australia has an established breeding program in
place that will allow continued innovative development. Pink Lady production continues to
increase nationally. New and young plantings of this variety across Australia are close to
1,000,000 trees (ABS, 2001). Current production of 32,775 tonnes is expected to increase
dramatically over the next 3 to 4 years. Victoria and Western Australia continue to be the largest
growers of Pink Lady producing 13,578 and 8,807 tonnes respectively (ABS, 2001).

Furthermore, the new, next generation variety that will supersede the Pink Lady, “Pink Lady 2”,
will be in the ground in 2002. This variety will be managed by AFFCO (Australian Fresh Fruit
Cooperative) and will have improved attributes (red, sweet and long storage) and will be
released with associated plant variety rights, to ensure the Australian industry receives
maximum return for its new variety investment.

Sundowner production is expected to increase threefold from current production of 5,630 tonnes
in the next couple of years12. Once again, Victoria and Western Australia are the largest
producers of this variety with production of 1,682 and 2,344 tonnes respectively (ABS, 2001).

Despite the dramatic increase in new varieties, there is still a role for older varieties and these
will continue to be grown13. However, it is new varieties such as Pink Lady and “Pink Lady 2”
that will drive the industry‟s future. The World Apple Review (2000) used the percent of
production in new varieties as an indicator of a country's production efficiency and potential to
compete on world markets into the future. The world market is shifting towards a greater
reliance on new varieties and declining dependence on mainstream varieties such as Red
Delicious, Golden Delicious and Granny Smith. Production of new varieties can lead to greater
returns and position a country to be competitive in future global markets. Australia‟s
competitiveness with respect to new varieties is discussed in detail in Chapter 5.

Table 2.3 outlines average domestic wholesale prices for Red Delicious, Granny Smith, Fuji and
Pink Lady. Data is provided for 1996-97 to 1999-00 and is sourced from NSW Agriculture based
on returns from Flemington Markets in Sydney.

Table 2.3      Average Wholesale Domestic Fresh Apple Prices
       Year             Red Delicious       Granny Smith              Fuji              Pink Lady
                        ($/18kg pack)       ($/18kg pack)         ($/6kg pack)         ($/6kg pack)
    1996-97                 $26.79              $25.27               $36.26               $13.80
    1997-98                 $16.55              $13.46               $23.69                 $9.45
    1998-99                 $23.06              $19.73                   na                    na
    1999-00                 $15.78              $15.98               $26.08               $13.96
Source: NSW   Agriculture (2001)



12
  There are currently 350,000 young trees maturing in Australia.
13
  Tasmanian exports of Red Delicious are an excellent example of the important role such varieties have
within the industry.

      Hassall & Associates Pty Ltd                                                            Page 32
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Table 2.3 shows that prices for newer varieties (Fuji and Pink Lady) have consistently exceeded
those received for older varieties (Red Delicious and Granny Smith) over the last five years. In
2001, Red Delicious prices have improved markedly, in response to lower domestic production
in the eastern states (as discussed previously).

Nature of the Australian Industry

Australian apple production is driven by small family farms, with few corporate entities involved.
Packing is also usually undertaken by family-owned packing-houses, with little corporate
involvement14. Some larger family owned operations are vertically integrated to the extent that
they own production through to the retail sector, including wholesaling and distribution. Others
have used backwards vertical integration through to nursery production of tree stock to diversify
their interests across the value chain (pers. comm., Jon Durham, CEO, AAPGA).

Apple production has undergone significant structural adjustment in the last two years. The
result of this process is that the viability of smaller farms is now under pressure and the number
of producers operating smaller enterprises of this size is declining. For instance, the number of
growers in the Orange district has fallen from approximately 360 to 100 in the last few years
(pers. comm., Ross Capobianco, Australian Country Orchards, Orange). This industry
adjustment has been characterised by the amalgamation of small family farming enterprises and
even larger enterprises finding viability difficult under the present operating environment.
Whereas some larger growers have bought extra properties in order to achieve economies of
scale to increase competitiveness, others have been sub-dividing existing properties and selling
part of their holdings in order to raise capital to enable the rest of their operations to continue.

Some industry participants have stated that these industry trends will result in fewer growers,
fewer processors and a loss of young people returning to the industry. There is a fear amongst
some growers that there will be a loss of skilled labour from the industry. Reports were received
of properties where in the past there were four or five permanent employees on a medium sized
operation yet now there are none. As the industry adopts intensive production systems there will
be a slight but significant reduction on the reliance on labour in production. The greatest
potential for reducing reliance on labour in the foreseeable future will be in advances in
technology in sorting and grading of the fresh market product. In-line blemish sorters, when
perfected, will have the potential to significantly reduce labour requirements (pers. comm.,
Ron Gordon, Batlow Fruit Cooperative). Compared to many of our competitors (e.g. Chile,
China), Australia has relatively high labour costs. Technological improvements that decrease
the reliance on labour within the industry will help improve our international competitiveness.

Another pressure on the industry, as with all other agricultural industries, has been the fact that
input costs are rising faster than commodity prices and productivity gains. Figure 2.3 illustrates
the index of prices paid by (all) farmers in Australia over the last two decades.




14
  Although increasing sophistication in packing has decreased the extent to which traditional growers still
undertake this role. Co-operative packing arrangements amongst growers are becoming more prevalent.

      Hassall & Associates Pty Ltd                                                               Page 33
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Figure 2.3                                Index of Prices Paid (Input Costs)




                            120
     Index of Prices Paid




                            100
                            80
                            60
                            40
                            20
                             0
                                  82/83

                                          83/84

                                                  84/85

                                                          85/86

                                                                  86/87

                                                                          87/88

                                                                                  88/89

                                                                                          89/90

                                                                                                  90/91

                                                                                                          91/92

                                                                                                                  92/93

                                                                                                                          93/94

                                                                                                                                  94/95

                                                                                                                                          95/96

                                                                                                                                                  96/97

                                                                                                                                                          97/98

                                                                                                                                                                  98/99

                                                                                                                                                                            99/00
                                                                                                      Year

Source: ABARE (2000a)
Note: Base Year, 1997-98 = 100

The index of prices paid is expected to increase at a faster rate over the next few years if
inflationary pressures increase. In addition, the impact of rising costs is further exacerbated by a
low Australian dollar, and resultant higher machinery and chemical costs, although export apple
price gains offset increased input costs to some extent. Most apples being sold on the domestic
market do not enjoy this price windfall15.

As with any industry that is experiencing a downturn, the banking sector is somewhat nervous of
the apple industry at present. Long-term lending decisions are being put on hold, with 12 month
financing being favoured. Investment in orcharding has a 5-8 year program to reach breakeven
point, therefore uncertainty with respect to financing options places additional pressure on
growers when facing investment and re-investment decisions (pers. comm., Bob Domato, apple
grower, Orange).

In competing countries, orchard intensification has been a significant trend within the industry in
recent years. Whereas growers around the world have been planting high-density orchards for
many years, Graham Fleming notes that only a limited number of Australian growers are utilising
these world recognised orchard systems (Fleming in Pome Fruit Australia, March 2001). The
main drivers of the trend towards orchard intensification overseas have been:

                             Earlier bearing varieties result in a better return on investment;
                             Earlier bearing orchards allows earlier adopters to capture the premium prices available
                              for new varieties;
                             Improved recovery of marketable fruit (i.e. better packouts16 because of superior quality
                              fruit grown on physically smaller trees);
                             More efficient use of labour (i.e. much less ladder work results in overall reduction in
                              costs); and

15
     Approximately ten percent of the Australian apple crop is exported each year (ABARE, 2000b).
16
     Packout is the percentage of class one (or better quality) fruit that can be packed from a bin of apples.

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         Efficiency gains in pest and disease control leading to lower costs.

The downside of more intensive orchard systems is the significant increase in capital
requirements at planting and integrating machinery used for traditional and intensive plantings
(i.e. narrower tractors and mowers etc (it is not practical to have different machinery for different
planting systems)). Production risks (weather-related) are also higher with intensive systems
because of higher capital requirements (pers. comm., Ron Gordon, Batlow Fruit Cooperative).

In the face of these international trends towards orchard intensification, Australian industry has
lagged in the adoption of more profitable intensive apple production systems. Factors that
constrained orchard intensification in Australia in the past include:

         Limited capital17;
         Low availability and quality of nursery stock – this still remains an issue, but has
          improved over the last 5 years;
         An historical lack of import competition (this is changing at present and is discussed in
          more detail below);
         A perception by growers that Australia has less fertile soils than Europe and America,
          thus we are not able to support the same level of intensification;
         Production in warmer climates using intensive systems can result in greater losses due to
          sunburn - this can be a problem when trees are 2-3 years old. However, there are
          management practices available to reduce this risk;
         The fear of susceptibility of currently available dwarfing rootstocks to Woolly Apple Aphid
          (WAA). Semi-intensive rootstocks are resistant to attack by this insect. This issue will be
          of less concern as the industry progresses toward adoption of Integrated and Sustainable
          Fruit Production. So far, control of WAA has not been any more difficult on intensive
          systems than on traditional plantings, although some pundits claim it is too early to tell.
          Much of Australian production occurs in climates hotter than experienced in Europe and
          USA resulting in more generations of the insect – hence potentially greater risk;
         Age structure of industry participants – aging producers and reluctance to change; and
         The difficulty associated with making the transition to intensive plantings because of
          differing machinery requirements. Machinery requirements for intensive plantings may fit
          semi-intensive (traditional) systems, but not vice versa.

Despite the state-of-play in the past, the Australian industry is presently experiencing a trend
towards intensification of orchards. The industry is also starting to recognise the need to
specialise in area-specific varieties18 (pers. comm., Jon Durham, CEO, AAPGA). Both of these
recent trends demonstrate that the industry has recognised past shortcomings, and is presently
seeking to address these areas of concern. Such actions will assist in improving Australia‟s
production efficiency and international cost competitiveness in the future.

17
   Reductions in capital reserves for many growers in recent years due to tough domestic market
conditions have limited the extent to which some growers have been able to re-invest in new varieties.
18
   Traditionally, producers planted multiple varieties and fruit types, including stone fruit.

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High-density plantings dramatically increase production efficiency and profit. Whilst in Australia
it takes five years to breakeven on an orchard, in Italy breakeven can be achieved in 3.5 years
(pers. comm., Jon Durham, CEO, AAPGA). Obviously, the return on capital (Net Present
Value19 (NPV)) is greatly improved when returns are generated earlier. In addition, technology
that allows breakeven to be achieved earlier allows growers to more readily adapt to changes in
market preferences, as they are able to produce trees that bear fruit more quickly and they are
able to replace such trees with new varieties to meet consumer needs if required.

Gordon (1994) undertook a comparative analysis of intensive production systems (commonly
used in Europe) relative to semi-intensive production systems (commonly used in Australia).
Gordon‟s conclusion was that intensive production systems were considerably more profitable
than semi-intensive systems. Analysis of gross margins for each form of production revealed
that the gross margin associated with intensive production was 43 percent higher than that
achieved under a semi-intensive production system. In terms of NPV, the intensive production
system yielded an NPV of $115,569 over a 12-year period, compared with a semi-intensive NPV
of negative $208,04320. The major cause of this difference is the assumed higher yield and
packout of the intensive production system (Gordon, 1994).

Intensive production also yields a much more favourable cash flow. Gordon (1994) noted that
production was more profitable under an intensive system due to:

         Higher yields being produced earlier;
         High and more assured maximum yields21;
         Higher average packout or quality; and
         Lower unit production costs, through savings in pesticide costs and labour efficiencies in
          managing small trees.

Improved profitability under an intensive system occurs despite the greater costs associated with
trees and trellis and higher tree management costs (tree training and pruning) in the initial years.
Despite these relative levels of profitability, growers must keep in mind that a key factor in the
investment decision is that there is a greater capital investment per hectare associated with
intensive production. The cost of replanting to a high-density orchard is between $10-$12 per
tree, plus capital costs like trellising (pers. comm., Ross Capobianco, Australian Country
Orchards, Orange).

Access to new rootstock and varieties is another important issue for Australian growers. There
is a perception within the industry that the quality of nursery trees produced by the Australian
nursery industry is significantly poorer and more expensive than trees available in North America
and Europe. The consequence of this is that there is a delay in production and hence a reduced
return on investment.

19
   Net present value is the sum of the discounted project benefits less discounted project costs. Using
NPV as a form of investment decision criteria, a project is potentially worthwhile (or viable) if the NPV is
greater than zero. Where projects are mutually exclusive, the project with the highest NPV would be
chosen (NSW Treasury, 1997).
20
   Based on an orchard size of 10 hectares. Assumes 800 trees/ha for semi-intensive and 1,667 trees/ha
for intensive apple production.
21
   With the option of using hail netting as a risk management strategy.

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It was stated that there are too many domestic varieties, which causes confusion amongst
growers, and also that the quality of many domestic varieties was deficient relative to
international varieties. However, access to international varieties is constrained to the extent
that quarantine restrictions result in waiting periods of three-to-four years for access to new
rootstocks22.

The Australian Pome Fruit Improvement Program (APFIP) is helping to address the problem of
the length of time foreign rootstocks and varieties must stay in quarantine. Gary Langford
(National Coordinator, APFIP Pty Ltd) indicated that by January 2002 a new protocol would be in
place that reduced the length of time required in quarantine from four years to fifteen months.
He stated that over a time period of three-to-five years, given sufficient research, verification and
diagnostic testing, the post-entry quarantine period could be reduced to six months. This
process would involve collaboration with both New Zealand and the United States (pers. comm.,
Gary Langford, APFIP Pty Ltd).

Benefits associated with reducing the time required for post-entry quarantine include:

         Increasing domestic industry security against fire blight via improved (active) testing;
         Faster access to better international varieties for the nursery industry and growers; and
         More efficient quarantine that will reduce the incentive for materials to be smuggled into
          Australia.

Linked in to the issue of access to rootstocks is the role that plant variety rights (PVR) will play in
future with respect to the commercial release of rootstock and varieties. Many growers believe
that in future, varieties, and to a lesser extent rootstocks, will be released with plant variety rights
attached, a situation that will constrain growing options and have negative consequences for
grower profitability. Jon Durham (CEO, AAPGA) notes that PVR will allow plant breeders to
maintain exclusivity and therefore control supply, in effect leading to “closed loop marketing
arrangements”. A likely characteristic of this trend towards the introduction of commercially
owned varieties is that the varieties will be “sold” to growers under contracts that secure
ownership of the fruit but transfer production risk to producers23.

A new industry development to emerge in recent years has been the trend towards breeding
varieties that do not require a chill factor (historically, apples have required a chill factor to
bloom). These new varieties have allowed apple production to move from traditional cold
country areas to warmer environs (including areas such as Renmark and the Riverlands of
South Australia and Menindee, NSW). These warmer environs allow fruit to be marketed earlier
when supply is low, thereby extracting a premium for this supply24. This is beneficial for
individual growers that are able to take advantage of this opportunity, however there is a
perception that the whole industry may suffer somewhat from this occurrence as the early

22
   In effect, this has meant that in the past there has been little international competition for the domestic
nursery industry. As noted below, this situation is currently changing.
23
   Growers contacted during the study complained of the prospect of ending up as “peasants” controlled by
the PVR owning company.
24
   If Australia had strong import competition on the domestic market, this early season price premium may
not exist.

         Hassall & Associates Pty Ltd                                                               Page 37
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season apples do not have as good eating quality (they are often characterised by soft fruit) as
traditional new season apples do, and this may dampen demand prior to the arrival of traditional
new season apples. However, given that this trend to new growing regions appears to be in
response to market conditions, it is questionable as to whether market intervention to inhibit the
emergence of new, “new season fruit”, would provide economic benefits to the Australian
economy.

The Australian industry is characterised by excellent pest and disease management and
chemical use and management, being a leader in the use of integrated pest management (IPM).
The beginning of this was integrated mite control (IMC) where predatory or beneficial mites were
used in association with miticides to control pest mites. An extension of this was the use of
insect phenology models and pest monitoring with action thresholds to accurately predict the
most beneficial time to apply pesticides. Codling moth control is one such example. A further
development was the use of mating disruption (MD) to control codling moth. MD involves the
use of a synthetically produced copy of the natural female pheromone given off by the female to
attract the male during courtship. Dispensers carrying this pheromone are placed extensively
throughout the orchard. This continuous and season long fog of female pheromone confuses
the male and mating does not occur. This in effect prevents further generations of the moth for
the season. MD is now widely adopted by industry and has significantly reduced the reliance on
insecticides. MD products for other insect pests are under development (pers. comm., Ron
Gordon, Batlow Fruit Cooperative).

Australia‟s clean and green image is another industry strength, although this Australian
comparative advantage is being eroded by the development of Integrated Fruit Production (IFP)
certification by Southern Hemisphere competitors. IFP incorporates environmental sustainability
with integrated pest management.

Production of Processing Grade Fruit

Processing grade apples are a bi-product of fresh market production and occur because
consumers expect and demand perfect looking fresh market apples. Apples are downgraded to
processing grade due to excessive blemish, which include russet, pest and disease damage, hail
damage, poor colour and bruising. Even those orchards with the highest levels of production
efficiency have some second and processing grade fruit25.

Table 2.4 lists the volume of production for processing by state for 1999-00.




25
   Second grade fruit is an intermediate grade between first grade and processing grade. Second grade is
often packed in cheaper packaging such as fibreboard bins and sold in lower priced markets. Up until 2 to
3 years ago, there was a viable market for such quality. However, this market has almost vanished now
except for the higher value varieties such as Fuji and Pink Lady. Most second grade fruit is now diverted
to processing; either juice or the peeler market. The peeler market is sliced, or pulped apple use in pies,
baby food etc.

      Hassall & Associates Pty Ltd                                                               Page 38
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Table 2.4      Volume of Apple Production for Processing by State (1999-00, kg)
 State                                   Volume of Apple Production for Processing (kg)
 Victoria                                                29,000,239
 New South Wales                                         15,179,905
 Tasmania                                                11,596,936
 Queensland                                               6,958,771
 Western Australia                                        6,694,771
 South Australia                                          2,010,639
 Australia                                               71,441,261
Source: (ABS, 2001)

The bulk of apple production for processing is derived from Victoria, NSW and Tasmania. This
approximately reflects the relative shares that these three states have of total apple production.
Victoria accounts for 31 percent of total production and 41 percent of processing production,
NSW 21 percent of each measure and Tasmania 18 percent of total production and 16 percent
of processing production.

There are differing views on the returns derived from juice grade fruit. Some industry
commentators believe that growers should accept that returns for low-grade fruit will never be
large arguing that it is a low-value bi-product and that any returns should be accepted as a
bonus. Under this approach, business plans and enterprise budgets should be completed
assuming low or no returns for juice apples. However, under a modern approach to enterprise
planning, “bi-products” are regarded as “co-products” and the grower should seek maximum
returns from all outputs.

Furthermore, many growers and industry players claim that a functional market has always
existed for juicing apples and as such they would at least like the returns for juice grade fruit to
cover the costs of picking. Growers argue that juice apples put a floor in the fresh apple market
price and keep poorer apples off the fresh apple market. The „floor price‟ works to the extent
that fresh apples are of a higher quality than juice apples, and can therefore extract a price
premium that will exceed the juice apple price. Historically, buyers of eating fruit know that they
must offer more than the juice apple price to secure supply of higher quality fresh apples.
However, if there is little or no demand for juice apples (as has occurred in recent years), a fresh
apple buyer can drive the price paid to growers to something approaching the cost of production.
Section 6.3 further outlines the interactions between the fresh apple market and the juice apple
market.

There is a perception among producers that when processing (both juice and peeler grade)
prices are adequate and cover the handling costs, the tendency for producers/packers is to
divert more apples to processing so as to maintain a better fresh market pack and in so doing,
improve the return on fresh markets. Conversely, when processing grade prices are poor they
believe that more inferior quality apples find their way into fresh market packs, hence lowering
overall returns for fresh fruit (pers. comm., Ron Gordon, Batlow Fruit Cooperative).




      Hassall & Associates Pty Ltd                                                         Page 39
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Although the return on juice grade fruit is low, it is generally considered by growers that it is
better to get some return on this fruit rather than nothing at all, or worse still, having to pay to
discard the product (pers. comm., Kevin Baddiley, President, AAPGA). Also, growers do not like
to leave fruit to rot because of the risk of disease build-up. The decline in prices for juicing grade
fruit and fruit destined for processing has resulted in the cost to get fruit to a processor or
wholesaler costing more ($13/case) than what is returned to the grower (typically $10 or $11 a
case).

2.1.2     Processing and Converting

There are two main categories of participant within the Australian juice processing industry:
converters and processors. Converters do not deal directly with apples, rather they modify
concentrated apple juice in preparation for retail sale. Converters represent the bulk of domestic
juice production activity. Where product is not highly differentiated, as in the case of retail apple
juice, converters prefer lower input costs and utilise low cost imported CAJ. Processors on the
other hand, produce either fresh juice or CAJ from whole Australian apples. They account for a
much smaller share of the domestic processing market and compete directly with imported CAJ.
Chapter 6 provides expanded detail on how each of these participants is affected by the
importation of CAJ.

The major factor affecting the domestic processing industry in Australia at present is the
emergence of China as a major exporter of CAJ (see Table 6.1). The rise of China as a major
player on the world trading market for CAJ has resulted in landed prices for imported CAJ in
Australia declining significantly in recent years as oversupply on world markets has driven down
world price. This decline in the price of imported CAJ has highlighted the decision that domestic
converters currently face: whether to source low-cost imported CAJ or to utilise supply of more
expensive domestically produced juice grade apples. The choice is a straight-forward one for
converters if they do not seek to differentiate their product on a price-driven retail market.

At present, imported Chinese concentrate can be sourced in Australia for $1.20 per litre (landed
value, pre local clearance duties). If converters were to source domestically produced juice
grade apples, it is estimated that it would cost around $2 per litre once all processing and mixing
costs are taken into account26 (pers. comm., Vitesh Patel, Fruitmark, Melbourne).

The Australian apple processing sector consists of one large player (>10,000 tonnes crushed
per annum), nine medium-sized operators (less than 10,000 but more than 5,000 tonnes
crushed per annum) and a number of smaller operators (<5,000 tonnes crushed per annum).
Combined, it is estimated that these processors crush approximately 55,750 tonnes per
annum27. It is estimated that processors account for approximately 10 percent of the entire
market, with the bulk of activity undertaken by juice converters and converter/processor
conglomerates.




26
     Assumes domestic growers are paid approximately $100-$120 per tonne for juice grade apples.
27
     Estimate derived based on discussions with industry sources.

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Australian apples are processed for a limited, boutique fresh apple juice market and, more
importantly, to be used concentrated and as blends with imported concentrated apple juice.
Five percent of processed production is marketed and sold as cold and fresh all Australian juice
whilst 95 percent of production originates from CAJ. The majority of processors produce blends
because inputs are cost effective, and historically, Australian production was not available all
year round.

Graeme Dray from Appledale (Orange, NSW) says that survivors of current import prices will be
multi-fruit processors. These are the big operators who process multiple varieties, can fruit and
produce other manufactured goods. Graeme Dray claims that there is no room for boutique
operations like Appledale under current market conditions. It is too difficult to compete with
converters who source low-cost imported CAJ (pers. comm., Graeme Dray, Appledale, Orange).

2.1.3    Consumption

There is limited up-to-date consumption data available within Australia. Apparent annual
consumption of apples in Australia fell from 16.6 kilograms per person in 1989/90 to 13.5
kilograms in 1996/97. This decrease in domestic consumption has been attributed to a low
advertising budget for fresh apples and an increased availability of competitively priced
substitutes (ABARE, 2000b).

HAL (2001) lists a number of pertinent points with respect to apple consumption. Apples are
notoriously difficult for consumers to select. Quality varies considerably at the retail level and
consumers are often unaware of when various varieties are at their best. Also, HAL (2001)
found that the price relationship between apples and bananas has a strong bearing on consumer
choice.

Over the last decade, competition between fruits has grown within the fresh produce sector. In
this period most retail chains increased product lines, both fruit and vegetables, by
approximately 30 percent. This provides the consumer with a wider range of product choice,
effectively increasing the competition for the consumer‟s dollar. Given the high degree of
substitutability of fruit (relative to vegetables, that are often purchased as complements), the
importance of ensuring product has excellent quality is paramount. However, as noted later, the
quality of apples at the retail level is often perceived to be less than it would be, if proper
handling and storage techniques were adopted. This issue is discussed in detail in section
4.1.3.

Consumers of fresh fruit are becoming more discerning, demanding safe, healthy, better quality
products with greater product differentiation and reliability of supply that meets consistent quality
specifications. Consumers are eating on the run and therefore purchasing and consuming food
away from the home, where fresh apples are less acceptable. In response to this trend,
supermarket chains are attempting to use their buying power to be more demanding of food
suppliers. Competitive prices, electronic data exchange, contractual supply alliances, third party
assurances on the quality of delivered product, as well as rigorous internal processes (allowable
chemicals, notification of presence of genetically modified organisms) are just a few of the
increasing demands placed on growers by supermarkets (World Apple Review, 2000).



        Hassall & Associates Pty Ltd                                                        Page 41
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Retailers benefit from these greater demands, as do consumers (as they have greater
information with respect to product quality, so long as retailers do not increase prices to exact a
premium for this improved information). However, such demands place additional resource and
cost demands on producers. Often times these additional costs are not reimbursed by retailers.

In addition, Australian apple producers are now experiencing some international pricing
competition for fresh apples28. While Japanese access to the Australian market for Fujis is not
likely to have a significant market effect29, there are other international suppliers who in time may
gain access, making brand loyalty for “Australian” produce vital 30 (HAL, 2001). Further
discussion of marketing and promotion activities aimed at increasing Australian apple
consumption is provided later in this chapter.

2.1.4     Summary of the Industry Profile

Our analysis of the Australian apple industry has revealed that:

         Australian apple production in 2000 was 320,000 tonnes. Victoria and NSW account for
          approximately 50 percent of total production;
         In 1998-99, the most recent data set available, the farmgate value of Australian apple
          production was $266.2 million;
         Red Delicious and Granny Smith account for in excess of 50 percent of total production.
          However, in response to market trends, new emerging varieties such as Pink Lady,
          Sundowner and Gala are increasing their share of total production at the expense of
          traditional varieties;
         Smaller family-farms have been exiting the industry in recent years as structural
          adjustment occurs in the wake of lower grower returns. In future, competitive growers
          will adopt orchard intensification techniques and use new rootstocks and varieties;
         In 1999-00, in excess of 71,000 tonnes of apple production was used for processing.
          Victoria (41 percent) and NSW (21 percent) account for the largest proportion of
          processing volume;
         Converters and processor/converter conglomerates dominate the processing sector,
          accounting for up to 90 percent of total activity. Converters blend CAJ that is sourced
          either locally or imported, while processors utilise Australian juice grade apples to
          produce CAJ or fresh juice; and
         Imported CAJ can be sourced for $1.20 per litre (landed value). To source equivalent
          domestic product costs up to $2.00 per litre.



28
   Until recently, Australia had an insulated domestic market due to our phytosanitary requirements, which
protect domestic industry against pests and diseases such as fire blight. Currently, Japan is the only
nation that has access to Australian fresh apple markets, having satisfied the phytosanitary criteria for
entry. This process involves an application by a country to export a commodity to Australia and a
subsequent pest- and disease-risk analysis undertaken by Biosecurity Australia. This analysis determines
whether the risk to plant, animal and human health from pests and diseases is low enough for imports to
proceed. Often, conditions are imposed on the imports.
29
   There were no imports in 1999-00. Data for 2000-01 is not yet available.
30
   Other countries that seek access to Australian fresh apple markets will need to complete a pest- and
disease-risk analysis in accordance with the established IRA procedure, similar to that undertaken by
Japan for Fuji apples.

         Hassall & Associates Pty Ltd                                                           Page 42
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2.2       Review of Current Domestic Industry Activities
The following section provides an overview of the current domestic industry activities that are
influencing the Australian apple industry. Activities include export market development,
marketing and promotion programs and research and development.

2.2.1      Export Market Development

Fresh Apple Export Market

The fresh apple export market is described in terms of:

          Australian production areas;
          The history of exporting in Australia;
          Domestic bodies that facilitate export activities;
          Australia‟s current export markets and trends in these markets; and
          Future trends likely to influence export markets.

Australian Production Areas

Within Australia, the main apple export producing regions are Tasmania and the
Donnybrook/Manjimup area in Western Australia. State level export data reveals that exports
from Tasmania tend to be into bulk produce, lower value markets whilst those from Western
Australia tend to be to higher value markets. In 1998-99, 55 percent of the volume and
47 percent of the value of Australian fresh apple exports came from Tasmania. It is believed that
Tasmania‟s freedom from pests such as fruit fly contributes to it‟s export dominance (ABARE,
2000b). Western Australia is the next largest exporter of fresh apples accounting for 19 percent
of volume and 25 percent of value. One example of Western Australian exports is the Pink Lady
export program to the United Kingdom that was based on a premium priced new variety
exported to a discerning market. The trademark of this variety is owned by the AAPGA who
receive a royalty payment from each box wholesaled. Strict quality control is enforced in this
important, high-value market.

History of Exporting in Australia

The Australian industry has a history of exporting. Prior to the early 1970‟s, Tasmania was a
major supplier to the United Kingdom (UK). With the loss of access to the UK market on its
entering the European Economic Community (EEC) in the early 1970‟s, along with the failure to
find alternative markets, the domestic industry was plunged into over-production. Following this,
the Federal Government introduced a national tree-pull scheme and the industry was soon
under-supplied. From the early 1970‟s to recent years, the industry has had a domestic market
focus. The development of new varieties including Pink Lady, Sundowner and to a lesser extent,
Fuji, has seen a revival of interest in exporting.




          Hassall & Associates Pty Ltd                                                  Page 43
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Despite Australia‟s historical role as an exporting nation, it has been difficult to secure
commitment from producers to supply export markets on an on-going basis. When domestic
prices rise above export prices, suppliers divert their fruit to the domestic market31. The only
exception to this generalisation is the Pink Lady and Sundowner program to the UK and the
Tasmanian Fuji program to Japan and Taiwan (pers. comm., Ron Gordon, Batlow Fruit
Cooperative).

Domestic Bodies that Facilitate Export Activities

Export market development was coordinated through the former Australian Horticultural
Corporation (AHC); Horticulture Australia Limited (HAL) now undertakes this role. HAL work
with AAPGA, AusTrade, the Department of Foreign Affairs and Trade (DFAT) and AFFA to gain
access to and develop export markets such as Tasmanian apples into Japan. AFFA plays a role
in helping to set horticultural export market access priorities both through the Horticulture
Industry Market Access Committee (HMAC) and in DFAT‟s Market Development Task Force
(MDTF). Also within AFFA, the role of Biosecurity Australia (BA) is important, as it conducts
technical negotiations with our trading partners on Sanitary and Phytosanitary (SPS) issues, in
both opening and maintaining market access for Australian produce, including apples.

Current Export Markets and Trends

Between 10 and 12 percent of Australian production has been exported over recent years
(ABARE, 2000b). Although this is a small amount compared to some other apple producing
countries, production in the Southern Hemisphere fills a counter seasonal supply requirement in
the Northern Hemisphere.

Australia historically exports between 1.2 and 1.5 million cartons of fresh apples. Apple exports
peaked in 1997-98 at 35,400 tonnes with an estimated value of $38 million. Malaysia
(29 percent in 1999-00) and Singapore (16 percent) are the leading export markets for Australian
produce. Table 2.5 shows the volume and value of Australian fresh apple exports by destination
market for 1999-00.




31
     This point is discussed in more detail below, with specific reference to exports to India in 2001.

         Hassall & Associates Pty Ltd                                                                     Page 44
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Table 2.5      Volume and Value of Fresh Apple Exports by Market, 1999-00

Country of destination                       Volume (kg)                       Value ($000’s)

Malaysia                                       9,455,363                            $8,360
Singapore                                      5,086,942                            $4,904
Sri Lanka                                      3,701,466                            $3,301
India                                          2,940,575                            $2,703
Bangladesh                                     2,096,235                            $1,899
Taiwan                                         2,094,053                            $3,392
United Kingdom                                 1,687,764                            $4,709
Hong Kong                                      1,397,282                            $1,488
Indonesia                                      1,201,501                            $1,387
Papua New Guinea                                 531,108                              $611
Fiji                                             411,583                              $416
Other                                          2,004,904                            $2,604
TOTAL                                         32,608,776                           $35,774
Source: ABS (2001)

Between 1998-99 and 1999-00, the volume of Australian exports increased by 27 percent and
export value by 15 percent. Expansion in the volume and value of Australian exports was largely
a result of a low Australian dollar, a depressed domestic market and a number of well-targeted
promotions. Strong growth occurred in Hong Kong, Japan, Indonesia, Sri Lanka, India and
Bangladesh, the last two experiencing a 6,240 percent growth on exports in 1999 (HAL, 2001).
However, the growth in export volume was not matched by grower returns per carton, which
increased only 10.5 percent (HAL, 2001).

Despite Malaysia being our major export market, Australian market share declined from 25
percent in 1997 to 12 percent in 1999, whilst at the same time, China‟s market share increased
from 16 to 44 percent32 (HAL, 2001). The catalyst for this outcome was a poor domestic season
in Australia in 1997. Faced with a shortage of supply on the domestic market, Australian
producers re-directed exports of Red Delicious apples that traditionally went to Singapore and
Malaysia to the more profitable domestic Australian market. The Singapore and Malaysian
market slack was subsequently captured by China (Fuji) and New Zealand (Galas)33.

The repercussions of this event for Australian exporters were enormous. In 1997, Singapore
and Malaysia represented a market where Red Delicious captured 90 percent market share
(pers. comm., Kevin Baddiley, President, AAPGA). By 1998, following capture of this market by
Australia‟s competitors, the share devoted to Red Delicious had declined to 30 percent and in
2001 it is estimated this market now comprises 25 percent Brayburn, 25 percent Jonagold and
50 percent Fuji.

32
   Three of our most important competitors also increased their market share in these markets over this
period. South Africa increased its share from 2 percent to 9 percent, New Zealand from 3 percent to 8
percent and Chile from 3 percent to 4 percent.
33
   Between 1992 and 2000, China has gained 37 percent market share in Singapore, US has lost 20
percent and Australia has lost about 14 percent. Current (2000) market share is China 43 percent, NZ (20
percent), France (11 percent), US (11 percent) and Australia (10 percent) (World Apple Report, 2001).

      Hassall & Associates Pty Ltd                                                              Page 45
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In addition to China supplying the Malaysian and Singapore markets with Fujis, 1998 marked the
year in which Chinese production had a major impact on worldwide markets. For Australia, the
direct impacts of these market changes included Australian growers losing money on Red
Delicious exports and diversions of significant volumes of product onto the domestic market. For
the first time since the 1970s, Australian domestic prices reflected world prices. In effect, this
ended the insular domestic market conditions that domestic producers had been subject to up
until this point (pers. comm., Kevin Baddiley, President, AAPGA).

Following the loss of the key Red Delicious markets of Malaysia and Singapore, Australian
exporters went looking for new export markets for this traditional variety. Fortunately for the
Australian industry, India emerged as an alternate market. In 1999 Australia held a small quota
from India. However, a bad domestic season for Indian producers led India to allow Australia to
export significantly greater volumes than originally envisaged. This trend continued in 2000 with
the abolition of the quota system and a freeing up of import controls.

Rapid growth in Red Delicious exports to the sub-continent took up much of the slack left by the
loss of the traditional Singapore and Malaysian markets. In 1999-00, Red Delicious for the
Indian market were sourced from both NSW and Tasmania. This market is a price sensitive bulk
commodity market, however Australia‟s strong historical and cultural ties with India, including the
use of the English language, a common origin of legal and parliamentary systems, membership
of the Commonwealth and via our common interest in cricket, worked initially to establish
effective wholesale distribution channels.

The immense growth in the sub-continent markets is characterised by particularly low returns.
However as noted above, these markets are vital to the domestic Australian market as an
alternative to Singapore and Malaysia. Sri Lanka continues to grow as a market taking 172,000
cartons in 2000. Despite this, a large applied tariff of 35 percent will restrict Australia‟s growth in
Sri Lanka (India had a 55 percent import duty) (HAL, 2001). Collectively Sri Lanka, India and
Bangladesh take over 430,000 cartons and are the most rapidly growing destination for
Australian apples. Further to growth in the sub-continent market, growth in the Japanese market
via a tightly held group of growers and exporters in Tasmania remains particularly encouraging
(HAL, 2001).

In recent weeks, a shortage of Red Delicious apples in eastern Australia has put the newly won
Indian export market under threat. Growers have indicated that production across Queensland,
NSW, Victoria and Tasmania has dropped by around 40 percent this year, causing the domestic
price to double. Due to this domestic shortage, Australian producers are diverting product from
the Indian export market to the domestic market, where higher returns can be achieved at the
current time (ABC Rural, Wednesday May 9 2001). Although it is understandable that producers
would seek higher short-term returns for this season‟s apples on the domestic market,
Australia‟s 1997-98 experience in the Malaysian and Singapore markets would suggest that the
market share Australia has built up in India could be under serious threat from competitors who
will seek to supply this market in Australia‟s absence this year. This would represent a major
setback for Australian exporters, especially given that India provided an opportunity for Australia
to export Red Delicious at a time when demand trends in many other countries are shifting away
from this variety. Given the lessons of Australia‟s experience in Singapore and Malaysia,
sustained export market development activities are vital if we are to remain competitive on the
global market. This issue is discussed further in Chapter 7.

      Hassall & Associates Pty Ltd                                                            Page 46
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Future Trends Likely To Influence Export Markets

The overhang of Northern Hemisphere fruit from China and the US continues to narrow the
Southern Hemisphere window of sales into Asia. All round, future opportunities for counter-
seasonal supply will narrow with improved storage technology and longer life varieties. As noted
above, the presence of the Chinese Fuji on the Asian market over the last three years has been
responsible for a major shift in consumer preference away from Australian Red Delicious. One
potential opportunity rests with the Gala variety. Gala is a variety that is catching on very quickly
in Asia and is in particularly strong demand. Although currently supplied by other countries,
Australia is in the fortunate position of increasing production and has the opportunity to supply
this variety for export34.

Another factor in Australia‟s favour in Asia is that Australia has long-established personal
relationships within this region. This has allowed some recovery in purchases from Malaysia
and Singapore and was a crucial factor in the Australian success in the Indian market. These
relationships and the success with which the “AUSTRALIA fresh” promotion was received in Asia
remain important conduits for high value markets in the future.

In addition to markets on the sub-continent and Asia, Australia is beginning to turn export focus
to the United States, which imports roughly twice as many apples as Malaysia and Singapore.
The HAL Marketing Forum last year coordinated the first shipment of Pink Lady to the US with a
quantity of approximately 120 metric tonnes being shipped to the West Coast. However,
establishing appropriate import protocol with the United States has been a costly and lengthy
process. The United States has approved an in-transit cold treatment process for fruit fly,
however they do not accept the pre-clearance inspection given by AQIS for light brown apple
moth despite this pre-clearance being accepted by other importers of Australian apples.

China has also been identified as a potential export market for Australian apples. However,
inconsistencies in their administration of imports has retarded any significant growth thus far.
China has also rapidly expanded it‟s own production, therefore future exports to China will only
be successful if Australia produces varieties that the Chinese market demand and do not already
produce. As with the United States, opportunities for counter-seasonal supply exist in the
Chinese market.

One deficiency of the Australian export promotion program recognised by HAL is that Australia
currently exports under a range of home brands. This is not assisting Australia to achieve critical
mass with its 1.5 million cartons of exports. Being a deregulated marketer Australia draws a
stark comparison to other exporters who have either a single or a handful of highly visible brands
(HAL, 2001). Further information regarding the development of branded products as an option
to improve Australia‟s export competitiveness is provided in chapter 7.




34
  Australia currently has 573,000 mature trees with the Gala variety. In addition, there are 844,000
younger trees that are yet to reach maturity (ABS, 2001).

      Hassall & Associates Pty Ltd                                                          Page 47
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Australia does not incur any significant market access issues in the major export markets of
Singapore, Malaysia, Hong Kong and the United Kingdom. Singapore and Hong Kong are „free
ports‟ in as much as they do not impose import tariffs while Malaysia has minor control over
tariffs with import licensing requirements. The United Kingdom does not have an overly
restrictive tariff regime for apples, however, the United Kingdom have very strict quality and food
safety requirements that may prevent the entry of a product that may be acceptable on other
markets. The distance to United Kingdom markets (transport cost) and fierce competition from
other Southern Hemisphere countries makes the United Kingdom a difficult market to maintain.
Excluding the export of the Pink Lady variety to the United Kingdom (high value dedicated
trade), the United Kingdom is currently seen as an export opportunity only under opportunistic
conditions. However, the development of new varieties may provide the opportunity to emulate
the success of the Pink Lady program.

The importance of export market development and maintaining excellent relationships with our
customers is discussed as part of the options to improve industry competitiveness in chapter 7.
Future export efforts will have a role for both high value niche export markets (such as Pink Lady
into UK) as well as a role for lower value bulk markets (such as Tasmanian Red Delicious into
the sub-continent). The importance of learning from past lessons (loss of Red Delicious market
in Singapore and Malaysia) is crucial, and timely, given the current transfer of supply from the
newly won Indian market to the domestic market, in response to decreased domestic supply.

Apple Juice Export Market

Australia currently exports 5.7 million litres of apple juice, with a free-on-board value of
$7.8 million. Japan accounts for 37 percent of exports, Hong Kong (15 percent), Singapore
(12 percent) and Indonesia (7 percent). Other nations that receive insignificant volumes of
exports of Australian apple juice include New Zealand, Thailand, China, India, Philippines,
Malaysia and Sri Lanka. Further information about the apple juice export market is provided in
Sections 3.2.2 and 6.7.

2.2.2     Marketing and Promotion Programs

Marketing

HAL (and AHC before it) is funded through a program of compulsory levies. These levies are
collected at the wholesale level by the Levies and Revenue Service (LaRS35) from fresh apples
at 27.5c per carton and from processed apples at $5.50 per tonne. Levies collected from fresh
apples go towards residue testing (1c), research and development (6.5c) and promotion (20c).
Levies collected from apples to processing go to the HAL marketing programs and
administration ($4/tonne), research & development ($1.30/tonne) and residue testing (20c/tonne)
(pers. comm., Howard Moxham, HAL).

On an average year HAL spends $1.6 million on domestic promotion and $650,000 on export
market development. At present the promotion of apples is worth 1 percent of value, which is
similar to the proportion spent by other fruit competitors (The Australian Banana Growers
Council indicated that marketing and promotion accounted for about 1 percent of the total
farmgate value for bananas). However, by comparison to competitor snack food products, there
35
     A branch of AFFA that was formerly the Federal Levy Management Unit (LMU).

        Hassall & Associates Pty Ltd                                                      Page 48
The Australian Apple Industry Squeeze
is an under-investment in apple promotion. With highly promoted products such as snack foods
(eg Mars Bars), the value of the promotion is worth up to 7 percent of the product value.

Fresh Apple Marketing and Promotions

Although consumer groups have a strong understanding that apples are a healthy product,
apples are seen by consumers generally, and children in particular, as an old fashioned fruit, a
staple. Apples lack the appeal of being „unusual‟ or „exotic‟ as other fruits such as rambutan,
nectarines, mangoes and kiwi fruit conjure in the consumer‟s mind. The benefit of being viewed
as a staple is that apples are invariably part of the weekly purchase. The downside is that they
do not secure the same portion of the consumer‟s budget as highly promoted snack foods. An
increase in promotion and delivery of quality product has the potential to expand market share.

One of the key services/products of HAL is the management and undertaking of marketing and
promotion activities in partnership with key stakeholders (AAPGA). The success of the
partnership lies primarily with the three marketing forums (apple domestic, apple export and pear
domestic and export) that are charged with the responsibility of developing innovative marketing
programs that will enhance profitability. In 1999-00, HAL undertook a number of marketing and
promotion initiatives. For the apple industry, these included:

       A retail marketing pilot in India for apples, pears and citrus;
       Representation at the Food & Hotel Asia exhibition in Singapore under the AUSTRALIA
        fresh banner. This took Australian horticultural products to 45,000 food professionals
        from 67 countries;
       The development of a new level of co-operation with major supermarket chains with
        nationwide funded promotions for apples and pears;
       2,500 store visits by the fresh produce retail service to educate retailers on better product
        handling and marketing practices. It was found that staff of large supermarkets are often
        over-worked and under-trained, and as a result they did not have a sufficient
        understanding of maintaining product, rotation and display. The store visits allowed retail
        staff to gain a quick education on product need (rotation between cold store and shelf)
        and successful methods of product presentation and handling. To follow up training, HAL
        have begun providing retailers with short sharp product tips. These product tips inform
        staff as to what products are coming into season, out of season as well as how to do
        sugar tests and display ideas. The need to maintain and promote consistent product
        quality throughout the supply chain has been recognised by HAL as a major marketing
        initiative. In 2001 HAL aim to continue store visits and education; and
       The establishment and maintenance of a Quality and Food Safety Forum to provide a
        channel for food safety and quality issues to be raised, addressed and communicated to
        all participants in the supply chain with the aim of increasing co-operation and efficiency.
        The importance of an effective quality assurance channel was emphasised by Senator
        Troeth, the Parliamentary Secretary for Agriculture, Fisheries and Forestry, in her
        address to the 2001 Outlook conference. Senator Troeth‟s address emphasised the
        need for an effective quality assurance system in maintaining Australia‟s image of clean
        and green and therefore sustaining a long-term presence in our markets.


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As well as the promotion activities outlined above, the former AHC assisted the AAPGA in a
major market research exercise into consumer‟s apple buying habits. Some key outcomes from
this market research are listed below:
          15 percent of apple purchases were considered to be disappointing when eaten, mainly
           due to flouriness, bruising or over-ripeness. These problems mostly arise due to over-
           maturity and/or poor handling;
          The average consumer was found to buy 5-10 percent less apples and pears than they
           intended to, deciding against buying them due to quality perceptions;
          The qualitative phase of the research indicated that consumers were prepared to pay
           more for fruit with more consistent, reliable quality, thereby avoiding disappointment;
          Most consumers are aware of and have tried new varieties including Gala, Fuji,
           Braeburn, Pink Lady and Sundowner;
          Only 22 percent of consumers store apples correctly (in the fridge); and
          The Red Delicious variety was the most unpredictable in quality and gave consumers the
           largest percentage of disappointment in consumption. Consumer disappointment is
           reflected in the low prices now being received for this variety, although Red Delicious
           maintain a role in export and bulk domestic markets.

This consumer research indicated to the industry that:

          Production of a more standardised external quality apple is required36. Red Delicious
           would be an exception as there is virtually no ideal „standard‟;
          Consumers and retailers need better education about storage and handling. This is just
           as important as agronomic aspects in determining final product quality; and
          Consumers need to be educated about the range of varieties and their characteristics.

In 2001, a new domestic promotional campaign, It’s Crunch Time, was launched. This
incorporates a mass media campaign, public relations activities, research, state promotions and
merchandising. In addition to this domestic campaign, promotional campaigns in key export
markets (Malaysia, India, Hong Kong, Indonesia, Singapore and Sri Lanka) are in operation.
The "AUSTRALIA fresh" program is the central platform of much of this export marketing, with
efforts aimed at sustaining the trademark and maintaining its presence in export markets (HAL,
2001). In terms of export market development, HAL (2001) recognises several opportunities for
Australian exports, specifically:

          Australia is viewed favourably as a supplier of fresh, clean produce throughout Asia;
          We are able to supply counter-seasonally to the Northern Hemisphere;
          The ability to extend the season with new varieties and storage techniques is emerging;
          Consumer disposable incomes in Asian regions are improving as economies recover;
          Growth of „western style‟ retailing such as supermarkets and hypermarkets throughout
           Asia; and
          Move to direct buying by retailers, especially supermarkets.

Further discussion with reference to emerging retailing trends is provided in section 4.1.3.


36
     Newer varieties will assist as they generally have a longer shelf life.

          Hassall & Associates Pty Ltd                                                     Page 50
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Apple Juice Marketing and Promotions

As well as the above promotional activities, some effort has also been made to promote
Australian apple juice. In 2000, AHC ran a joint promotion with Woolworths (AHC contributed
$40,000 and Woolworths contributed $20,000) promoting 100 percent Australian fresh apple
juice. Although this promotion resulted in a doubling of Australian fresh apple juice purchased
during the time frame of the promotion, the distribution of benefits of this promotion were narrow.
Sales of fresh juice cannibalised sales of the same company's long-life shelf product. Although
many juice producers see the benefit of an Australian juice promotion campaign, very few would
be involved as the benefits of using low cost imported concentrate in blends far outweighs the
benefits of producing 100 percent Australian apple juice and highly promoting this product.

It was suggested by HAL that a more effective promotion campaign would focus on promoting
100 percent Australian juice rather than just 100 percent Australian apple juice. A campaign of
this size may benefit from government support in the form of a promotion forum that brings
together the key stakeholders from (horticultural) juicing industries to focus on the most effective
means by which to promote Australian juice products.

2.2.3    Research and Development

Apple industry research & development is undertaken by HAL (formerly the HRDC) with 5 key
result areas in mind. These are:

        Identifying market requirements and opportunities;
        Assisting in new product development;
        Developing sustainable and efficient production systems;
        New technology development; and
        Development of supply systems that meet end user requirements.

An R&D Committee, which consists of industry representatives (and hence represents industry
levy payers), manages the R&D program. The R&D committee ensures that:

        The R&D program meets objectives of both HAL and the industry body;
        R&D resources are undertaken most effectively;
        The R&D program is outcome focused;
        Commercialisation and technology transfer strategies are identified; and
        Research outcomes are communicated and adopted appropriately.

Projects brokered on behalf of industry are funded by industry money collected through either
statutory or voluntary levies or voluntary contributions and Commonwealth matching dollars.
The greatest proportion of horticulture projects are in production development (41 percent) and
the smallest amount are in market requirement and opportunities (8 percent) (HRDC, 2000).

Table 2.6 outlines the level of funding for research and development in the apple industry and
other comparative rural industries for 1999-00.


        Hassall & Associates Pty Ltd                                                       Page 51
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Table 2.6         R&D Expenditure in Apple and Comparative Rural Industries, 1999-00
                                        Apple and                   2           All                     39
                                               37         Oranges                        38    Grains
                                          Pear                            Horticulture
                                                                     40
Industry (Farmgate) Gross Value         $387 million     $392 million       $5.5 billion      $6.5 billion
Levy Funds                              $1,960,779        $1,805,983       $18,000,000
Voluntary contributions                  $554,021          $360,017        $10,000,000
Total R&D                               $2,500,000        $2,200,000       $28,000,000        $68,000,000
R&D as % of Gross Value                    0.6 %             0.5%              0.5%               1%

The level of R&D expenditure within the apple industry is equivalent to other similar agricultural
industries (including all horticulture). R&D funding was not revealed as an issue during the
consultation phase of this study.

A major benefit to emerge from combining the activities of HRDC and AHC into one body (HAL)
is that R&D and promotion and marketing activity can be better coordinated. Many of the
options discussed in Chapter 7 rely on the industry making use of HAL to achieve the benefits
associated with these changes in the structure of industry organisations.

2.2.4       Summary

This overview of activities that affect Australian industry has revealed that:

         Australia exports 33,000 tonnes of fresh apples. Malaysia, Singapore and, more
          recently, the sub-continent are Australia‟s most important export markets;
         Australia also exports 5.7 million litres of apple juice, valued at $7.8 million (f.o.b.).
          Japan is our most significant market for juice products (37 percent share of total juice
          exports);
         Enhancing Australia‟s export market focus will benefit Australian industry in terms of
          international competitiveness. Considerable efforts are required to develop new markets
          and retain existing markets (e.g. India), particularly at times when domestic production
          declines;
         By comparison to competitor snack products, there is an under-investment in apple
          promotion (1 percent of product value41). However, in 2001, a new domestic fresh apple
          promotional campaign, It’s Crunch Time, was launched;
         R&D expenditure within the apple industry is equivalent to other horticultural industries;
          and
         The apple industry is well placed to benefit from the merging of the activities of the HRDC
          and AHC into one body, HAL. This will facilitate more coordinated R&D and promotion
          and marketing activities.




37
   AAPGA website and HRDC 99/00 annual report
38
   HRDC 99/00 annual report
39
   GRDC 1998 annual report
40
   Australian Citrus Growers Inc website
41
   Although this is equivalent to the investment made by competitor fruits such as bananas.

         Hassall & Associates Pty Ltd                                                             Page 52
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3. GLOBAL APPLE INDUSTRY OVERVIEW
3.1   Production
Three fruits dominate the world fruit market: apples, oranges and bananas. Production growth in
all fruit categories has grown at 3 percent per year, more than twice the rate of population growth
over the 1990s. Apples have been the fastest growing major fruit, with market share increasing
from 12 percent in 1989-91 to 14 percent in 1999 (World Apple Review, 2000). However, major
fruits face competition from minor fruits and competing snack foods, such as biscuits,
confectionary, chocolates, cakes and pastries. Production of all three types of minor fruits
(deciduous, citrus and tropical) has grown by more than half in the last decade.

World apple production exceeded 60 million metric tonnes for the first time in 1999 (World Apple
Review, 2000), with total production being increasingly dominated by China. In 1999, China
recorded an unprecedented annual increase in apple production of 2.5 million metric tonnes.
This one-year increase in Chinese production was greater than the annual production of all but
two countries (United States and France). China‟s market share of world production has
increased from less than 10 percent to more than 33 percent in less than a decade (World Apple
Review, 2000).

The major apple producing countries (by volume) as well as Australia are listed in Table 3.1
along with trends in production volumes over the last decade.

Table 3.1       World Apple Production by Country, by Volume (‘000 metric tonnes)
Country                               1990                1995                  1999
China                                4,332              14,017                22,010
United States                        4,380               4,801                 4,852
France                               2,326               2,516                 2,643
Turkey                               1,900               2,100                 2,500
Italy                                2,050               1,940                 2,416
Germany                              2,222               1,415                 2,062
Iran                                 1,524               1,824                 1,944
Poland                                 812               1,288                 1,604
Russian Federation                      Na               1,200                 1,330
India                                1,094               1,200                 1,321
Chile                                  700                 850                 1,165
Argentina                              975               1,146                 1,056
Brazil                                 543                 664                   944
Japan                                1,053                 963                   941
                                         1
Australia                             316                  317                   334
Source: World Apple Review (2000)
Note:
1. Australian estimate in 1990 is for 1992.




      Hassall & Associates Pty Ltd                                                        Page 53
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Table 3.1 shows that over the last decade, Chinese production increased by 408 percent. Other
major apple producing countries exhibiting growth in total production were Poland (98 percent),
Turkey (32 percent), Iran (28 percent) and India (21 percent). The only major apple producing
countries to experience a decline in production over the last decade were Germany (-7 percent)
and Japan (-11 percent).

On a global scale, Australia is not a significant apple-producing nation, accounting for only 0.7
percent of world apple production. However, Australia is one of the top six apple producers (by
production volume) in the Southern Hemisphere. Southern Hemisphere nations are important in
terms of the context of the global industry as they export a large percentage of production as
counter-seasonal supply to the Northern Hemisphere and this affects competitive conditions in
the Northern Hemisphere in the spring and summer (World Apple Review, 2000). HAL (2001)
identifies South Africa, New Zealand and Chile as Australia‟s key competitors, in that order.
These Southern Hemisphere countries, along with the United States, are significant competitors
in the Asian markets of Malaysia, Singapore and the Philippines.

Table 3.2 lists trends in Southern Hemisphere apple production over the last two decades for the
major producing nations.

Table 3.2       Southern Hemisphere Apple Production, 1979-81 - 19991 (‘000 tonnes)
                                                                                              2
Country             1979-81            1989-91             1992-94            1996-98     1999
Chile                    251               705                827                 933     1,165
Argentina                946             1,015              1,004               1,123     1,056
Brazil                    87               516                666                 739       945
South Africa             395               525                556                 577       615
New Zealand              211               351                469                 539       536
Australia                317               317                329                 314       334
Total                  2,207             3,429              3,851               4,225     4,651
Source: World Apple Review, (2000)
Note:
1. Estimates for 1979-81, 1989-91, 1992-94 and 1996-98 are average production.
2. Estimate for 1999 is preliminary, apart from Australia, which is in actual estimate.

Table 3.2 shows that whilst the six largest Southern Hemisphere producers have increased
aggregate production over the last twenty years, the proportion which Australia produces has
been steadily declining (from 14 percent in 1979-81 to 6 percent in 1999). Expansion of apple
production in the Southern Hemisphere occurred during the 1980‟s when improved
transportation and storage technology and growing demand for off-season fruit in the Northern
Hemisphere made expansion profitable. Australia was the only Southern Hemisphere country
left out of the expansion, slipping from 3rd in 1980 to 6th in 1999 (World Apple Review, 2000). Of
illustration, Australia‟s production level is now only 62 percent of the production of fifth-placed
New Zealand and only 29 percent of the level of our key competitor, Chile.




      Hassall & Associates Pty Ltd                                                          Page 54
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Reasons why the Australian industry has missed out on this expansion in Southern Hemisphere
production are diverse. They include limited appropriate growing areas, having access and
opportunity to plant more popular and profitable crops and the historically insular nature of the
domestic market. Indeed, it can be argued that Australia‟s historically insulated domestic market
has led to lags in the Australian industry adopting new varieties and intensifying orchards, and
may have indirectly led to fruit with less perceived quality than is produced in more competitive
overseas markets.

It must be noted, however, that the Australian industry has recognised its perceived past
weaknesses, and to its credit is currently moving to address these areas. The recent opening of
Australia‟s domestic fresh apple market to imports from Japan and our exposure to the impacts
of rapid expansion in Chinese exports to the world market, (and its resultant knock-on impact on
export fruit and CAJ prices), will increase the incentive for the Australian industry to improve
international competitiveness in the future. Further information pertaining to Australia‟s
international competitiveness is provided in chapter five and recommendations to improve
international competitiveness are provided in chapter seven.

Although world production increased to greater than 60 million metric tonnes for the first time in
1999, without China‟s increased production growth in world production would have been much
less expansive throughout the 1990‟s. Figure 3.1 shows trends in global production over the last
decade, both with and without Chinese production.

Figure 3.1                             Global Production in the 1990s, With and Without China


                              70,000

                              60,000
       Production ('000 mt)




                              50,000

                              40,000

                              30,000

                              20,000

                              10,000

                                  0
                                                 1990                             1995          1999
                                                                                   Year
                                                        World Production incl. China
                                                        World Production excl. China




Source: World Apple Review, 2000

The two main messages to emerge from Figure 3.1 are that Chinese production has both
dramatically increased total global apple production as well as the rate of growth in total global
apple production. Table 3.3 summarises the influence Chinese production has had on growth of
global apple production.


      Hassall & Associates Pty Ltd                                                                     Page 55
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Table 3.3         Growth in Global Production in the 1990s, With and Without China
                                                    Growth in Apple Production (%)
Indicator
                                         1990-99               1990-95                  1995-99
With Chinese Production                    79%                   48%                      21%
Without Chinese Production                 31%                   22%                       7%
Source: World Apple Review (2000)

The rapid growth in Chinese apple plantings after deregulation of the fruit market in the early
1990‟s has been described by Chinese Government officials as “too much too quick” (United
States Department of Agriculture (USDA), 1997). Mass production along with inadequate apple
storage and transportation systems has resulted in a domestic fresh apple market characterised
by a large quantity of low priced, generally poor quality domestic fruit. Within China, the Fuji
continues to be the most popular variety grown, accounting for approximately 45 percent of
acreage and production. The New Red Star is the next most popular variety grown, accounting
for 12 percent of total acreage and production. The Qinguan variety is the most popular variety
used in the production of Chinese concentrated apple juice (GAIN, 2000).

There is a large variation in the production costs incurred by Chinese apple growers. Production
costs range from $US544 to $US3,628 per hectare depending on the quality of the fruit
produced (GAIN, 2000)42. The main inputs into production are agricultural chemicals, pesticides
and plant medicines. The use of machinery to support planting, growing and/or harvesting is
essentially non-existent. Grower orchards are usually only around one hectare and therefore too
small to make machinery use cost effective.

A detailed review of China‟s apple industry was undertaken by RCS Group in 1998.                  Key
characteristics of Chinese apple production to emerge from this review include:

         Production is largely uncoordinated, being small family farm and plot based, with an
          absence of a wider view on production and price trends;
         Production is often undertaken on hillsides, where other crops are not viable;
         There is an absence of extension services available to Chinese producers;
         Apples are grown at minimal cost using family labour;
         Efficient post-harvest handling and storage is rare, with resultant high spoilage rates; and
         There is a feeling in China (1998) that problems facing the apple industry were not
          production related, but rather, were due to a lack of processing facilities to handle the
          manufacture of more CAJ.

Chinese farmgate apple prices during August 2000 ranged from $US0.07 to $US0.12 per
kilogram for average quality. Poorer quality fruit was selling for $US0.05 per kg. As the 2000
apple harvest progressed, these prices were expected to fall further, with peak harvest to occur
in September and October. The Global Agriculture Information Network (GAIN) report suggests
that most growers in China are not happy with this situation, although most growers seem
resigned to it (Global Agriculture Information Network, 2000).

42
  Efforts were made by Hassall & Associates to locate more specific cost of production data for Chinese
producers. Discussions with Dr Gus Hooke (a Beijing-based macroeconomist, industry analyst and
agricultural specialist) and Junying Chen (Australian-based China sector analyst) indicated that little
industry data existed for Chinese production costs.

         Hassall & Associates Pty Ltd                                                         Page 56
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The flattening of the growth in global apple production over the last part of the previous decade
has been partly due to a downward trend in world apple prices, which began in 1996 (World
Apple Review, 2000). Within the world‟s two largest open markets, the US and European Union
(EU), prices had declined significantly by the end of the 1990s. In the US, 1999 producer prices
were approximately 70 percent less than their 1991 peak, and in the EU, prices averaged about
one third of their peak level (World Apple Review, 2000).

Approximately nine percent of total global apple production is exported. Table 3.4 lists the top
ten fresh apple exporting nations (based on 1998 data). The top ten apple exporters dominate
total world exports, accounting for 79 percent of total volume and 84 percent of total value.

Table 3.4       Top Ten Fresh Apple Exporters, 1998
                                                    Volume                           Value
 Rank               Country
                                                   (m tons)                         ($’000)
   1                France                         766,207                          488,559
   2            United States                      582,234                          350,454
   3                 Chile                         575,601                          233,443
   4                 Italy                         540,138                          258,773
   5              Netherlands                      338,901                          186,582
   6               Belg-Lux                        335,470                          238,857
   7            New Zealand                        291,720                          204,083
   8             South Africa                      242,000                          124,470
   9               Argentina                       227,520                          118,093
  10                  Iran                         190,000                           30,000
                   Top Ten                       4,089,791                        2,283,314
                  Total World                    5,176,391                        2,660,958
                 (Top Ten %)                         79.0%                            83.9%
Source: World Apple Review (2000)

The role of Southern Hemisphere nations amongst the top exporting nations is quite significant.
Despite the fact that no Southern Hemisphere nations are ranked in the top ten nations in terms
of production, there are four (Chile, New Zealand, South Africa and Argentina) ranked in the top
ten in terms of exports. Chile is a particularly significant exporter, with exports accounting for
approximately 50 percent of total production (French exports account for approximately 29
percent of production and US, Italian and Argentinean exports account for roughly 22 percent of
production). The fact that our Southern Hemisphere competitors are important exporters
illustrates the need for Australia to enhance export focus and increase domestic production so
as to increase exports of fresh apples. Without an increase in total exports, Southern
Hemisphere competitors will continually erode Australian export market share and industry
competitiveness will be persistently subject to greater international pressure.

In terms of future trends, the World Apple Review (2000) states that China is the only country
likely to enter the list of top ten exporters in the immediate future. It is predicted that China will
be a permanent member of the top ten exporters in the near future.



       Hassall & Associates Pty Ltd                                                           Page 57
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Table 3.5 outlines the top ten fresh apple importing nations (based on 1998 data).

Table 3.5          Top Ten Fresh Apple Importers, 1998
                                                          Volume                            Value
 Rank                   Country
                                                         (m tons)                          ($’000)
      1              Germany                              707,763                          438,656
      2          United Kingdom                           460,369                          390,920
      3         Russian Federation                        358,758                          137,892
      4              Belg-Lux                             248,411                          204,954
      5             Netherlands                           235,922                          163,745
                            1
      6               China                               158,812                          113,032
      7           United States                           141,971                           95,390
      8                Spain                              132,909                           79,463
      9                Brazil                             126,186                           55,433
     10              Canada                               115,278                           84,749
                     Top Ten                            2,686,379                        1,764,234
                    Total World                         4,506,625                        2,807,216
                   (Top Ten %)                              59.6%                            62.8%
Source: World Apple Review (2000)
Note:
1. Includes Taiwan

Once again, the top ten nations dominate total world imports, accounting for 60 percent of the
volume of imports and 63 percent of total value. At first glance, it would appear curious that
China, given their massive production stocks, would be ranked sixth in terms of imports.
However, Taiwan absorbs 150,000 of the 158,000 tonnes of imports that are sent to this
destination (World Apple Review, 2000).

The World Apple Review (2000) notes that the expansion of preferential and bilateral trade
agreements will prevent the true emergence of economies of trade in the near future. It states
that future market expansion will likely be as dependent on opportunism as efficiency.

3.1.1      Global Production Forecast

The recent economic crisis in Asia has softened consumer demand in developing countries and
prices remain low (World Apple Review, 2000). Across the board, total world demand for fresh
apples has been weak. In the more industrial and affluent countries of Europe, Asia and North
America, aging populations, busy lifestyles and the purchase and consumption of food away
from the home has reduced eating opportunities for fresh apples43. Further, developing markets
such as Brazil and Indonesia (where apple demand was increasing with rising incomes) have
suffered different degrees of economic slowdown since 1997.




43
     The importance of this issue with respect to Australia was discussed in section 2.2.2.

          Hassall & Associates Pty Ltd                                                               Page 58
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HAL (2001) states that current low prices being experienced in the European Community, United
States, New Zealand and South Africa, as well as high freight rates in the Southern Hemisphere,
will lead to a reduction in world supply as new plantings decrease. However, it is projected that
cycles in apple supply and demand will move closer together as orchardists invest in faster
producing, more intensive orchards44. These faster yielding varieties and production systems
improve the capability of the apple industry to keep up with ever changing consumer behaviour
and demand. In the future, those orchardists successful on the world market will have quick
yielding, intensive orchards using patented varieties unique to the exporting country and/or
licensed to producers in the opposite hemisphere with controlled production to provide
customers with year round supply and marketing support. By controlling production of an
exclusive variety, production will more evenly track demand and profitable prices are more likely
to be maintained.

Despite the rapid increase in Chinese production in the 1990s, the total acreage planted to apple
trees in China decreased by 18 percent between 1996 and 1999. This decline is mainly due to
the decline in wholesale apple fruit prices. Despite this reduction in total acreage, it is predicted
that China‟s total apple production has not yet peaked due to the continuing maturity of China‟s
planted apple trees and the number of younger trees already planted and coming into
production. However, GAIN (2000) reported that China‟s apple production may peak sooner
than this reported prediction.

Kevin Baddiley (President, AAPGA) supports this view. He comments that Chinese production
has not peaked but total acreage is declining. Some 50 percent of Chinese plantations are yet to
reach full production45. Highly productive areas in China are currently being pulled from apples
and replanted with stone fruit and vegetables (similar to Australian producers switching to stone
fruit). Baddiley believes that Chinese production should peak in the next two years, with world
markets recovering thereafter (pers. comm., Kevin Baddiley, President, AAPGA).

For Australia, the fact that Chinese production has yet to peak will ensure that the competition
we face on world fresh apple markets will continue to increase in the immediate future.
Oversupply on world markets will continue to depress fresh apple prices until after Chinese
production has peaked and global supply and demand began to equate. The net result of this is
that competition for export markets will increase, and export returns will remain subdued as long
as oversupply causes declines in world price.

The impact of increased Chinese production will also be felt within the Australian processing
sector, with any additional processed product from China being exported due to the small
domestic consumption market that exists within China for CAJ products. With additional
Chinese CAJ on world markets, the competitive world price for CAJ is unlikely to increase in the
near future, placing further pressures on domestic producers of fresh and processing grade
apples as well as domestic processors (as opposed to domestic converters who benefit from
low-cost CAJ). Further background information on the global processing industry is provided in
the following section.


44
   Traditionally, the apple market operated on a 15 year cycle. There are now varieties developed in Italy
that can bring an orchard to break even in 3 and a half years (pers. comm., Jon Durham, CEO, AAPGA).
45
   At present, 50 percent of China‟s apple trees are full bearing, 20 percent are bearing but not in full
production and 30 percent are yet to bear fruit (GAIN, 2000).

      Hassall & Associates Pty Ltd                                                              Page 59
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3.2       Processing
Apple juice remains the most popular product made from apples. International apple industry
commerce is dominated by concentrated apple juice (CAJ), as it is easy to ship, store, blend and
reconstitute. Furthermore, trade in CAJ avoids quarantine barriers that are applied to the trade
of fresh apple product. CAJ also fits comfortably into a multitude of branded products for many
integrated food companies (World Apple Review, 2000).

The top ten countries producing apples for processing supply 80 percent of all processed apples
used commercially (World Apple Review, 2000). Table 3.6 outlines trends in the volume of
processed apples produced in the top ten processing countries over the last few years.

Table 3.6       Top Ten Apple Processing Countries, 1996-97 to 1999-00 (metric tonnes)
Country                      1996-97               1997-98             1998-99             1999-00
United States               1,870,209             2,013,862           1,972,676           2,050,648
China                         853,052               860,825           1,117,020           1,750,000
Poland                      1,200,000             1,400,000           1,200,000           1,100,000
Germany                       840,000               830,000             800,000             800,000
Russian Federation            865,000               900,350             675,000             515,000
Argentina                     758,650               562,719             754,675             490,027
Italy                         324,800               290,300             350,000             350,000
Chile                         404,807               342,218             373,160             321,200
France                        275,000               290,000             300,000             310,000
Hungary                       360,900               354,000             292,000             260,000
Top Ten                     7,752,418             7,844,274           7,834,531           7,946,875
% of World Volume              79.7%                 78.6%               80.8%               80.0%
Source: World Apple Review (2000)

The United States remains the major producing country of apples for processing, although China
is rapidly closing the gap in processing production, experiencing growth of 105 percent between
1996-97 and 1999-00. The US experienced aggregate growth of only 10 percent over the same
time period. Most other major processing countries experienced either flat or negative growth
between 1996-97 and 1999-00, particularly between 1998-99 and 1999-00. In fact, between
1998-99 and 1999-00, China experienced rapid growth (57 percent), the US and France
experienced minor growth (<5 percent) and all other top ten nations experienced either static or
negative growth.

Five to ten percent of China‟s apple crop is processed each year. The main product into which
these apples are processed is apple juice concentrate. China‟s total apple juice concentrate
production in 1998 was 90,900 tonnes, which used 900,000 tonnes of fresh apples to produce.
This volume of CAJ was produced from 55 factories (GAIN, 2000). Despite this, the Beijing Food
Research Institute estimated that processing capacity in China in 1998 was 100 million tonnes 46
with most factories operating at below 50 percent capacity (RCS Group, 1998).

46
  This large discrepancy in volumes appears to be due to unreliable data sources. The USDA estimate
quotes figures from the China Food Industry Yearbook. This states that the number of factories in Shaanxi
province is in dispute as is the number of factories that are presently in operation.

      Hassall & Associates Pty Ltd                                                              Page 60
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Much of the volatility in supply amongst leading nations in recent years can be linked to
significant price volatility within the apple processing industry. Monthly prices received for
processing apples in Washington State typify this volatility: in five seasons the average grower
price for juice apples ranged from a high of $200 per tonne (Aug 96) to $15 per tonne (Jan 99)
(World Apple Review, 2000). This volatility is partly a result of the erratic supply of raw apples
as apples for processing are often grown in areas subject to adverse climatic disruptions. Over
half the major apple producing countries have variations in total apple production of up to 100
percent (World Apple Review, 2000).

Table 3.7 provides data on the total volume of apples produced, the volume produced for
processing, the volume processed for juice and the volume of CAJ produced for each major
producing region. Data is supplied for 1998-99 for selected countries only47.

Table 3.7      Volume of Processing Apples and Processed Juice, 1998-99
                                                                Processed for
                              Production       Processing                                CAJ
Region                                                              Juice
                               (‘000 mt)        (‘000 mt)                             (‘000 mt)
                                                                  (‘000 mt)
European Union                  7,129              1,810             1,590               188
Eastern Europe                  2,445              1,646             1,603               190
North America                   6,037              2,133             1,160               164
Asia & Russia                  21,069              2,148             1,975               188
Southern Hemisphere             4,524              1,586             1,407               183
Total                          41,203              9,323             6,617               913
Source: World Apple Review (2000)
Note: mt = metric tonnes

Despite variations in the total volume of apples produced and used for processing, the total
volume of CAJ produced across each of the five regions does not vary considerably. Asia &
Russia dominate total apple production, however, in terms of total volume of apples produced for
processing, North America produces almost the same volume as Asia & Russia. Table 3.8
provides data summarising the proportion of total apple production that is used for processing for
each of the major producing regions.




47
  Data on CAJ production was available for selected countries only. These included Austria, France,
Germany, Italy, Spain (EU), Bulgaria, Hungary, Poland, Yugoslavia (Eastern Europe), Russia, China,
Japan (Asia) and all six major Southern Hemisphere producing nations. Together these countries
produced over 70 percent of global supplies of apples in 1998-99.

      Hassall & Associates Pty Ltd                                                        Page 61
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Table 3.8          Proportion of Apple Production Processed (%), 1998-9948
                              Proportion of           Proportion of           Conversion Rate,
Region                   Production Processed       Processing Apples        Raw Apples to CAJ
                                  (%)                   Juiced (%)               (tonnes)
European Union                     25                       88                       8.5
Eastern Europe                     67                       97                       8.4
North America                      35                       54                       7.1
Asia & Russia                      10                       92                      10.5
Southern Hemisphere                35                       89                       7.0
Total                              23                       81                       8.5
Source: World Apple Review (2000)

Table 3.8 shows that whereas Eastern Europe processes two thirds of total production, Asia &
Russia process only ten percent of total production. Variations in the proportion used for
processing are influenced by a number of factors, including the varieties produced and the
processing and marketing infrastructure in place. All regions, except for North America, juice in
excess of 80 percent of the total volume of apples used for processing. Conversion rates vary
considerably by region, mainly due to the quality of apples produced and the processing
technology available (World Apple Review, 2000).

Several suppliers, including China, Poland, Argentina, Italy and Chile export in excess of 90
percent of their CAJ production. In addition, France and Hungary export over 60 percent of their
production. These data show that trade in CAJ is a fundamental component of the global CAJ
industry, rather than being a residual market. Therefore, determinations that influence world
trade in CAJ (such as the US anti-dumping measures against China (explained in more detail
below)) are significant in terms of their implications for all nations involved in trade of CAJ,
including Australia.

Apple juice consumption has grown in recent years in many countries, however consumption per
capita remains quite low with consumers still preferring fresh apples. Exceptions to this include
Western Europe, United States and Canada. Particularly in Canada and the United States, high
per capita consumption reflects the fact that these countries have large domestic production of
apple varieties that produce good juice (World Apple Review, 2000). Future expansion of CAJ
markets and trade will depend upon the extent to which consumers in developing countries can
be successfully targeted to increase per capita CAJ consumption. In the short-term, it is likely
that established markets will remain the priority for the processing sector.




48
     Data for selected countries only.

         Hassall & Associates Pty Ltd                                                   Page 62
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3.2.1      Growth in Chinese Exports and US Anti-dumping Measures

China emerged as a player on the world market for CAJ in the mid-1990s. Despite some initial
quality problems, Chinese exports of CAJ increased significantly after 1996. Exports were
initially targeted towards Japan, however, following Japanese recession, new markets in the
United States, Europe and Australia absorbed most Chinese CAJ exports (World Apple Review,
2000). Table 3.9 demonstrates the growth in CAJ exports from China to major markets during
the late 1990s.

Table 3.9        Chinese Exports of CAJ by Country, 1996-1998 (metric tonnes)
Country                             1996                1997                    1998
United States                     6,280                14,540                  45,931
Japan                             8,091                 8,395                   6,999
Australia                         2,309                 2,220                   6,188
Germany                               0                 3,108                   4,690
Canada                              279                   208                   4,468
Italy                                 0                     0                   4,510
South Africa                        180                   139                   4,091
South Korea                       2,652                 1,378                     451
Spain                                 0                 1,740                     896
Taiwan                              188                   997                     623
Others                              600                   726                   1,751
Total                           20,579                 33,451                  80,598
Source: World Apple Review (2000)

To illustrate this growth in Chinese CAJ exports, Figure 3.2 shows the growth in total Chinese
CAJ exports between 1996 and 1998. Annual growth in total exports of CAJ from China was 63
percent between 1996-97 and 141 percent between 1997-98.




        Hassall & Associates Pty Ltd                                                    Page 63
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Figure 3.2                                   Growth in Chinese CAJ Exports, 1996-98

                                    90,000

                                    80,000
     Chinese CAJ Exports (tonnes)




                                    70,000

                                    60,000

                                    50,000

                                    40,000

                                    30,000

                                    20,000

                                    10,000

                                         0
                                                      1996                  1997      1998
                                                                            Year


Source: World Apple Review (2000)

United States imports of apple juice concentrate from China increased by more than 1,200
percent between 1995 and 1998. During that same period, the average price of Chinese
concentrate apple juice fell from US$2.01 per litre in 1995 to US$0.99 per litre in 1998, a fall of
51 percent. As a result, the average price for US apple juice concentrate fell by 50 percent while
the average price received by growers for juicing apples decreased by 64 percent. According to
the USDA, US apple growers lost more than $135 million in revenue from the decline in apple
juice prices (US Information Research Centre, 2000).

In 1999, in response to a petition filed by US processors, the United States International Trade
Commission conducted an investigation as to whether the US industry was materially injured by
reason of imports from China of certain non-frozen concentrated apple juice. The Commission
investigated the issue of material injury by examining conditions of competition, the volume of
the subject imports, the price effects of the subject imports and the impact of the subject imports
on the domestic economy. The findings of the Commission that the domestic industry was
materially injured by imports from China were transmitted to the Secretary of Commerce on May
30, 2000 (US International Trade Commission, 2000). As a result of the assessed “injurious
nature” of low priced Chinese apple juice concentrate imports on the US domestic industry, the
United States Department of Commerce placed a 51.74 percent duty on Chinese concentrated
apple juice imports. The duty will sunset after five years, but could be extended after a review by
government (US Information Research Centre, 2000)49.




49
  Investigations to determine US price movements since the anti-dumping measure was imposed provide
anecdotal evidence that suggests US processors are paying substantially increased prices to apple
growers for juice grade apples.

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The US anti-dumping measures are significant for Australia. Although the measures are good
news for US apple growers and domestic producers of apple juice, they are bad news for
countries like Australia who already import large quantities of Chinese CAJ. With less Chinese
CAJ being absorbed by the US market, more is available to the Australian market at an even
lower price (due to oversupply on the world market).

Chinese CAJ exports to Australia declined marginally in 1996-97 and then increased by 179
percent in 1997-98. GAIN (2000) indicates that exports to Australia in 1999-00 were 10,907
metric tonnes, reflecting an annual growth rate of 76 percent. Despite these increases in
Chinese CAJ exports in recent years, the Chinese processing industry is experiencing difficult
times at present. RCS Group (1998) stated that an official from the Ministry of Light Industry
indicated that factories could not profitably produce concentrate when the international price for
concentrate fell below $US1,000 per tonne. At this point, it was stated that factories would face
no alternative but to shut down until favourable international prices returned.

An examination of the present operating environment would suggest that Chinese processors
are in fact continuing to operate at prices below this threshold level. Given a typical CAJ density
of 1.36 kg/litre, this would yield an effective breakeven price of US$1.36 per litre. Based on the
present exchange rate of US$1 = A$0.51 (Sydney Morning Herald, 1 May 2001), this equates to
an effective breakeven price of A$2.67 per litre. The current landed price for Chinese CAJ is
estimated to be $1.20 per litre (pers. comm., Viresh Patel, Fruitmark, Melbourne). This would
indicate that Chinese processors are continuing to export CAJ to Australia at prices that are
substantially below that which the Ministry of Light Industry indicates is a breakeven level of
profitability for Chinese processors. Given the reduction in the value of the Australian dollar
relative to the US dollar over the last 12 months, it would seem that the Chinese industry is not
exchange rate sensitive.

In light of these findings, one option for Australian industry would be to more thoroughly
investigate whether China is exporting CAJ to Australia below breakeven levels of profitability
(i.e. dumping). If this is the case, Australia may be able to follow the US lead and investigate
whether dumping duties could be applied against Chinese imports of CAJ. Such a move would
have to be led by the processing industry, so as to comply with legislative requirements. This
issue is addressed in detail in chapter 7.

Another mechanism that is available to members of the World Trade Organisation (WTO) is to
apply to temporarily restrict imports using “safeguard” measures. Countries may apply to
impose safeguard measures if their domestic industry is injured or threatened with injury caused
by a surge in imports. An import “surge” is defined as either a real increase in imports (an
absolute increase) or an increase in the imports‟ share of a shrinking market, even if the import
quantity has not increased (relative increase) (WTO, 2001).

Safeguard measures must only be applied to the extent that is necessary to prevent or remedy
serious injury and to help industry adjust. Where quotas are imposed, they should not reduce
the quantity of imports below the annual average for the last three representative years for which
statistics are available. In addition, safeguard measures should not last for more than four
years, although this can be extended up to eight years, subject to specified conditions (WTO,
2001).


      Hassall & Associates Pty Ltd                                                        Page 65
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In principle, safeguard measures cannot be targeted at imports from a particular country.
Furthermore, when a country restricts imports to safeguard domestic producers, it must give
something in return. Exporting countries are entitled to seek compensation or take equivalent
retaliatory action (e.g. raise tariffs on exports from the country that is enforcing the safeguard
measure) if no agreement on compensation is reached.

Within the current policy environment, it is unlikely that safeguard measures would be
acceptable to either Australian industry or government. Given the dual requirements of having to
enforce measures against all importers and needing to offer something in return, the industry
would need to provide a very strong case if it was to be considered by government. In any case,
the application of safeguard measures may harm the expansion of overseas markets by
Australian industry (due to retaliatory actions such as raising tariffs on Australian exports). This
would not assist the industry in implementing export market expansion plans. For this reason, it
is likely that Australian exporters (at the least) would oppose the imposition of trade limiting
measures against our trading partners.

Given the imposition of safeguard measures would likely not receive strong support either from
industry or government in the present trade environment, it is not listed as an option for industry
in Chapter 7.

3.2.2      Global Processing Forecast

The World Apple Review (2000) provides forecasts of CAJ production for the five major
producing regions (selected countries only). Table 3.10 lists actual 1998 CAJ production as well
as forecasts for 2003 and 2008.

Table 3.10         Actual and Forecast CAJ Production, 1998-2008 (‘000 metric tonnes)
Region                        1998 (actual)                   2003 (forecast)            2008 (forecast)
European Union                    188.2                             199.8                     210.2
Eastern Europe                    190.4                             202.4                     226.0
North America                     164.2                             177.7                     182.0
Asia & Russia                     187.5                             258.0                     344.3
Southern Hemisphere               182.6                             221.4                     236.0
Total                             912.8                           1,059.3                   1,199.4
Source: World Apple Review (2000)

Overall, CAJ production is forecast to rise by 16 percent between 1998 and 2003 and an
additional 15 percent between 2003 and 2008. Forecast growth in CAJ production in Asia &
Russia will be driven by China, whose production is forecast to grow from 90,000 metric tonnes
in 1998 to 250,000 metric tonnes by 200850.




50
     Note from Table 3.8 that only 5 to 10 percent of Chinese production is currently processed.

         Hassall & Associates Pty Ltd                                                              Page 66
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The extent to which these predictions for China are realised will depend upon whether sufficient
capital can be found to expand processing capacity and bring idle capacity online. In the past,
the rapid growth in production in China has attracted considerable interest from external
processing companies, despite the fact that there is low domestic consumption of apple juice
products and there is little to no market research information on how markets for this product
could be developed (GAIN, 2000). The low percentage of fruit currently processed in China
relative to total production (see Table 3.8), combined with current under-utilisation of Chinese
processing capacity, provide clear indicators that the scope exists for future increases in apple
production in China to be absorbed by the Chinese processing industry.

The small domestic Chinese consumption market will mean that any future increase in CAJ
production in China will be delivered to the export market. Therefore within the next ten years
from 1998 it could be expected that China will supply an additional 160,000 metric tonnes of CAJ
to the world market per annum. This provides strong evidence that the world price for CAJ will
not rise in the immediate future. This in turn will place greater pressure on domestic Australian
producers of not only juice grade apples, but also fresh market apples51 as they will continue to
compete with imported Chinese product. In strict economic terms, provided Chinese product is
of a sufficient quality, this would lead Australian converters to source low-cost imported Chinese
concentrate at the expense of domestic juice grade apples. The impact this has on the
Australian industry is discussed in detail in Chapter 6.

Increased world supply of CAJ will also impact on Australian exports of CAJ. Australia currently
exports a small volume of product, mainly to Japan. Any future increase in world CAJ output will
further dampen world prices and increase international competition for access to buyer markets.
Australian exporters will need to remain focused on maintaining and continually improving their
export competitiveness. One option for achieving this would be via product differentiation on the
basis of quality. Export markets for juice products are discussed in Section 6.7, specifically the
relationship between CAJ imports into Australia and juice exports from Australia.

Market forecasts show that current major players in the CAJ market will remain so into the next
decade. In most seasons, there is considerable profit in converting low value apples into value
added, highly marketable consumer product such as fresh or concentrated apple juice. Most of
the major suppliers will continue to target production towards export markets.

3.3       Summary of Global Apple Industry
This overview of the global industry has revealed:

          World apple production exceeded 60 million metric tonnes for the first time in 1999;
          China dominates total production, accounting for one third of apple volume produced;
          Australia accounts for less than one percent of global production and is the smallest of
           the „Big 6‟ Southern Hemisphere producers. Its position has declined markedly over the
           last two decades relative to the other five Southern Hemisphere producers;


51
   As more juice grade product is diverted to fresh market outlets this in turn lowers the fresh market price
(this is discussed in detail in chapter 6).

          Hassall & Associates Pty Ltd                                                              Page 67
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       Global production of fresh apples is likely to increase in the immediate future, with
        Chinese production being the key driver. Oversupply on world markets will continue to
        depress fresh apple prices until after Chinese production has peaked and global supply
        and demand begin to equate;
       Despite only processing 5-10 percent of their crop each year, China is second to the US
        in terms of the volume of production processed. Forecast global growth in CAJ
        production to 2008 will also be driven by expansion in Chinese processing;
       Increased CAJ production in China will flow-on to world export markets, as there is a
        small domestic consumption market in China. Further expansion in Chinese CAJ exports
        will continue to depress world CAJ prices, with the imported price of CAJ into Australia to
        remain significantly less than equivalent domestic prices for juice grade fruit; and
       The impact of trade actions such as the US anti-dumping decision against Chinese CAJ
        imports will affect Australia, as more CAJ will be diverted to world markets. Further
        investigation of the nature and impact of low-cost CAJ imports on Australian industry is
        required. Evidence suggests that current import prices ($1.20 per litre) are substantially
        less than the official threshold level for profitable production incurred by processing
        companies in China ($2.67 per litre).

Australia‟s declining share of world production, particularly relative to our Southern Hemisphere
competitors, exemplifies the challenges facing the domestic apple industry. Without a
commitment from industry to foster a culture of exporting, the industry will become increasingly
less competitive on world markets relative to our key Southern Hemisphere competitors. If the
Australian industry continues to choose a domestic focus over an export focus (e.g. diverting
fresh apple supply from export markets to domestic markets in times of domestic production
shortfalls), opportunities for future growth will be forgone.




       Hassall & Associates Pty Ltd                                                       Page 68
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4.       FACTORS AFFECTING THE AUSTRALIAN APPLE INDUSTRY
The following chapter provides an overview of some of the major factors that affect the
Australian industry. The effect of government subsidies on competitiveness is reviewed, as is
the effect of phytosanitary restrictions on imports to Australia. The impact of changes in retail
mechanisms for fresh produce are examined, from both a domestic perspective as well as
tracking international trends. Finally, likely future changes to international trade flows and
market conditions are assessed and the implications of these changes for Australian industry are
discussed.

4.1      Effect of Government Subsidies and Protection on Competitiveness
Many governments subsidise agricultural production in the form of direct and indirect domestic
production subsidies and export subsidies52. Domestic production subsidies usually take the
form of subsidies to increase the prices received by farmers or subsidies for key inputs such as
water or capital infrastructure. Export subsidies are the most distorting Government intervention
as more product is pushed onto the world market, thereby reducing world prices.

Subsidies impact on both the domestic economy in which they are enforced and on overseas
competitors via world markets. Domestically, the use of subsidies on a large-scale implies
substantial opportunity costs. Subsidies can lead to resource misallocation and skewed income
distribution. Structural and distortional problems can result in a decrease in the efficiency of the
domestic economy. Subsidies distort incentives that would otherwise exist given perfect
competition. These distortions cause inefficient distribution and resource allocation (Jakhade,
2000).

Common arguments in favour of subsidies include the infant industry argument and the national
security argument. Under the infant industry argument, new national industries are protected
from foreign competition during their “infant” stage. Theoretically, protection to these industries
should sunset once sufficient market share has been realised by the domestic industry.
However, in reality, governments often find it difficult to sunset or scale back the level of
protection afforded the industry once the protectionist policies are in place.

The second common argument for the use of subsidies, national security, has as a basis the
premise that due to national security measures, certain domestic industries should be supported
to be able to survive import competition. Domestic food production is an example of such an
industry. A common outcome from such a policy is that domestic consumers often end up
paying higher prices for food items, as foreign producers who may have a comparative
advantage in food production are unable to sell their product into the domestic economy in a
competitive manner (Olsson, 1994).

52
  The General Agreement on Tariffs and Trade (GATT) prohibited direct export subsidies to manufactured
goods. For agricultural goods, the Agricultural Agreement prohibits export subsidies unless the subsidies
are specified in a member‟s list of commitments. Where they are listed, WTO members are required to cut
the amount of money spent on export subsidies and the quantity of exports that qualify for the subsidy.
Developing countries have scope to use subsidies to reduce the costs of marketing and transporting
exports under certain conditions during the six-year implementation phase of the Agriculture Agreement
(WTO, 2001).

      Hassall & Associates Pty Ltd                                                             Page 69
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Protectionist measures artificially increase the short-term competitiveness of those industries
that benefit from them.        Over the long-term, however, protectionist measures cause
competitiveness in subsidised industries to be eroded, particularly when subsidies have to be
scaled back as part of moves towards a free trade regime. Essentially, the longer an industry is
protected from a free trade environment, the greater will be the adjustment costs when (and if)
those industries are subject to diminishing support levels and/or a free trade platform.

Measurement of subsidies is difficult, as they are not homogenous, falling under several different
categories, leaving ample room for ambiguity and quantification problems. A long-term
perspective must be taken when attempting to gauge the full effect of a subsidy or other
protectionist policy. Misallocation of resources (and subsequent deadweight economic loss) will
occur over time, as the market mechanism has been interfered with. Deadweight loss results
when the marginal social benefit of the protectionist policy is less than the marginal social cost
(Jakhade, 2000).

Domestic support in competitor countries impacts on Australian industry in two main ways.
Firstly, it can greatly affect the market opportunities for Australian product in the subsidising
country even if there is relatively open access to markets. Locally produced goods are artificially
less expensive due to government support, making it more difficult for Australian imports to be
price competitive. Lack of price competitiveness will result in a decline in market share for
Australian products, thereby decreasing the net return to Australian industry.

Secondly, domestic support can lead to the generation of surpluses that subsequently compete
on world markets against Australian product. Not only does this increase in world supply drive
down the world price if there is insufficient demand to soak up the increased supply, but the fact
that surplus production has been subsidised means that Australian exports are competing on a
crowded world market with other product that has been produced at a lower cost, using artificial
support measures to decrease production costs. Obviously, Australian competitiveness is
disadvantaged when exports compete on an oversupplied world market against subsidised
product from competitor countries.

The WTO Agreement on Subsidies and Countervailing Measures disciplines the use of subsidies
and regulates the actions countries can take to counter the effects of subsidies. The measure
provides the means for countries to use the WTO‟s dispute settlement procedure to seek the
withdrawl of the subsidy or the removal of its adverse effects. Otherwise the country is able to
launch its own investigation and charge countervailing duties on subsidised imports that are
found to hurt domestic producers (WTO, 2001).

The WTO Agreement on Agriculture seeks to reform trade and make policies more market-
oriented. This process was begun in 1995, and has a six-year implementation phase (ten years
for developing countries). Central components of this Agreement include:

       A process of tariffication whereby quotas and other non-tariff measures have been
        converted to tariffs and tariff-quotas;
       Scaling back domestic support measures (price supports or production subsidies) that
        encourage over-production;


       Hassall & Associates Pty Ltd                                                       Page 70
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        Allowing measures that have a minimal impact on trade. These include government
         measures such as research, disease control, infrastructure and food security, as well as
         direct payments to farmers that do not stimulate domestic production; and
        Allowing certain payments to farmers where farmers are required to limit production.

Article 20 of the Agriculture Agreement committed members to start negotiations on continuing
the reform at the end of 1999 (or beginning of 2000). Those negotiations are now well
underway, using Article 20 as their basis. The first phase began in early 2000 and ended with a
stocktaking meeting on 26–27 March 2001. The first phase consisted of countries submitting
proposals containing their starting positions for the negotiations. The meetings discussed each
of these proposals in turn (WTO, 2001).

The negotiations are now in their second phase. In the second phase, the meetings are largely
“informal”. The work program decided at the March 2001 stocktaking meeting set a timetable of
six informal meetings in May, July, September and December 2001, and February and March
2002. In the second phase, the discussions are by topic (tariffs, tariff quotas, export subsidies,
etc), and include more technical details, which is needed in order to find a way to allow members
to develop specific proposals and ultimately reach a consensus agreement on changes to rules
and commitments in agriculture (WTO, 2001).

Key policy arrangements in competitor countries that impact upon the Australian horticulture
industry are discussed below:

   European Union: enforces strict food safety standards as well as high tariff barriers to
    horticulture imports. The European Union also provides farmers with a range of support
    through the Common Agricultural Policy (CAP). This support includes compensation
    payments for product withdrawn, direct production subsidies, export subsidies and rootstock
    adjustment programs. The European Union also supports the horticultural processing sector
    through manufacturing subsidies (ABARE, 2000b).

   United States: has in place a number of arrangements that impede trade in horticultural
    products. These include high tariffs, the North American Free Trade Agreement (NAFTA)
    which favours imports from Canada and Mexico over other trading nations and strict
    quarantine control for some products that impose fumigation cost on exporting countries
    even when there is no disease or pest risk. In addition, some states, such as California,
    have their own set of protocols which exporters must satisfy, thereby doubling the
    requirements that need to be met in order to export to this key US market.

    Recently, the US has also announced two key assistance measures for their domestic apple
    industry as part of the 2001 agricultural appropriations bill. Growers have been provided with
    $US100 million in assistance for market losses and an additional $US38 million for crop
    losses suffered by apple growers over the last two years (The Fruit Growers News, 2000).




        Hassall & Associates Pty Ltd                                                      Page 71
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   Japan: has relatively high tariff rates on some imported horticultural products. Japan has an
    import licensing system for all imports and enforces stringent quarantine controls on all
    horticultural products. Also, Japan evaluates applications for access to their market on a
    variety-by-variety basis. In 2000, the US was successful in the WTO in arguing against such
    a classification system (arguing for commodity classifications rather than by variety). Despite
    this, Australia still must still seek access under the old variety-based classification regime.

   South Korea: quarantine issues are a major impediment to market access for Australian
    horticultural producers. Most fruits are prohibited because of phytosanitary conditions.
    Bilateral discussions are held periodically to improve this situation. Once horticultural
    products are granted access, imports are subject to stringent quarantine measures and a
    high tariff quota system.

   China: Official access to China, when achieved, is likely to be impeded by SPS measures on
    imports. Gaining access will also take considerable time as China also assesses access on
    a „one product at a time‟ basis. To date, Australia has only been granted access to China for
    Tasmanian apples. China currently has very high import duties (30 percent), however these
    are likely to fall if China makes a successful accession to the WTO. Expectations are that
    tariffs on apples will decrease to 10 percent by 2004.

    Specific information on domestic support arrangements in China is difficult to obtain.
    According to the US State Department, direct subsidies for Chinese exports were abolished
    in January 1991, however, a number of indirect subsidies to China‟s manufactured exporters
    still exist. For example, manufacturing exporters have access to guaranteed provision of
    energy, raw materials and labour supplies and bank loans that do not need to be repaid or
    which enjoy lengthy and preferential payment terms. Exporters also have access to tax
    rebates and duty exemptions on inputs for export production (ABARE, 2000b).

    Chinese government assistance to fruit growers is administered at a county level.
    Assistance generally comes in the form of management advice, technical training, education
    on variety availability and market information (GAIN, 2000). Fruit growers are also taxed
    slightly differently to average Chinese farmers. Rather than turning over a certain
    percentage of their crop each year, fruit growers are assessed on a National Agricultural and
    Forestry Specialty Product Tax which equals approximately 12 to 13 percent of each
    individual growers annual income (GAIN, 2000).

All countries have some form of protectionist measures in place, although there are large
divergences in the level of protection imposed in different countries. Australia operates in line
with its WTO commitments on tariffs for horticulture. Tariffs on horticulture product imports into
Australia are among the lowest in the world, not exceeding 5 percent of the landed (import) value
and are zero on all fresh fruit and vegetables (ABARE, 2000b). However, in order to protect
human, plant and animal health and maintain our clean, green image and operating
environment, Australia does have stringent phytosanitary controls on imports of horticultural
products. The effects of phytosanitary restrictions on imports to Australia are discussed below.




      Hassall & Associates Pty Ltd                                                        Page 72
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4.2      Effect of Phytosanitary Restrictions on Imports to Australia
Under the World Trade Organisation SPS Agreement, a country is allowed to set its own
Appropriate Level of Protection (ALOP) with respect to SPS issues. The binding condition on
this is that the ALOP must be applied consistently. Australia historically has maintained a highly
conservative ALOP in order to protect our unique environment and our domestic industries from
the introduction of exotic pests and diseases. As a side effect, these quarantine-based
restrictions have kept the Australian market for fresh apples insulated from international
competition until recently.

Australia maintains stringent SPS measures for apple imports to prevent the introduction of a
range of horticultural pest and diseases affecting apples and other plant industries and the
environment, and which occur in other apple producing countries. Among these pests and
diseases is fireblight, which has been the subject of intense industry and media attention
recently. Fire blight is caused by a bacterium (harmless to humans) and is one of the major
world pests of pome fruit. The bacterium survives in dormant tissue and is known to be spread
by the movement of planting material. Apple varieties such as Pink Lady, Gala, Jonathon and
Jonagold are very susceptible whilst Golden Delicious is less susceptible and a few such as Red
Delicious are almost resistant if grown on a resistant rootstock. Fire blight is widespread in
Europe, North America and New Zealand (AAPGA, 2001). Fireblight also affects other plants,
and is of greater concern to the pear industry.

Phytosanitary measures also restrict the import of new rootstocks and varieties and delay the
entry for at least three years (whilst imported material is held in post-entry quarantine)53, if not
indefinitely. Recently, new rootstocks have been developed overseas to produce smaller trees,
bearing consistently higher yields and quality. These new rootstocks, some of which are
available in Australia, are easier to harvest, spray and prune, thereby reducing labour costs54.
Without access to high yielding rootstocks designed for intensive orchard production, Australia
will have difficulty remaining competitive on the world market. As noted earlier, current efforts by
the Australian Pome Fruit Improvement Program to decrease post-entry quarantine times will
benefit growers by providing faster access to better international varieties and by increasing
domestic industry security against fire blight via improved (active) testing.

Another outcome of Australia‟s phytosanitary measures is that until recently, domestic producers
have been somewhat insulated from the decline in prices that characterised world markets in the
mid-to-late 1990s. As imports of fresh apples increase, whether from Japan or from other
exporting countries approved in the future, these imports, combined with increased
concentration of retail buying power, will further subject local producers to global trade
influences.




53
   As noted in Section 2.1.1, the time required for post-entry quarantine is scheduled to be reduced from 4
years to 15 months in January 2002.
54
   The results of benchmarking undertaken by a group of Tasmanian producers revealed labour and labour
management as the key influences on grower returns.

      Hassall & Associates Pty Ltd                                                               Page 73
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4.3        Changes to Retail Mechanisms for Fresh Produce

4.3.1      Within Australia

Increasing retail concentration through supermarkets and large fruit barns55 is an important
industry issue within Australia. Traditionally, the retail sector was characterised by multiple
buyers, with small fruit and vegetable shops visiting markets every few days and competing to
secure product. These buyers took care with handling and product quality and maintained a
direct interface with their customers. They were directly reliant on a fruit and vegetable trade. In
comparison, large retail buyers are at least once removed from the customer, and if consumers
are not satisfied with the quality of apples on display, they will often spend money in-store on a
competing product (either another fruit or a snack product) (pers. comm., Jon Durham, CEO,
AAPGA).

The emergence of the three big supermarket chains and large fruit and vegetable barns has
changed the structure of retailing56. These competitors buy centrally and warehouse product. A
common complaint from growers is that such a retail structure results in product being “sleepy
and floury” by the time it is on retail shelves. This poor quality leads to reduced consumer
demand.

Inappropriate handling of apples by wholesalers and retailers has been identified by HAL as one
of the major causes of poor product quality (see Section 3.2.2). Efforts directed at encouraging
retailers to maintain the cool chain when handling and displaying apples will provide an
opportunity for the industry to promote produce quality and expand demand. Some current
varieties of apples are able to be kept for up to 12 months and retain their crispness and taste if
the cool chain is maintained. Growers claim that a bad experience with apples will put
consumers off for a long time, but that supermarkets and fruit and vegetable barns are not
particularly concerned about this as they have alternative snack foods or produce to sell in-store.
Therefore, efforts by HAL aimed at addressing this issue should provide positive benefits for
growers, retailers and consumers. This issue is discussed further in Chapter 7.

Peter McClymont (Chair, TOWAC Fruit Export Cooperative) comments that supermarkets are
getting better at handling product, with assistance from industry sponsored programs. However,
McClymont states that supermarkets face problems with improving handling as a result of high
staff turnover and the subsequent loss in working knowledge of handling procedures (pers.
comm., Peter McClymont, TOWAC Fruit Export Cooperative). Retailers are also constrained by
the availability of space in cold storage facilities.




55
   Fruit barns are large, stand-alone fruit and vegetable discount retailing operations, where customers
usually buy in bulk.
56
   The recent decision by Franklins to exit the retail sector as a chain operator will lead to changes in the
structure of fresh produce retailing. Franklins stores are being acquired by Woolworths (67 stores), South
African-based Pick „n Pay (60) and Foodland (35), with the remaining 100 stores to be acquired by a
variety of independent operators (Australian Financial Review, Tuesday 5 June, 2001). The entry of the
South African operator into the domestic retail sector (following the recent entry of Aldi supermarkets
(German-based)) will increase retail competition in the short-to-medium term.

        Hassall & Associates Pty Ltd                                                               Page 74
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Growers also complain that retail concentration results in a reduction in competition from buyers,
leaving them effectively as price takers. Anecdotal evidence abounds that historically growers
received more than half the retail price of fresh apples in Australia, whereas they currently
receive between 10 percent and 20 percent. Under current conditions, growers compete with
each other (to great extremes in some cases) to supply the large retailers. As a result of retail
concentration, the importance of wholesalers within the value chain has decreased, although
central markets still exist in all major Australian cities. Those brokers who have remained in the
marketplace are working on lower commissions and the major retail chains insist on a rebate,
effectively further reducing agents commission.

One claim to emerge from an analysis of retail concentration trends is that supermarkets wish to
stock small volumes of high profit lines that they can purchase all year round. This provides an
opportunity for growers to supply retailers to these specifications by adopting organised supply
cooperatives. The potential for the establishment of organised supply chains as an option to
enhance industry competitiveness is discussed in further detail in Chapter 7.

A trend that has emerged in recent years that may tend to work against the concentration of
fresh produce retailing in the hands of the supermarkets and a small number of large “fruit and
vegetable barns” is the development of internet retailing of fresh fruit and vegetables (e.g.
“greengrocer.com”). These emerging e-retailers are highly dependent on the delivered quality of
the produce they sell given that customers buy from Internet retailers sight unseen on the basis
of trust. Where quality standards are not met, customers are likely to permanently return to
traditional methods of purchasing fresh produce where quality can be personally assessed.

Given the imperative of these emerging e-retailers to secure reliable supply and the propensity
of their customers to be time poor and less price/cost sensitive, it would appear that there may
be opportunities for growers to establish supply arrangements individually or cooperatively with
these new e-retailers. However, it is quite likely that this sector will remain a niche market for the
foreseeable future with a limited customer base. Therefore, although the larger idea remains
valid, it is likely that there are limited expansion possibilities for producers along this avenue in
the next few years.

4.3.2        Globally

In recent years, the United Kingdom (UK) supermarket sector, the recognised global leader in
grocery retailing, has witnessed the emergence of two separate fresh supply models:

              Outsourcing of category management responsibilities; and
              Supermarket internalisation of the fresh produce supply chain.

These two trends, countervailing in nature, reflect the retail mechanisms currently faced by
exporters of Australian produce and the potential directions in which the domestic supermarket
sector in Australia may shift. A brief discussion of each fresh supply model is provided below.




        Hassall & Associates Pty Ltd                                                         Page 75
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Supermarket Outsourcing of Category Management Responsibilities

At least one of the major supermarket chains in the UK is in the process of shedding
responsibility for fresh produce purchasing, warehousing, transportation and even ownership of
produce on its shelves to external parties including integrated growers and supply chain
managers. The outsourcing of fresh produce category managers, in effect leaves the
supermarket as a landlord renting space to a produce supplier. Space (shelving), quality and
price requirements are determined by the supermarket, with supply responsibility left to a
contracted operator.

The short-term implications of this trend for Australian exporters of fresh produce are that they
need to be aware of the trend to outsourcing and either link up with contract operators, (who are
no longer the supermarkets), or be prepared to form or join alliances that can guarantee
supermarket requirements on a year round basis. In the longer term, if this model is adopted in
Australia, the above will need to be practiced domestically, and further concentration of buyers of
produce can be expected in a market where non-contract operators are left searching for low
priced residual outlets. Outsourcing of category management could potentially favour Australian
producers, as it would be one remedy for the current situation where supermarkets poorly handle
apples and put floury product on shelves, which softens consumer demand.

Supermarket Internalisation/Control of the Supply Chain

Internalisation/control of the supply chain is an older and more widely practiced fresh supply
model than the trend to outsourcing category management. Essentially, this
internalisation/control represents vertical integration in which supermarkets seek to control the
entire fresh produce supply chain. Under this model, growers contract to supply exclusively to
supermarkets, who then own the produce and set prices. Anecdotal evidence from the UK
suggests that once producers are locked into contract growing, supermarkets are able to exert
considerable pressure on prices received by growers.

Another overseas retail trend likely to impact on Australia in the future is the movement of
European supermarkets into the Asia-Pacific region57. These European supermarkets are
bringing with them their current sources of supply who are more likely to be Chilean or South
African than Australian. Long term supply agreements are in place between the supply country
and the European supermarket and as these new supermarkets absorb market share in Asia,
Australia might well find itself locked out of traditional export markets.

Peter McClymont stated that another trend to recently emerge overseas is that European
supermarkets are beginning to demand evidence of grower cost structure so as to justify
margins. Such efforts obviously increase the competitive pressure on growers who seek to
supply retail outlets, as well as increasing the potential for grower returns to be squeezed by
large retailers who have the ability to be price makers within the market (as opposed to growers
who are increasingly price takers).



57
 A recent example is the emergence of the German-based Aldi as a competitor within the domestic retail
market.

      Hassall & Associates Pty Ltd                                                           Page 76
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4.4          Likely Changes to International Trade Flows and Market Conditions
From the analysis in the last three chapters, five key trends can be gauged with respect to likely
changes to international trade flows and market conditions:

i)    Chinese production has not yet peaked. It can therefore be expected that China will drive
      further expansions in total world production, although production in other major nations is
      unlikely to match this Chinese expansion. As a result, Chinese market share of total world
      fresh apple production is likely to expand.

ii) In addition to increasing market share of total world apple production, China will likely
    emerge as a major exporter of fresh apple production. It is expected that China will continue
    to be a competitor in Australia‟s key Asian markets.

iii) In the absence of specific trade policy actions, it is unlikely that the price of CAJ imported
     into Australia will rise in the immediate future. Production of CAJ is forecast to increase
     through to 2008, once again with China as a key driver of this trend. China presently has
     sufficient idle capacity to expand domestic processing volumes, provided matching capital is
     raised. Historically, external processing companies have been interested in being involved in
     the Chinese industry.

iv) Global trade in both fresh and processed apple products is likely to become even more
    competitive in future. Factors driving this development include:

          Excess supply in global markets for fresh and processed products;
          Improved storage technology and longer-life varieties will that decrease the scope for
           traditional counter-seasonal supply (i.e. the window of opportunity to take advantage of
           counter-seasonal supply is closing);
          Trade policy developments such as the US anti-dumping decision that in effect drives
           more Chinese CAJ onto world markets; and
          Continued liberalisation of global markets (e.g. likely to occur if Chinese accession to the
           WTO is approved) will continue to free up barriers to trade.

v) On the domestic front, the opening of the Australian fresh apple market to import competition
   from Japan, and possibly other countries in the future, as well as future reductions in time
   required for post-entry quarantine, will increase the degree of influence that international
   trends have on the domestic industry.

In summary, competition in international trade will increase in future. Increased competition in
the immediate future will be both an outcome of, and take place in, an international market
characterised by oversupply and subsequently, dampened prices. China will continue to be the
dominant player in terms of apple production and CAJ exports. A less insulated domestic
market will mean that Australian industry will be more susceptible to global trends than has been
the case historically.




          Hassall & Associates Pty Ltd                                                        Page 77
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There are several important implications for the Australian industry arising from these changes to
international trade flows and market conditions. Firstly, the continuing emergence of China as
the dominant player in the world market will come as no surprise to Australian industry. Australia
(and our competitors) are well aware of this fact. Australian industry must utilise this knowledge
and seek to increase our production efficiency and cost competitiveness so as to preserve and
increase our current market share in competitive export markets58.

Australia must also closely monitor trade policy developments in competitor countries. Although
we are well placed to take advantage of the benefits of trade liberalisation (i.e. Australia has
lower levels of protection than key competitor markets such as US and EU), the imposition of
dumping and countervailing duties by national governments against imports from other nations
has flow-on impacts on the world market. For instance, any further successful action by
individual nations against Chinese CAJ imports (or any other nation exporting low-cost CAJ) will
redirect additional supply of CAJ to the world market. This will increase competition on the world
market at the same time as dampening world price and may alter trade flows depending upon
the juicing price paid in the country imposing the duties. Such developments will have important
implications for Australian industry (Chapter 6 outlines the economic impacts of CAJ imports on
Australian industry).

Changing domestic market conditions (with respect to fresh apple imports and post-entry
quarantine) provide scope for Australian industry to benefit. As discussed previously, more
efficient quarantine measures provide dual benefits of improving quarantine procedures and
allowing growers faster access to new international rootstocks and varieties. By being able to
adopt world‟s best practice in a more efficient manner, Australian growers will improve both the
production efficiency and cost competitiveness of the domestic industry.




58
  Measures of Australia‟s relative production efficiency and cost competitiveness are provided in Chapter
5 and options to improve industry competitiveness are outlined in Chapter 7.

      Hassall & Associates Pty Ltd                                                              Page 78
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5.           COMPARATIVE ANALYSIS OF THE AUSTRALIAN INDUSTRY
As outlined in the previous chapters, developments within the global apple industry, such as
expanded Chinese apple production, are becoming increasingly important for the Australian
apple industry. Increased international competition fuelled by expansion of Chinese production
is placing greater importance on maintaining competitiveness across all sectors of the Australian
industry. Without efforts directed at this, local growers will experience decreased net returns and
Australian market share of the global apple trade will diminish.

The following section provides a comparative analysis of the Australian apple industry in terms of
production efficiency and cost competitiveness. The productivity of the Australian industry is
assessed across key performance measures (production efficiency, infrastructure and inputs and
financial and market factors). A review of the cost competitiveness of the industry is also
provided at both a global and domestic level. Finally, the importance of quality as an attribute
influencing competitiveness is discussed and the perceived quality attributes of Australian
product are listed.

Ongoing benchmarking of Australian industry, as is undertaken in this chapter, is an important
component in the development of a philosophy within the domestic industry of continuous
improvement aimed at achieving and maintaining global competitiveness. Ongoing
benchmarking is essential in ensuring Australia remains and improves competitiveness in world
markets, particularly with regards our Southern Hemisphere competitors. The benchmarking
undertaken in this report could form a component of a future national education and
benchmarking program for the industry.

5.1       Productivity Measures
The World Apple Review (2000) ranks major apple producing nations in terms of productivity.
Three types of performance measures are used to gauge productivity:

          Production efficiency;
          Industry infrastructure and input quality; and
          Financial and market factors.

Each of these measures is discussed below, with the rankings of the leading nations (including
Australia) provided. From the aggregate of these measures an overall competitiveness ranking
is provided and conclusions are drawn as to what these rankings suggest about the international
competitiveness of the Australian industry.

The competitiveness rankings have two key uses:

          They allow a comparison of Australia‟s international competitiveness relative to other
           competitor countries; and
          They allow individual components of the wider competitiveness measure to be focused
           upon to pinpoint areas of weakness in terms of competitiveness.


          Hassall & Associates Pty Ltd                                                    Page 79
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What the overall rankings are unable to distinguish is:

         How some criteria are more relevant to more immediate competitiveness and others are
          indicators of long-term preparedness to compete;
         Within country (i.e. regional) divergences in performance; and
         Significantly, transport costs. This is an important shortcoming of these measures
          (transport costs are examined in detail in Section 5.2 where international cost
          competitiveness is reviewed).

5.1.1     Production Efficiency

The World Apple Review (2000) provides the definitive guide to comparative production
efficiency amongst apple producing countries. This review assesses production efficiency using
six key measures:

1.        Percent change in total production, 1992-94 to 1997-99: This is an indirect measure of a
          country‟s past success in competing in the marketplace. The use of three-year averages
          reduces the effect of seasonal variability in any one season.

2.        Relative variability of production, 1989-99: Year-to-year production variability increases
          the difficulties associated with conducting orderly marketing and to make future
          marketing plans. The measure of variability used was to divide the largest crop by the
          smallest crop over the decade being examined. Although variability tended to be largest
          in countries where apple plantings were expanding, the largest variations were still
          associated with seasonal weather factors.

3.        Percent of acreage non-bearing, 1999: Most analysts agree that growers/regions that are
          confident about remaining competitive in the global apple market will have a continual
          program of orchard renewal underway. Although too high a proportion of non-bearing
          acreage will increase financial risk, a higher non-bearing percentage will generally be
          preferred to a lower one.

4.        Percent of production in new varieties, 1999: The global market is rapidly shifting towards
          greater reliance on new varieties in place of traditional varieties such as Red Delicious
          and Granny Smith. New varieties provide higher current returns, provide better
          positioning for the future and are an indicator of the progressiveness of a country‟s apple
          industry.

5.        Planting density in 1999, trees per hectare: Across both new and established varieties,
          producers with higher densities of dwarf and semi-dwarf trees are more competitive than
          those with old plantings of low density orchards. Advantages associated with denser
          plantings include earlier production, higher production per hectare and increased
          efficiencies in production, harvesting and management.




         Hassall & Associates Pty Ltd                                                       Page 80
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6.      Average yield per hectare harvested, 1997-99: This key measure of productivity is
        affected by factors such as choice of rootstock, density of planting, soil, climate and
        region.

The results of the comparative analysis of production efficiency across these six key measures
are listed for major apple producing countries in Table 5.1.

Table 5.1      Comparative Production Efficiency Measures

                                                            % of
                               Relative
                 % Change in                % of Acreage Production Trees per ha, Yield per ha,
     Country                 Variability of
                 Production                 Non-bearing that is New     1999        1997-99
                              Production
                                                          Varieties
    Belgium           -18               3.82      0          71.3        1,969         42.6
    France          -11.2               1.34   10.8          25.5        1,008         35.1
   Germany           -6.6               2.38      0          54.6        1,632         24.9
    Greece          -11.1               2.14    2.2           0.3          381         21.6
      Italy          -2.1               1.28    8.6          11.3        1,000         33.3
  Netherlands       -17.6               3.00   14.3          68.3        2,152         36.6
     Spain            -12               2.12    6.1           5.6          233         15.6
       UK           -49.5               3.69      1           6.3        1,184         14.7
    Austria          54.3               1.78   20.5          37.3        2,285         25.5
 Russian Fed         -7.3               1.95   23.8             0          355          2.6
   Hungary          -34.4               2.72    5.2           9.8          627         13.6
    Poland           12.9               2.58     31          35.1          572         16.3
    Canada           -9.2               1.34    9.5             8          500         17.8
    Mexico           -6.3               1.67    9.8           2.7          225          8.1
      USA            -1.5               1.18      9          16.2          620         26.9
     China         112.3                4.86   21.6          26.8          125          8.6
     Japan           -7.4               1.38    5.7          62.7        1,000         18.5
    Turkey           19.5               1.38   15.8             0          356         23.4
   Argentina         29.1               1.47      7            10          576         24.3
   Australia           -6               1.25   26.9           9.5          415         15.6
     Brazil          63.3               2.13      3            89          575         24.4
     Chile           16.5               1.53   20.5          32.8          414         31.1
 New Zealand         15.7               1.58   12.5          58.1          850         46.1
  South Africa        5.8               1.33   19.6          13.1          847         38.1
  Yugosalvia          0.8               1.96     13             0          511          5.1
   Romania          -19.8               2.24    1.9             0          587          6.3
   Bulgaria             8               5.99    5.3             0        1,121          6.5
Source: World Apple Review (2000)




      Hassall & Associates Pty Ltd                                                     Page 81
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Key points to note from these data include:

         Australia was one of fifteen countries to experience a decline in production over the
          decade, however Australia was the only Southern Hemisphere country to experience a
          decline (see Table 3.2). China experienced the largest expansion (112 percent) whilst
          the UK exhibited the largest contraction in production (-50 percent);
         Australia ranked second to the United States in terms of consistency of production. The
          largest crop was only 25 percent greater than the smallest crop;
         Twenty percent non-bearing is often used as a best practice guideline for orchard
          renewal. Australia had a non-bearing rate of 27 percent, which is better than many of our
          competitors, fifteen of which had less than 10 percent of their acreage non-bearing, well
          below best practice;
         Australia had less than 10 percent of production that is new varieties, a ranking of 17 th
          overall. This is a concern, however it is noted that Australian growers are presently
          addressing this issue by increasing the proportion of new varieties planted;
         Australia ranked 20th in terms of density of plantings (415 trees per hectare). This was
          substantially less than Austria (2,285 trees per ha) but much greater than China (125
          trees per hectare);
         A ranking of 20th for density of plantings and 17th for new varieties suggests that
          Australian producers have been somewhat slow on the uptake of newer, high density
          varieties. As noted above, evidence suggests the industry has recognised this and is
          rapidly moving to address these issues; and
         In terms of yield, Australia ranked 18th. Australian yield was below yields achieved in all
          of our Southern Hemisphere competitors, most significantly, New Zealand. There was no
          clear relationship exhibited between tree density and yield.

There are several conclusions on Australian industry performance that can be drawn from these
data. The declining importance of Australian industry in terms of total production both in a global
context and within the Southern Hemisphere was discussed within Section 3.1. Declining
market share of total production means that Australian export markets (both current and future)
are put at risk, particularly if relationships with our trading partners are not suitably managed. A
decreasing proportion of Southern Hemisphere and global production makes it more difficult for
Australia to influence global trading markets and raises problems associated with variability in
domestic supply and the impacts this has on maintaining hard won export markets59 (as
discussed in Chapter 2 with respect to Malaysia and Singapore in 1998 and India in 2001). Our
competitors who have increasing supply will be able to use this as a comparative advantage
relative to Australia in so much as they will be more likely to be able to continually supply export
markets in the future, unlike Australian industry which redirects product to the more valuable
domestic market when production falls.


59
   Being less susceptible to adverse climatic conditions than many of our competitors assists Australia to
maintain a relatively low level of production variability (second only to USA). However, domestic stocks
are not sufficient to absorb production variations, with export markets sacrificed for higher domestic
returns when domestic production shortfalls abound (such as in 1998 and 2001).

         Hassall & Associates Pty Ltd                                                           Page 82
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Another important conclusion to draw from these data is that it is apparent that the Australian
industry is currently planting new varieties in response to changing market conditions. A non-
bearing percentage of 27 percent indicates that Australian producers are undertaking a program
of orchard renewal (as exemplified by the movement away from Red Delicious in NSW, (see
Section 2.1.1 for comments on changes in varieties)). This movement to new varieties should
be reflected by an increase in the proportion of production that is new varieties (currently less
than 10 percent) in coming years, further enhancing the overall production efficiency of the
Australian industry60. In addition, our overall competitiveness will also improve as orchard
intensification becomes more prevalent within Australia. As with the uptake of new varieties, this
is a trend that is already beginning to emerge within Australia demonstrating that the industry is
responding to those factors that are viewed as perceived weaknesses of the industry.

Table 5.2 lists the top fifteen ranked nations in terms of production efficiency.

Table 5.2         World Rankings According to Production Efficiency
   Rank                                                Country
     1                                                  Austria
     2                                               New Zealand
     3                                               Netherlands
     4                                                   Chile
     5                                               South Africa
     6                                                  France
     7                                                   Brazil
     8                                                 Belgium
     9                                                  Poland
    10                                                   Japan
    11                                                Germany
    12                                                 Australia
    13                                                    Italy
    14                                               United States
    15                                                  Turkey
Source: World Apple Review (2000)

Underlying these rankings are the following results:

         China, Brazil and Austria had the greatest increase in production over the last decade;
         The US and Australia had the smallest relative variability of production;
         Poland and Australia had the highest percent of acreage non-bearing;
         Brazil, Belgium, Japan and New Zealand had the largest percentage of production that is
          new varieties;
         New Zealand and Belgium had the highest yield per hectare; and
         Austria and the Netherlands had the highest density of plantings.

60
  Newer varieties such as Fuji and Pink Lady also have greater yields than traditional varieties such as
Red Delicious. Movements from traditional to new varieties will therefore boost average yield for the
Australian industry.

         Hassall & Associates Pty Ltd                                                          Page 83
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When compared to the total share of world production and exports that Australia commands (<1
percent), our ranking of twelfth in terms of production efficiency compares exceptionally well
relative to other global producers. This signifies that our efficiency exceeds the ability that we
have to influence global markets, a very important factor considering the global market is
becoming increasingly competitive and Australian industry will be more and more sensitive to
global conditions in the future. Of particular note is that despite China dominating world apple
production they are not ranked within the top nations in terms of production efficiency (they are
ranked 17th). A flipside to this is that there exists scope for China to improve production
efficiency in future, thus improving their international competitiveness. A key challenge for China
in the future will be that as Chinese affluence increases and labour costs increase in response,
their high dependence on labour to service larger trees will become a disadvantage, driving
production costs higher (effectively decreasing their competitiveness in this respect).

Despite our high ranking relative to many larger producing nations, it is our ranking with respect
to our Southern Hemisphere competitors that is most important, given the fact that we compete
directly with these countries to supply out-of-season into the Northern Hemisphere and many of
these competitors export large proportions of their total production (see Section 3.1). Of our five
major Southern Hemisphere competitors, Australia ranks behind New Zealand (2nd), Chile (4th),
South Africa (5th) and Brazil (7th), although we are ranked above Argentina (16th)61. When
examined on this scale, the view of Australia‟s excellent position on the world scale is sobered
somewhat, and the challenge facing the Australian industry, in terms of improving
competitiveness with respect to our most important competitors, becomes apparent.

Improvements in production efficiency in the near future will be driven by a (continual) movement
to new varieties and orchard intensification (as discussed above). This represents our best hope
for improving our world ranking in terms of production efficiency. The biggest threat to our
current ranking would be any loss of momentum in this structural adjustment process and any
further loss of share of total world production.

5.1.2      Industry Infrastructure and Input Quality

The infrastructure and quality of inputs available to support the industry are key determinants of
competitiveness. Factors that influence competitiveness include:

          Adequacy of storage;
          Modern packing facilities;
          Efficiency of transport and distribution;
          Effectiveness of marketing systems;
          Availability and cost of suitable land;
          Water availability;
          Labour supply; and
          Costs of inputs.



61
     Recall that HAL identifies South Africa, New Zealand and Chile as our most important competitors.

          Hassall & Associates Pty Ltd                                                            Page 84
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The World Apple Review (2000) measured each of these factors using subjective scores on a
scale of one to ten. When ranked in terms of competitiveness of infrastructure inputs, the top
five countries were Chile, New Zealand, USA, Argentina and Canada. Australia ranked eight
amongst the major producing nations. Table 5.3 lists the top 15 ranking nations according to
industry infrastructure and input quality.

Table 5.3        World Rankings According to Industry Infrastructure and Input Quality
   Rank                                              Country
     1                                                 Chile
     2                                             New Zealand
     3                                             United States
     4                                              Argentina
     5                                               Canada
     6                                             South Africa
     7                                                France
     8                                               Australia
     9                                                Turkey
    10                                                 Brazil
    11                                              Germany
    12                                               Belgium
    13                                                  Italy
    14                                                Austria
    15                                                 Japan
Source: World Apple Review (2000)

Once again, four of Australia‟s five major Southern Hemisphere competitors rank higher than we
do, with only Brazil (10th) ranked below us in terms of infrastructure and inputs. Despite this, a
world ranking of eighth far exceeds the position we hold in terms of total production and total
exports within the world market. Major competitors that rank below us include Turkey (9 th),
Germany (11th), Italy (13th), the Netherlands (16th) and China (22nd). However, once again, the
importance of our performance relative to Northern Hemisphere competitors must be kept in
context relative to our performance against Southern Hemisphere competitors.

Another factor to consider when evaluating these rankings is that it is often difficult to accurately
differentiate performance when using subjective assessments. Where measures are estimated
using subjective scores, arbitrary decisions are made. Thus, these measures are ranked in
terms of relative guides rather than absolute measures of efficiency or performance. The major
weakness of subjective scores is that they are prone to bias. However, in this case there is no
reason to believe that Australia would be either favoured or disadvantaged by the use of
subjective assessments.

5.1.3    Financial and Market Factors

Financial and market factors have become increasingly important as international trade has risen
in prominence. Factors that are taken into account as part of the World Apple Review (2000)
review of international competitiveness include:

        Hassall & Associates Pty Ltd                                                        Page 85
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          Interest rates (1999);
          Inflation (1999);
          Capital availability (using a subjective score, 1-10);
          Security of property rights (subjective score, 1-10);
          Product quality control (subjective score, 1-10);
          Percent of production exported (actual, 1997-99); and
          Average export price (actual, 1998).

Table 5.4 lists the top 15 ranked nations in terms of competitiveness with respect to financial and
market factors.

Table 5.4          World Rankings According to Financial and Market Factors
   Rank                                                Country
     1                                              New Zealand
     2                                                 Belgium
     3                                              Netherlands
     4                                                  France
     5                                                  Japan
     6                                                   Chile
     7                                              United States
     8                                                Argentina
     9                                                Australia
    10                                                   Italy
    11                                                 Canada
    12                                                Germany
    13                                             United Kingdom
    14                                              South Africa
    15                                                  Austria
Source: World Apple Review (2000)

New Zealand‟s first place ranking is not surprising given the intensive deregulatory regime that
characterised this nation during the 1980s and 1990s. Relative to other Southern Hemisphere
competitors, Australia has an inferior ranking to Chile (6th) and Argentina (8th), but has a superior
ranking to South Africa (14th) and Brazil (17th).

Although the industry is unable to influence them, current low interest rates and inflation will
assist Australia to improve their relative performance according to financial and market factors in
the future. In addition, efforts to improve product quality (see Section 7.3) and greater uptake of
quality assurance programs such as Integrated Fruit Production (IFP) (see Section 7.1) will help
Australia to improve their subjective score for product quality control. In the same way, the
development of an enhanced export focus across the entire industry will lead to a greater
proportion of production exported, and coupled with improved quality, should increase average
export prices for Australian industry62.

62
     Assuming other things remain equal.

          Hassall & Associates Pty Ltd                                                      Page 86
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5.1.4    Overall Competitiveness Rankings

The overall competitiveness rankings, taking account of production efficiency, infrastructure
inputs and financial markets, are listed in Table 5.5.

Table 5.5        Competitiveness Rankings of Major World Apple Suppliers, 2000
                                          Production        Infrastructure &       Financial &
Country                   Overall
                                          Efficiency             Inputs              Markets
New Zealand                 1                  2                     2                  1
Chile                       2                  4                     1                  6
Netherlands                 3                  3                   16                   3
France                      4                  6                     7                  4
United States               5                 14                     3                  7
Belgium                     6                  8                   12                   2
Austria                     7                  1                   14                  15
South Africa                8                  5                     6                 14
Argentina                   9                 16                     4                  8
Japan                     10                  10                   15                   5
Australia                 11                  12                     8                  9
Canada                    12                  19                     5                 11
Germany                   13                  11                   11                  12
Italy                     14                  13                   13                  10
Brazil                    15                   7                   10                  17
Source: World Apple Review, (2000)

Table 5.5 shows that Australia was ranked 11th of major international producing nations in terms
of overall competitiveness. Amongst Southern Hemisphere producers, of which New Zealand
was obviously the standout, Australia was ranked fifth. Other Southern Hemisphere competitors
were Chile (2nd), South Africa (8th), Argentina (9th) and Brazil (15th). Quite obviously, Southern
Hemisphere nations are extremely competitive. Despite the fact that none of these nations are
ranked in the top ten in the world in terms of volume of production, all six major Southern
Hemisphere producers are ranked within the top 15 nations in terms of international
competitiveness. Significantly, four of these nations (Chile, New Zealand, South Africa and
Argentina) are ranked within the top ten exporters in the world. This suggests that for Australia
to remain competitive with these countries, we must focus upon shoring up existing export
markets and expanding into new markets with quality, market-driven varieties (i.e. develop an
enhanced export focus – see Chapter 7).

Despite their dominance of world production, China was ranked 21st overall, with rankings of 17th
(production efficiency), 22nd (infrastructure inputs) and 19th (financial markets). Of the top five
world apple producing countries in volume terms (China, United States, France, Turkey and
Italy, see Table 3.1), only the United States and France were ranked in the top five in terms of
competitiveness (ranked fourth and fifth respectively). The other rankings were China (21 st),
Turkey (18th) and Italy (14th).




        Hassall & Associates Pty Ltd                                                      Page 87
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The main point to emerge from the overall rankings of international competitiveness is that
despite the fact that Australia ranks above many major competitors on the world market
(especially relative to our market share and total production), we compare less favourably with
our direct competitors in the Southern Hemisphere. Thus, the key point to take away is that
despite comparing very well within a global perspective, we have an ongoing challenge to
continually improve competitiveness and efficiency so as to compete with our direct Southern
Hemisphere competitors. Processes that are currently in place to ensure this occurs include the
adoption of new varieties within orchards and the development of new export markets on the
subcontinent. Continued efforts to improve growing and packing quality (see Section 7) and
efforts directed towards the development of an enhanced export focus within industry will also
assist the industry in improving competitiveness and efficiency.

Our overall competitiveness ranking relative to our Southern Hemisphere competitors suggests
there is continual room for improvement within individual components of productivity measures
(such as production efficiency measures including percentage of production that is new varieties,
density of plantings and yield per hectare). It is harder to identify measures that are ranked
according to subjective criteria when attempting to pinpoint areas where Australia can improve
international competitiveness. Obviously a stable domestic economy aids when examining
financial and market factors. In addition, Australia is well placed with respect to some of the key
infrastructure and input measures (e.g. labour supply and availability and cost of land).

5.2      Comparison of Cost Competitiveness

5.2.1      International Comparisons

As part of a benchmarking exercise of the Australian apple industry undertaken by the AAPGA in
1997, an exercise was undertaken that compared total on-farm costs of production between
Australia, United States, South Africa and New Zealand63. These nations were all ranked above
Australia in terms of international competitiveness by the World Apple Review (2000) (New
Zealand (1st), United States (5th) and South Africa (8th) compared to Australia (11th)). In addition,
South Africa and New Zealand have been identified by HAL as two of our three key competitors
in the global industry. Therefore, a comparative analysis of costs of production provides a good
indicator of Australia‟s cost competitiveness relative to these key competitors.

Table 5.6 outlines the comparative on-farm costs for each of the four nations. Depreciation and
interest costs are not included.




63
     Costs associated with packing, storage, freight and marketing are not included in this analysis.

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Table 5.6        Comparative On-Farm Costs ($AUD/ha)
Cost Component                 Australia      United States       South Africa       New Zealand
Machinery costs                    765              161                840              1,108
Labour                           2,881            1,965              2,682              4,423
Chemicals                          880              360              1,156              1,477
Overheads                          156              221                524                379
Irrigation & Electricity           180               95                340                178
Fertiliser                         272               12                270                232
Insurance                          275               19                196                  -
Fuel & Oil                         284               97                288                  -
Other                              181              198                648                742
Total Cost ($/ha)               $5,874           $3,128             $6,944             $8,536
Source: AAPGA (1997)

Overall, Australia has lower per hectare on-farm costs than South Africa and New Zealand, but
significantly higher costs than those incurred in the US. In terms of the significance of individual
components of total costs, Table 5.7 summarises the proportion of total costs that each cost
component accounts for by each country.

Table 5.7        Proportion of Total On-Farm Costs by Cost Component (%)
Cost Component                 Australia      United States       South Africa       New Zealand
Machinery costs                   13                 5                12                 13
Labour                            49                68                39                 52
Chemicals                         15                12                17                 17
Overheads                           3                7                 8                  4
Irrigation & Electricity            3                3                 5                  2
Fertiliser                          5                0                 4                  3
Insurance                           5                1                 3                   -
Fuel & Oil                          5                3                 4                   -
Other                               3                6                 9                  9
Total Cost                       100               100               100                100
Source: AAPGA (1997)

Machinery, labour and chemical costs are the major cost components accounting for 68 percent
or greater of total costs per hectare across all four countries. Labour costs were the single most
significant cost component, accounting for almost half of total costs in Australia, and an even
greater proportion of total costs in New Zealand (52 percent) and the United States (68 percent).
Labour costs in South Africa accounted for a far smaller proportion of total costs (39 percent)
than they did for their direct competitors, Australia and New Zealand.

Overall, Australian on-farm costs per hectare are:

        188 percent greater than those incurred in the United States;
        18 percent less than those incurred in South Africa; and
        45 percent less than those incurred in New Zealand.


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Despite these conclusions, a more important cost comparison measure to analyse is on-farm
costs per tonne. On a per tonne basis the conclusions derived above differ substantially. Based
on the World Apple Review (2000), New Zealand has the highest yields in the world (46.1 t/ha,
see Table 5.1). This is three times greater than Australia (15.6 t/ha), and higher than the US
(26.9 t/ha) and South Africa (38.1 t/ha). Indicative unit costs per tonne are outlined in Table 5.8.

Table 5.8      Comparative On-Farm Costs ($/tonne)
Cost Component              Australia       United States        South Africa       New Zealand
Total Cost per hectare       $5,874            $3,128              $6,944             $8,536
Yield per ha, 1997-99         15.6               26.9               38.1               46.1
Total Cost ($/t)              $377              $116                $182               $185
Source: Adapted from World Apple Review (2000)

Accounting for yield variations between countries reveals a much different outcome for Australia
in terms of on-farm cost competitiveness. Whereas Australia maintains a cost advantage on a
per hectare basis with respect to South Africa and New Zealand, on a per tonne basis, Australia
has on-farm costs approximately twice those incurred by these two key competitors.

Yield is heavily dependent on a range of factors, including variety. Australia‟s heavy dependence
on Delicious varieties is a significant factor in Australia having a lower average yield per hectare
than New Zealand. As new varieties mature in place of Delicious varieties, Australian yields are
expected to rise.

Other factors that influence yield are climate and soils. Australia does not have the favourable
natural resources of large areas of consistent fertile soil, flat topography, water resources, and
suitable climate for growing apples compared to other international regions in New Zealand
(Hawkes Bay), US (Columbia Basin in Washington, California), Northern Italy, South Africa and
Chile. These factors all contribute to the lower yields achieved by Australian industry.

Another key factor, which must be taken into account when assessing the international cost
competitiveness of Australia, are transport costs. The cost of sea freight to export markets can
be a major cost impacting on competitiveness, with timeliness and reliability major issues in
terms of measuring overall cost competitiveness. Table 5.9 provides a comparison of the cost
and length of transport to Asian markets for Australia, United States, Chile and New Zealand.
Data provided is for 1995 and does not include port and stevedoring costs or insurance.




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Table 5.9       Comparison of Cost and Length of Time to Transport to Asian Markets ($AUD)
                             Australia              Washington State (US)                  Chile                        New Zealand
  Container
                      Cost               Time        Cost             Time        Cost               Time           Cost             Time
    Type
                                                                        TO SINGAPORE
                                                                                                                                  19-20 days
 20 ft Reefer       $3,650 -                                                                                                     (ex Nelson),
                                                      na               na           na                na           $4,054
  Container          $3,900          12 days                                                                                      15-16 days
                                    (ex Adel.),                                                                                   (ex Napier)
                                  9-17 days (ex                                                                                   19-20 days
                                                                                                   35-42 days
 40 ft Reefer       $6,500 -          Melb.)        $5,905 -                                                                     (ex Nelson),
                                                                     19 days     $10,135            via Long       $8,108
  Container          $7,215                          $6,925                                                                       15-16 days
                                                                                                     Beach
                                                                                                                                  (ex Napier)
                                                                        TO HONG KONG
                                    21-28 days                                                                                     23-24 days
 20 ft Reefer       $3,750 –      (ex Adel.), 18-                                                                                 (ex Nelson),
                                                      na               na           na                na           $4,054
  Container          $4,500        24 days (ex                                                                                     19-20 days
                                      Melb.)                                                                                       (ex Napier)
                                                                                                                                   23-24 days
                                                                                                   32-39 days
 40 ft Reefer                                       $3,567 -                                                                      (ex Nelson),
                       Na                 na                        15-16 days   $10,135            via Long       $8,108
  Container                                          $4,443                                                                        19-20 days
                                                                                                     Beach
                                                                                                                                   (ex Napier)
Reef Charter to Estimated to be $4.50/carton                                      Estimated to be $8.25 -            Estimated to be $6-
                                                               na
     Asia              to Singapore                                              $8.93/carton to Hong Kong      $6.24/carton for fruit to Japan
Source: AAPGA (1997)




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The cost comparison demonstrates that:

           Australia has economy of scale advantages when using 40 foot reefer64 containers
            compared to 20 foot reefer containers;
           The US has a significant competitive advantage in shipping to Singapore. Forty foot
            reefer container costs from the US to Singapore are cheaper than from Australia by
            $290-$595. In addition, qualitative information gathered from Asian markets indicates US
            shipping services are more reliable (in terms of arriving on time) than Australian shipping
            services (AAPGA, 1997);
           New Zealand faces the same problems as Australia in relation to shipping costs.
            However, wherever possible, New Zealand exporters use reefer charters to markets that
            will take large quantities of fruit; and
           The export of Chilean product to Asia is not likely to be competitive due to the high cost
            and length of voyage. Any product exported to Asia from Chile would be done so in a
            reefer charter.

Shipping services available to Australian exporters are generally uncompetitive with the reefer
charter services available from the US in terms of cost, voyage time and reliability. New Zealand
exporters, when faced with the same problem as Australia, use reefer charters. Reefer charters
are the only viable transportation option for Chilean product. Therefore, transportation costs
increase the difficulty Australia faces when competing in Asia. It was noted by the AAPGA that if
Australia wanted to increase its competitiveness in Asian markets it would need to take greater
control of shipping through greater utilisation of reefer charters. In order to do this, Australian
producers would need to put in place reliable supply consolidation arrangements, and an
effective marketing and distribution strategy in target export markets (AAPGA, 1997).

5.2.2       Domestic Comparisons

As part of the 1997 AAPGA benchmarking study, cost information was collected from domestic
growers and grower packers across Australia. Although the data is somewhat dated now, it
does provide comparisons of the costs of production across Australian states. Table 5.10
outlines the per hectare cost of production for growers and grower/packers across Australian
states.

Table 5.10          Average Cost of Production ($/ha), 1993-94
Business         NSW/SA/VIC                    QLD           WA             TAS            TOTAL
Grower               $8,234                   $5,388        $5,314         $8,743          $7,502
Grower/Packer        $9,412                     na          $6,532         $12,307         $9,651
Source: AAPGA (1997)

Table 5.10 shows that (based on 1993-94 data) growers in Queensland and Western Australia
have substantially lower costs of production per hectare than those in the Southern states.
Grower/packers in Western Australia have a similar advantage over their counterparts in the
Southern states. Average costs of production per tonne are listed in Table 5.11.

64
     Reefers are refrigerated shipping container vessels.


           Hassall & Associates Pty Ltd                                                       Page 92
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Table 5.11     Average Cost of Production ($/t), 1993-94
Business         NSW/SA/VIC              QLD              WA              TAS            TOTAL
Grower               $453                $508            $320             $401            $438
Grower/Packer        $467                  na            $407             $525            $501
Source: AAPGA (1997)

Lower production costs per tonne in Western Australia relative to other states are a reflection of
a more modern industry in Western Australia. New varieties, particularly Pink Lady and
Sundowner, have high yield profiles and hence lower costs per tonne of production.

Table 5.12 shows average cost components as a proportion of total costs for Australian apple
growers, by region.

Table 5.12     Cost Components as a Proportion of Total Costs (%) (Apple Growers)
Production Input                NSW/SA/Vic       Qld             Tas         WA            Total
Labour                              39              38             44          28             39
Chemicals                           12              13             10           7             12
Repairs & maintenance                5               9              5           7              6
Insurance                            4               2              5           3              4
Fertiliser                           3               6              2           5              4
Fuel & lubricant                     4               4              4           5              4
Electricity                          2               2              3           5              2
Depreciation                        13              17             11          16             13
Interest                             9               4             10          11              8
Overheads                            2               3              3           3              2
Other                                8               4              3           8              8
Total cost of production (%)      100%           100%           100%        100%           100%
Average orchard size (ha)           27              27              9          21             24
Average yield (tonnes)             552             352            230         243            442
Source: AAPGA (1997)

The four largest cost components incurred by growers were labour, depreciation, chemicals and
interest payments. On average, these costs made up approximately 72 percent of the total costs
of production. Labour and chemical costs in Western Australia accounted for substantially less
(35 percent of total costs) than in other states (>50 percent). Once again, this is a reflection of a
more modern Western Australian industry. Orchard consolidation and adoption of new
rootstocks and varieties since 1997 would alter these data reported above.

Table 5.13 shows average cost components as a proportion of total costs for Australian apple
growers/packers, by region.




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Table 5.13          Cost components as a Proportion of Total Costs (%) (Growers/Packers)
Production Input                  NSW/SA/Vic         Tas               WA               Total
Labour                                38               56               46                45
Chemicals                             13               10                5                12
Repairs & maintenance                  8                7               10                 8
Insurance                              3                3                2                 3
Fertiliser                             3                2                4                 3
Fuel & lubricant                       3                3                7                 3
Electricity                            3                2                4                 3
Depreciation                           8                4                5                 6
Interest                              11                2                4                 8
Overheads                              4                2                2                 3
Other                                  5               11               11                 6
Total cost of production (%)       100%             100%             100%              100%
Average orchard size (ha)             38               43               14                34
Average yield (tonnes)               734            1,008              302               704
Source: AAPGA (1997)

The four largest cost components for grower/packers were labour, chemicals, repairs and
maintenance and interest. Of these, labour was the largest component contributing, on average,
45 percent of total production cost. Relative to grower operations, labour absorbed a greater
proportion of total costs for grower/packers, particularly in Western Australia. Traditionally, many
grower operations also had packing operations. However, the high degree of sophistication in
packing operations today means that many growers no longer undertake this second stage of
the production value chain. Co-operative packing arrangements amongst growers are becoming
more prevalent.

5.3       Quality
Quality is an extremely important factor that influences the competitiveness of the Australian
apple industry. Product quality is important in terms of:

          The domestic market, where quality influences consumer apple purchases relative to
           other competing products (such as other fruits, snack products and confectionary); and
          The export market, where quality provides a means by which to differentiate Australian
           product relative to that of our major competitors.

An analysis of the adoption, implementation and understanding of quality systems and
requirements was undertaken by AAPGA for the Australian industry. A number of interviews
were undertaken to gain an understanding of the quality perceptions of buyers on both the
domestic and international markets and also the quality perceptions of Australian apple
producers. These interviews indicated that buyers on the domestic market did not believe that
any particular production region dominated the market with regards to quality (AAPGA, 1997).
Produce preferences were strongly regional with local production areas favoured when fruit was
available. Interviews with international buyers indicated that Australia was commonly rated



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behind our major competitors with respect to fruit quality. Despite this, a number of markets
rated Australian fruit highly with regard to flavour (AAPGA, 1997).

Domestic and international customers and Australian producers were asked to nominate their
top five quality issues with respect to Australian product. These issues are listed in Table 5.14.

Table 5.14        Top Five Quality Issues by Survey Group
       Domestic Customers               International Customers              Australian Producers
                                      Reliable & consistent quality of
     Consistent quality of supply                                        Absence of disease and defects
                                                   supply
                                       Overall visual appeal including
        Eating quality/texture                                                    Visual quality
                                                   colour
          Shelf life                       Eating quality/texture                 Eating quality
          Maturity                               Sweetness                        Hail Damage
           Colour                     Absence of disease and defects                 Colour
Source: AAPGA 1997

Table 5.14 demonstrates the fact that quality issues considered critical by Australian apple
producers differ from those highlighted by both domestic and export customers. Despite this
discrepancy, the Australian industry is becoming increasingly aware of the market emphasis on
non-visual aspects of fruit quality (flavour and texture) that were previously considered to be of
secondary importance (AAPGA, 1997). It is noteworthy that neither producers nor consumers
identified food safety or sustainability issues in their quality assessment. This is surprising given
the resources allocated by industry to this issue65.

Domestic producers in different states nominated different quality issues as priorities when
questioned with respect to the most sought after quality attributes for apples. Table 5.15 outlines
the quality priorities identified by state growers.

Table 5.15        Quality Priorities for Domestic Producers by State
      Qld                NSW               Vic               SA               WA                Tas
 Eating quality        Fruit size       Uniformity      Eating quality   Hail Damage         Uniformity
   Disease
                     Eating quality     Fruit size      Pest damage      Visual Quality      Fruit size
   damage
                        Disease                            Disease
 Pest damage                           Hail Damage                          Colour            Colour
                        damage                             damage
 Visual Quality          Colour           Colour        Visual Quality   Pest damage       Visual Quality
                                         Disease
 Hail Damage         Pest damage                           Colour         Uniformity       Eating quality
                                         damage
Source: AAPGA 1997

65
   Section 7 contains an option for industry targeted towards greater development and adoption of
industry-wide quality assurance and environmental management systems and processes (e.g. Integrated
Fruit Production (IFP) and Environmental Management Systems (EMS)). Such systems are growing in
importance, and Australian industry has demonstrated the practical application of quality assurance
programs in recent years, particularly with exports to the UK.


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Common attributes identified by growers across states include colour, eating and visual quality
and disease and pest damage.

The AAPGA also undertook a comparative assessment of the quality systems in place in two
major competitor countries: USA and South Africa. It appears that formal quality systems are
similar between the three countries. Comparative findings are listed in Table 5.16.




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Table 5.16     Comparative Analysis of Quality Systems and Implementation
                                         Australia                                      USA                                      South Africa
                                                                                                                       Formal systems uncommon, but
              Orchard               Few formal systems                         Few formal systems                    growers encouraged to adopt TQM
 Quality                                                                                                                   principles in the orchard
 System                                                                                                             Industry wide quality system in place
               Pack
                                    Few formal systems                         Few formal systems                    and plan for widespread adoption of
               house
                                                                                                                              ISO 9002 by 2000
                                                                       Seasonal standards set and „policed‟
                            Seasonal standards set by grower                                                        Legislative standards set annually for
  Quality Standards                                                     by individual producer groups, no
                          groups, no uniform national standards                                                       both export and domestic market
                                                                             industry wide standard
                                                                                                                   Primary Products Export Control Board
                             Field and pack house staff within           Field and pack house staff within
 Quality assessment                                                                                                    enforce export standards, govt
                            grower organisations – no external          grower organisations – no external
   and Inspection                                                                                                   inspectors enforce domestic market
                                       assessment                                  assessment
                                                                                                                                 standards
  Factors affecting          Orchard practices, virus free trees,     Tree training and effective information
                                                                                                                         General orchard practices
        quality                  harvest and handling practices         feedback from pack house/market
Quality issues of most     Absence of pest and disease damage,        Colour, limb rub, bruising, sunburn and       Codling moth, bruising, russet, bitter
       concern              visual and eating quality, hail, colour                  fruit size                           pit, core rot and sunburn
                          To achieve minimum standard required                                                      Maturity assessment and to satisfy
Overall quality focus                                                 Maturity testing for harvest and storage
                           for market, primarily visually assessed                                                             market standards
                             Good feedback from all parts of the                                                     Via marketing chain to field staff &
   Quality feedback                                                     From the pack house via field staff
                                          supply chain                                                                             growers
                               Informal quality systems may be
                                                                                                                      Legislative standards are in place
                                implemented by individual pack
                                                                       Quality systems may be implemented             which are implemented by grower
                             houses/grower groups, but industry
                                                                         by individual pack houses/grower          groups. Procedures are also in place to
                          focus remains on short term fruit quality
 Summary Comment                                                        groups but there is no industry wide          ensure growers meet standards.
                              rather than establishing a quality
                                                                        standard. Quality systems focus on           Quality is linked to grower returns,
                             system for long term improvement.
                                                                      fruit maturity and suitability for storage   therefore there is a direct cost for poor
                                Less emphasis on fruit maturity
                                                                                                                   quality, especially at pack house level.
                           monitoring relative to other industries.
Source: AAPGA (1997)


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5.4       Summary
This comparative analysis of Australia‟s production efficiency and cost competitiveness has
revealed:

          Australia is ranked twelfth in the world in terms of production efficiency and eleventh
           in terms of overall competitiveness. Although Australia compares favourably with
           many Northern Hemisphere competitors (especially relative to our market share of
           total global production), most of our Southern Hemisphere competitors have superior
           rankings (New Zealand (1st), Chile (2nd), South Africa (8th) and Argentina (9th). Only
           Brazil (15th) has a less favourable ranking;

          In terms of on-farm cost competitiveness, Australia ($377 per tonne) does not
           compare favourably with South Africa ($182/t), New Zealand ($185/t) and US
           ($116/t). Lower yields in Australia (due to variety choice and growing conditions) are
           the main reason for our lack of on-farm cost competitiveness, although these data do
           not include storage, handling, freight and marketing costs; and
          Australian industry is becoming increasingly aware of the market emphasis on non-
           visual aspects of fruit quality (product consistency, flavour and texture). Common
           quality attributes identified by growers include colour, eating and visual quality and
           disease and pest damage.




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6. ECONOMIC IMPACT OF APPLE JUICE IMPORTS ON THE
   DOMESTIC APPLE MARKET
The following chapter provides an overview of the economic impact of apple juice imports on
the Australian apple industry. Impacts are reported for each sector in the apple value chain
i.e.:


           Impact on growers, consisting of impacts on the:
                o   Domestic fresh apple market;
                o   Export fresh apple market; and
                o   Domestic juicing apple market.
           Impact on processors66;
           Impact on converters67;
           Impact on processor/converter conglomerates;
           Impact on juice exporters; and
           Impacts on consumers.

A combination of conceptual economic techniques and information supplied by industry
participants is utilised to describe the economic impacts on each sector. Availability of
reputable industry statistics has hamstrung detailed quantitative analyses.

6.1           Conceptual Model of the Australian Apple Industry
Figure 6.1 shows a conceptual model of the Australian apple industry showing major
activities in the value chain and product flows between sectors.




66
     Who crush Australian apples and produce fresh juice and CAJ.
67
     Who blend CAJ in preparation for retail sale of juices.


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Figure 6.1     Conceptual Model of the Australian Apple Industry


       Local Consumer Juice                  Local Converters,                        Imports of Juice
              Market                         (who manufacture                           Concentrate
                                              juice beverages)
                                                                              15.1 million litres
                 5.7 million litres

           Exports of Juice                   Local Processors,
                       3
             Products                       (who crush Australian
                                                   apples)


                                                                          2
                                                          71,400 tonnes

                                               Local Growers


                         32,600 tonnes                                 215,600 tonnes


                               Export Fresh Apple              Domestic Fresh Apple
                                     Market                          Market



Note:
1.        = flow of product indicating a supply and demand relationship
2. Local converters and processor/converter conglomerates also utilise this volume.
3. Export data supplied by ABS could not disaggregate between concentrated apple juice and retail
juice products.

6.2   Imports of CAJ: An Overview
In 1999-00 Australia imported in excess of 15.1 million litres of CAJ with an equivalent
customs value of $21.9 million. This represented a 20 percent increase in volume since
1998-99 and a 12 percent increase in value. Table 6.1 outlines the major countries from
which we source this volume of imported CAJ (ABS, 2001).




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Table 6.1                         CAJ Imported into Australia by Source, 1999-00
Country                                                   Quantity (litres)                  Value ($’000)
China                                                       11,724,198                        $15,212.1
New Zealand                                                 2,171,378                          $4,957.8
Brazil                                                       657,210                            $662.6
United Kingdom                                               363,405                            $627.9
Netherlands                                                  112,780                            $152.2
Hong Kong                                                     42,032                            $104.2
United States of America                                      27,917                             $51.8
Austria                                                       14,700                             $40.0
Australia (Re-imports)                                         7,347                             $20.2
South Africa                                                   7,168                             $11.2
Italy                                                          4,233                              $9.9
Spain                                                           679                               $6.1
Korea, Republic of                                             4,294                              $5.8
Taiwan                                                         2,620                              $5.6
Israel                                                          720                               $0.8
Portugal                                                        420                               $0.4
Singapore                                                       360                               $0.4
Total                                                       15,141,461                         $21,869
Source: ABS (2000)

China dominates total Australian imports of CAJ, accounting for 77 percent of the total
volume of CAJ imports and 70 percent of total value. Other significant importers include New
Zealand (14 percent volume, 23 percent value), Brazil (4 percent volume, 3 percent value)
and the United Kingdom (3 percent volume, 2 percent value). All other countries supply less
than 1 percent of the total volume and value of imported CAJ.

Figure 6.2 shows the trend of increasing CAJ imports into Australia over the last decade.

Figure 6.2                        Trend in CAJ Imports into Australia, 1993-2000

                     16,000,000

                     14,000,000

                     12,000,000
   Volume (litres)




                     10,000,000

                      8,000,000

                      6,000,000

                      4,000,000

                      2,000,000

                             0
                                     1993     1994     1995      1996          1997   1998     1999      2000
                                                                        Year


Source: ABS (2001)


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As can be seen from the above figure, there has been a steadily increasing trend in imports
of CAJ to Australia over the last decade. This trend in increasing supply has been mainly
due to a decline in the landed value of imported product over this time and has led to a
resultant increase in imported CAJ share of the Australian market. The average landed
value per litre for Chinese CAJ imports has declined from $2.75 per litre in 1995 to $1.30 per
litre in 2000 (ABS, 2001).

As noted earlier, imported Chinese concentrate can be sourced in Australia at present for
$1.20 per litre (landed value, pre local clearance duties). If converters were to source
domestically produced juice grade apples, it is estimated that it would cost around $2 per litre
once all processing and mixing costs are taken into account68 (pers. comm., Vitesh Patel,
Fruitmark, Melbourne). Therefore it is quite clear that imported CAJ is a much more cost
effective alternative to domestic production.

With a value of $21.9 million, CAJ imports are equivalent to 8 percent of the total farmgate
value of production in the apple industry and are approximately three times greater than the
gross value of Australian apples purchased for juicing ($7.1 million)69. Although the value of
imports is not significant when compared to the total farmgate value of Australian industry, it
is significant to the processing sector, and has a major influence on processor and grower
margins. As discussed previously, the Australian industry, including both growers and
processors, is located in distinct regional areas across all states. Therefore any negative
impacts arising from imported CAJ will be felt proportionately more heavily in these
production regions relative to the average impacts felt across the economy as a whole.

When examining the impacts of imported CAJ on the Australian industry, it must be kept in
mind that Australia also exports apple products. In 1999-00 the value of Australian fresh
apple exports was $35.8 million and the value of Australian apple juice exports was $7.8
million (ABS, 2001). Therefore, Australia benefits from trade in apple products70. The
benefits of apple exports must be weighed against the costs of apple imports when
assessing the aggregate impacts of trade in apple products on the Australian apple industry
in particular, and the Australian economy in general.

The impacts of imported CAJ on various sectors of the apple value chain are considered
below.

6.3       Impact on Domestic Apple Growers
Domestic apple growers are potentially affected by imports of CAJ in three ways:

          Impacts on the domestic market for juice grade apples;
          Impacts on the domestic fresh apple market; and
          Impacts on the fresh apple export market.


68
   Assumes domestic growers are paid approximately $100 per tonne for juice grade apples.
69
   The gross value of domestic production processed is calculated by multiplying total processed
volume of production (71,441 tonnes from Table 2.4) by an average price paid to growers of $100 per
tonne.
70
   The value of exports ($43.6 million) is approximately twice the value of imports ($21.9 million).


          Hassall & Associates Pty Ltd                                                    Page 102
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The impacts incurred on each of these three markets are outlined below.

6.3.1     Impact on Juice Grade Apples

Demand for domestically produced juice grade apples declines when imports of CAJ
increase. This is because domestic juice converters can source CAJ at a lower cost from
overseas markets than purchasing domestically produced CAJ. Given reduced demand for
domestically produced juice grade apples, the domestic price received for this fruit declines.
Figure 6.3 outlines the impact of this reduced demand for domestically produced juice grade
apples.

Figure 6.3       Impact of CAJ Imports on Juice Grade Apples for Juicing

Price
                 D1                                   S1

           D2




     P1

     P2




                                                                      Quantity
                                2       1
                            Q       Q

With reduced demand for domestically produced juice grade apples (Q 1 to Q2), the price for
domestic production reduces from (P1 to P2)71. Growers report this reduction as being from
$200 per tonne to $100-120 per tonne.

Faced with this situation, domestic apple producers have two courses of action. In the short-
term, they can accept this reduced price for juice grade apples and continue to supply apples
to this market with the hope that this price may improve in future. Or alternatively, they may
attempt to seek better returns for this grade of fruit by marketing this product on the domestic
fresh apple market72.



71
   Prices for domestic juice grade apples are also driven lower as domestic processors (who source
domestic juice apples) must remain competitive with domestic converters who source imported CAJ.
Lower imported CAJ prices therefore drive the price paid by processors to growers lower.
72
   Study consultation revealed that growers are likely to implement both these alternatives in
combination.


        Hassall & Associates Pty Ltd                                                    Page 103
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By adopting the first course of action (i.e. continuing to supply apples to the domestic juice
grade market), producers will see a decline in returns for as long as domestic prices remain
below their former level. Producers may seek to increase efficiencies to win back some of
this lost margin, however, the extent to which efficiency gains can offset losses within the
low-value juice grade apple market is not likely to be significant. If returns remain depressed
through the medium-term, any producer whose economic viability is dependent on the
returns generated from the juice grade apple market will be continually squeezed, most likely
to the point where they are forced to exit the industry. Indeed, structural adjustment is taking
place in the industry at the current time for this and other reasons.

If producers adopt the second course of action (i.e. transfer supply of juice grade apples to
the domestic fresh apple market in the short-term), then this in turn has flow-on impacts on
the domestic fresh apple market. These impacts are explained in the following section.

6.3.2    Impact on Fresh Apple Market - Domestic

When producers transfer juice grade apples to the domestic fresh apple market, adverse
impacts are incurred by producers. Figure 6.4 illustrates the shift in supply that occurs on the
fresh apple market due to the transfer of product and the subsequent reduced price received
on this market.

Figure 6.4       Impact of Imports on the Domestic Fresh Apple Market

Price
                 D1                                  S1

                                                             S2




    P1

    P2




                                                                    Quantity
                                     1       2
                                 Q       Q

The increase in supply on the domestic fresh apple market (Q1 to Q2) results in the price on
the fresh apple market declining from (P1 to P2). Therefore, the initial decline in price on the
juice grade apple market has a follow-on negative impact on price in the fresh apple market.
This compounds the negative first-round impacts for domestic growers.




        Hassall & Associates Pty Ltd                                                  Page 104
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In addition, if growers transfer juice grade apples to the fresh apple market, the overall
quality of produce marketed on the fresh apple market will decline. It is quite possible that
declines in the quality of produce may result in a decline in consumption of fresh apples as
consumers divert expenditure to alternative fruit or snack products. This second-round
impact would exacerbate the situation for growers, as the initial decline in price on the fresh
apple market would be followed by a decline in demand for fresh apples, further weakening
the market position of apples relative to other fruits and snack-based competitor products.

6.3.3    Impact on Fresh Apple Market - Export

There is no direct link between the demand for exported fresh apples and imports of CAJ.
Demand for export fresh apples is determined by supply and demand factors in Australia‟s
major export markets (Singapore, Malaysia and markets on the sub-continent).

While it is possible that an Australian fresh apple market flooded with juice grade apples may
result in a situation where producers may seek higher returns off-shore and increase supply
in export markets, Australian apple exporters report that this is not the case. Similarly, while
shortages of export apples may shut Australia out of export fruit markets in the medium term,
a large crop of oversupply caused by shifting juice grade fruit onto the domestic fresh apple
market has not resulted in a supply shift to export markets.

6.4     Impact on Processors
Australian processors produce CAJ for converting into retail products and/or fresh juice for
immediate consumption. Australian processors that use Australian fresh apples in the
production of CAJ are worse off when low-cost CAJ is imported into Australia. This is
because they are competing directly with converters who are able to access low cost
imported CAJ product, an all but direct substitute for Australian produced CAJ73.

To remain competitive, Australian processors have to reduce the price they pay to domestic
producers for juice grade fruit74. In this way, the domestic juicing price is set in competition
with the imported CAJ price. Faced with the long-term prospect of competition from low-cost
imported CAJ, Australian processors have no option but to source inputs, including apples, at
the lowest possible price. Otherwise, they will suffer declining market share and within time,
threatened financial viability.

Grower co-operative processors are particularly adversely affected by low-cost CAJ imports
because growers have invested in value-adding processes in support of their fresh market
business. Not only are they subject to lower prices in their growing operations (see section
6.3 above), but also, it becomes increasingly difficult for their processing business to remain
competitive with competitors that source low-cost CAJ imports. Comments of this nature
were received from Darral Ashton, grower and director of Batlow Fruit Cooperative, Batlow
and Graham Dray, Appledale Cooperative, Orange.



73
   Of course, to the extent to which some processors are also converters, they benefit from lower input
costs. This issue is addressed in section 6.6.
74
   At present, domestic juice grade prices received by growers are $100 to $120 per tonne. Growers
indicate that historically acceptable prices were $180 to $200 per tonne.


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Some processors may be able to retain viability sourcing Australian product even in face of
low-cost imports being secured by competitors. John Lucey operates a small boutique
brewing company in Western Australia that produces fresh, natural apple products with no
preservatives or additives. Although his operation is relatively new and is small-scale, the
benefits of using fresh, natural product offsets the cost differential that could otherwise be
captured by using imported CAJ. Processors who are able to enter these relatively limited
fresh fruit juice markets are able to offset losses associated with low-cost CAJ competitors.
Expansion of the fresh juice market would appear a potential option for the industry (see
Chapter 7).

With world production of CAJ continuing to increase at present (especially in China), it
appears as though low-cost imported CAJ will remain a characteristic of the industry in the
immediate future. Even if imports from the current leading importing nation were to decline
(or increase in price), importers would source CAJ from the next cheapest source. Indeed,
some processors identify New Zealand as a large future supplier of good quality, low priced
CAJ75.

As discussed in section 2.1.2, Australian processors that use Australian fresh apples in the
production of juice products represent only ten percent of the total processing/converting
market. Converters and processor/converter conglomerates capture the bulk of market
share. Impacts of CAJ imports on these two sectors are discussed below.

6.5   Impact on Converters
Converters benefit from imports of CAJ. This is simply because the landed price of CAJ is
lower than the equivalent price of domestically produced substitutes. Therefore, by
purchasing imported CAJ in place of domestic product, converters are able to reduce their
unit production costs and increase the margin they make on manufactured product provided
for retail sale76.

However, the extent of benefit derived by converters depends upon the degree of
competitiveness in the market. As there are a large number of companies in Australia that
supply a similar product within the apple juice market, the extent to which individual
converters are able to retain increased margins is diminished. In effect, economic theory
suggests that competitive market pressures will force converters to pass all or at least a large
proportion of these cost savings on to consumers via lower retail prices. In this manner, the
benefit that converters receive from low-cost imported CAJ is effectively passed on to
consumers in the form of lower prices77.


75
   Kelvin Kajowski (Technical Manager, Nugan Quality Foods, Griffith) says that imports of Chinese
CAJ varies greatly in quality, with better quality product realising premiums up to $0.20 per litre.
Quality is measured in clarity, turbidity and standard brix (a measure of sugar content). It is possible
to further differentiate on the basis of quality by adopting processing technology that requires less
heat, thereby causing less damage to flavour and colour. Other quality differentiations might include
freedom from chemical residues and adopting suitable storage techniques for apples to decrease
likelihood of patulin contamination.
76
   Imported concentrate is used by converters in the manufacture of retail juices, canned fruit, fruit
bars, cordials, confectionery, snack foods and cider products.
77
   Unless this profit is absorbed at the retail level. This is discussed in Section 6.8.


      Hassall & Associates Pty Ltd                                                           Page 106
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As an aggregated sector, converters may be able to receive an indirect benefit at the
expense of processors by increasing market share. With price elastic goods such as apple
juice, lower retail prices will benefit converters because the reduction in price causes an
increase in consumer demand, thereby increasing retail sales and thus net revenue of
converters. Particularly if domestic processors are unable to be price competitive with
converters, the converting sector of the industry will be able to derive an economic benefit at
the expense of the processing sector via increased market share of juice sales.

6.6      Impact on Processor/Converter Conglomerates
The Australian apple juice processing sector includes some companies that act as both
processors and converters. For these companies, low-cost CAJ imports are a „double-edged
sword‟ in many respects. On the one hand, the proportion of their business that is reliant on
sourcing imported product benefits from low-cost CAJ imports by reducing their unit costs of
production.

On the other hand, there is increasing pressure on the proportion of their business that relies
upon domestically sourced product, as this input is more expensive than the direct substitute,
imported CAJ. Whilst companies may wish to continue to use some proportion of Australian
product in their manufacturing activities, as long as the domestic price exceeds the imported
price, they will be under pressure to either source a greater proportion of imported CAJ or
decrease the price paid to domestic growers for domestic juice grade apples in order to
remain competitive with converters who solely source imported CAJ.

Unless processor/converter conglomerates can achieve a market advantage from inclusion
of Australian produced CAJ or fresh juice there will, over time, be a movement towards
substitution of Australian produce for the low-cost imported product, unless Australian
growers can become more price competitive.

6.7      Impact on Juice Exporters
In the first instance, lower world prices will handicap the competitiveness of Australian CAJ
exports. However, to the extent that Australian exports can be differentiated, and consumers
respond positively to this differentiation, this general conclusion can be reversed.

Imports of CAJ can assist Australian exporters of fruit juice products. As discussed
previously, low-cost imported CAJ puts downward pressure on the juice price paid to
domestic growers (as processors seek to remain competitive with imported product). For
Australian processors and processor/converter conglomerates who export juice products,
this lower domestic price enables them to be more competitive on international markets.
Kelvin Kajowski (Nugan Quality Foods) states that prior to the US decision to impose anti-
dumping duties on Chinese CAJ imports, a Japanese customer of ten years standing
reduced their volume of purchases of high quality Australian product because it could be
sourced more cheaply to a similar standard from the US. With the recovery in US juice
prices since the imposition of dumping duties, Australian product has become more
competitive, and he expects to recapture this Japanese client.




      Hassall & Associates Pty Ltd                                                   Page 107
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However, the extent to which exporters may benefit in terms of enhanced international
competitiveness must be weighed up against the impacts they incur in the domestic market.
Particularly if they produce for the domestic market solely using domestic juice grade apples,
the trade benefits derived via enhanced competitiveness must be weighed against the
relative domestic competitiveness of their more expensive product. The net impact of
imported CAJ for these processors can only be derived by examining both domestic and
export market outcomes78.

6.8      Impact on Consumers
Economic theory suggests that consumers would benefit from imports of CAJ. This is
because less expensive production inputs are being sourced from overseas rather than from
the domestic market. Assuming converters and retailers are forced to pass on these cost
savings in a competitive market, the retail price of CAJ will decline as a result of imports.
Given the competitive processing market in Australia, it is likely that these cost savings are
being passed on to consumers. However, retail concentration makes it possible for a
proportion of these cost savings to be captured at the retail level (retail concentration was
discussed in Chapter 4).

The major downside for consumers from low-cost imported CAJ is if product quality is
jeopardised by use of imported product. Dissatisfaction with juice products will lead to
decreased consumption. Decreased juice consumption delivers economic disbenefits to all
sectors of the apple value chain. Differentiating Australian product may offer some potential
benefit for the industry.




78
     At present, export markets for Australian juice products are limited.


         Hassall & Associates Pty Ltd                                               Page 108
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6.9      Summary
Table 6.2 summarises the economic impact of CAJ imports on each sector of the Australian
apple industry.

Table 6.2         Summary of Economic Impact of CAJ Imports
Industry Sector                  Impact of CAJ Imports
Domestic Apple Market            Domestic prices for juice grade fruit are driven downwards. If juice
   - Juice Grade Apples          grade fruit is shifted to the domestic fresh apple market (as is
   - Domestic Fresh              common), the fresh apple market price also declines, as does the
       Apples                    quality of fruit on this market. Australian apple growers face lower
   - Export Fresh Apples         prices under this scenario. Export markets are isolated from this
                                 impact.
Processors of Australian         Lose price competitiveness. If they are unable to differentiate their
Apples                           product on quality or country-of-origin, this sector will decline.
Converters of Apples             Benefit from low-cost imported CAJ, however competitive market
Concentrate to Retail Products   pressures force cost savings to be passed on to the retail level (and
                                 hence to consumers and retail outlets).
Processor/Converter              Both win and lose, depending upon the relative proportion of product
Conglomerates                    sourced from the domestic and imported markets. In time, it is likely
                                 that these operators will switch to use of imported product if they are
                                 unable to secure a market advantage from buying domestically.
Juice Exporters                  Benefit from lower domestic price by increasing international
                                 competitiveness. Extent of benefit must be weighed in conjunction
                                 with impacts incurred in their domestic market activities (i.e.
                                 depends on how much of their domestic product uses domestically
                                 produced juice grade apples and the extent that low international
                                 prices for CAJ drives down the price of their own product).
Consumers                        Benefit, as long as cost savings are passed down the value chain
                                 and quality is not affected.

Overall, growers and processors of Australian apples lose from the importation of low-cost
CAJ. All other sectors remain unaffected, benefit, or at least have the potential to benefit
from importation of CAJ.




      Hassall & Associates Pty Ltd                                                           Page 109
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7. OPTIONS FOR IMPROVED INDUSTRY COMPETITIVENESS
The development of an industry approach based on achieving global competitiveness and
being export focused is the most important objective for the Australian apple industry at
present. Such an approach would involve:

       Benchmarking performance against international competitors;
       Striving to improve international competitiveness;
       Gearing domestic production towards export markets;
       Further developing and expanding overseas markets and committing to those
        markets for the long-term;
       Developing integrated supply alliances to facilitate efficient and effective exporting;
        and
       More generally, establishing an industry-wide approach that is focused on realising
        the opportunities that are presented in overseas markets (whilst simultaneously
        addressing domestic opportunities).

Continued reliance on a domestic market that has limited growth possibilities will inevitably
lead to significant hardship for many within the Australian apple industry as that market
becomes more competitive. Producers who are less efficient by global standards will be
confronted with reduced returns and may be forced to leave the industry. Their place will be
taken either by the more efficient and market responsive domestic producers or, in the long
term, possibly by imports. Thus, without a significant commitment to achieving and
maintaining global competitiveness and the further development of export markets, the
Australian industry risks losing both export and domestic market share (due to greater import
competition from overseas apples and increased price competition from other fruits (both
domestic and imported)).

A strategic approach to guide the process of achieving global competitiveness and the
development of an export focus is outlined within this chapter. This strategy has components
that provide a range of options for each of the key elements of the value chain. To achieve
the goal of increased global competitiveness and enhanced export focus will require:

       Business planning/skills to underpin improved enterprise level planning and financial
        management, including greater use of benchmarking;
       Enhanced agronomic and processing practices to improve production efficiency;
       Approaches to handling and processing that achieve improvements in the quality of
        product marketed;
       Product promotion/differentiation to attract a market premium for domestic juice
        products;
       Exploring new market opportunities; and
       Consideration of the merits of an anti-dumping case against imported CAJ.




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It is essential that the options be viewed as components of the process of achieving global
competitiveness and developing a stronger export focus, rather than being viewed in
isolation. Options targeting each element of the value chain must be addressed together to
ensure that a strong commitment to global competitiveness is fostered throughout the
industry. On this basis, the options presented are intended to foster a process of
development of an industry approach based on achieving and maintaining global
competitiveness rather than a radical change. Each component is essential to ensure that
the approach is advanced across all sectors of the value chain.

Options, including a brief description, issue addressed, rationale, constraints, delivery
mechanism and a conclusion are developed below.

7.1       Element 1       Business and Production Management Skills & Systems
                          Development

7.1.1      Business Planning/Benchmarking for Growers

Objective:
          To enable individual enterprises to improve their financial and business management
           by supporting and promoting business planning skills and systems.

Option Description:
          Implement targeted training programs that build on existing industry initiatives and
           encourage growers to undertake business planning, incorporating participation in and
           use of benchmarking services; and
          Integration of business planning with the industry approach             to     Quality
           Assurance/Environmental Management initiatives (see Option 7.1.2).

Rationale:
          Business planning is not widespread within the industry and it is acknowledged that
           there is a need for better business planning amongst growers;
          While the best operators do undertake business planning to varying degrees,
           operators generally do not have focused plans or data that allow them to report key
           benchmarking data such as breakeven cost of production;
          Moves to promote business planning would complement the requirement for
           enterprises to improve record keeping and activity reporting associated with the
           introduction of the GST;
          Efforts directed towards increasing the participation in benchmarking and uptake of
           benchmarking data are a critical component of effective business planning. Once
           benchmarking is implemented and understood it will be important for growers who
           wish to maintain their presence in the industry to formulate and execute realistic
           business plans;
          Business planning will assist more producers achieve best practice;
          Effective business planning assists in balancing short-term objectives (e.g. product
           differentiation, profit generation) with long-term objectives (e.g. market access);




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       Increased benchmarking will improve industry efficiency and competitiveness if it is
        undertaken effectively and acted upon by growers; and
       The FarmBis program is an established delivery mechanism to assist with farmer
        training, benchmarking and business planning.

Potential difficulties:
       There is a dearth of Australian apple industry data, especially in relation to product
        price. Industry would need to instigate better data collection and databasing for
        effective benchmarking;
       Historically, many growers have operated in the cash economy and are reluctant to
        commit to formal business planning and sharing of information (for benchmarking
        purposes);
       In addition, these same growers often had very little detailed information relating to
        their costs of production;
       Historically, there has been a low uptake of benchmarking services amongst growers;
       Benchmarking is challenging. AFFCO has a major program to benchmark grower
        costs, but the challenge is to unbundle mixed product lines (varieties and species);
       Benchmarking production costs must have an appropriate time-frame (up to five
        years) to account for all aspects of perennial pome fruit management, such as
        pruning. Annual benchmarking may lead to misleading results; and
       Low participation in benchmarking may deter growers from undertaking other value
        adding initiatives such as Environmental Management Systems (EMS).

Acceptability:
       There is a fair degree of support amongst growers for this option. However, it is
        traditionally very difficult to get farmers to attend farmer training;
       Grower receptiveness to business planning and benchmarking may have been
        improved by the requirements for improved record keeping and activity reporting
        associated with the introduction of the GST; and
       There may be mechanisms emerging from the current FarmBis program that could be
        used to motivate growers and overcome grower reluctance. FarmBis funds training in
        business management skills for individuals, while the national component of the
        program, FarmBis Australia funds wide-reaching projects of significance to the
        national industry.

Delivery Mechanism:

Industry
Industry associations could contribute by:
       Improving databasing and data collection activities to facilitate more effective
        benchmarking;
       Working with government agencies (including Farmbis State Planning Groups) and
        service providers to ensure appropriate training courses are developed and available
        to growers;



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        Promoting business planning and benchmarking within the industry; and
        Facilitating the integration of business planning            and    industry     Quality
         Assurance/Environmental Management Systems.

Government
Commonwealth and State agencies could contribute by:
        Working with industry and service providers through the AAA-FarmBis Australia
         Program administered through AFFA to ensure the availability and promotion of
         suitable training programs. This program aims to enhance the business management
         skills of Australia‟s primary industry sector through education and training projects.

Conclusions:
This option should be pursued as a priority for the industry.

7.1.2    Production Systems Management

Objective
        To promote the adoption of productions systems that can be demonstrated to be
         more:
             o Sustainable;
             o Efficient; and
             o   Respond more comprehensively to community expectations about the manner
                 in which consumer goods are produced and labeled.

Option Description:
        To support the development and adoption of industry wide quality assurance and
         environmental management systems and processes that are capable of integrating
         and validating best practice production systems, environmental standards and
         consumer expectations.

Rationale:
        The community‟s growing expectations about the quality, integrity and environmental
         sustainability of consumer products is being evidenced in more stringent
         environmental legislation and market differentiation. Both of these trends are
         expected to be maintained in the medium and long terms;
        The development and adoption of quality assurance and associated environmental
         management systems provides a vehicle for individual growers to ensure they not
         only meet the minimum standards required in legislation, but are well placed to
         maintain, and in some cases enhance, market access and performance;




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        Throughout the world, retailers, especially supermarket chains, are increasingly
         demanding evidence that fresh produce, including apples, are grown in an
         environmentally sustainable manner with food safety assurance. Most European
         countries supplying apples to supermarkets have in place Integrated Fruit Production
         (IFP) programs. These programs rely on independent auditors to confirm that the
         produce is grown under approved IFP programs. IFP programs address pest and
         disease control, nutrition, irrigation, soil management and environmental issues to
         ensure suppliers are producing fruit under sustainable production systems;
        Evidence of this has been demonstrated by the insistence of supermarkets in the UK
         that Pink Lady apples exported from Australia would not be accepted unless there
         was an IFP program in place throughout the industry. The Australian industry funded
         the development of an IFP protocol or guidelines, which were subsequently approved
         by UK supermarkets;
        Australian industry has been an innovator in the adoption of integrated pest
         management programs for many years. The Alar scare in the late 1980‟s, which was
         followed by the industry pesticide charter (developed in consultation with consumer
         groups), resulted in significant proportions of the industry R&D budget being
         dedicated to this issue over the last decade; and
        At this point in time, domestic markets have not placed any demands on the local
         industry with respect to IFP, aside from food safety issues. However, in future it is
         expected that if foreign imports of fresh apples are permitted access to the domestic
         market, sustainability issues will arise in negotiations with supermarkets.

Potential difficulties:
        The cost of compliance and certification usually remains with producers and can‟t be
         passed on to consumers and retailers; and
        There is a perception that retailers are driving this issue more than consumers, so as
         to demonstrate their (supermarkets) duty of care obligations associated with food
         safety issues and as a marketing advantage.

Acceptability:
        Acceptability of the sustainability issue is high in the Australian industry. It is seen as
         being inevitable. However, industry is becoming more conscious of the compliance
         costs as there is no associated market premium and some yield losses result.

Delivery Mechanism:

Industry
Industry associations could contribute by:
        Developing suitable standards and audit systems;
        Working with government agencies (including Farmbis State Planning Groups) and
         service providers to ensure appropriate training courses are developed and available
         to growers; and
        Promoting the merit of industry based Quality Assurance/Environmental Management
         Systems.



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Government
        Growers would be eligible to apply for project funding under the FarmBis and Farm
         Innovations Programs. Projects would be assessed against the guidelines of the
         programs; and
        Furthermore, the Commonwealth assists industry by administering the statutory
         levies system, by which funds are raised for both R&D and promotion.

Conclusions:
While this option is currently being addressed, and remains a priority for industry there may
be the prospect for greater involvement with programs offered by the relevant
Commonwealth and State Government agencies.

7.2 Element 2           Enhanced Agronomic and Processing Practices to Improve
                        Production Efficiency
7.2.1    Enhanced Variety Breeding Program, Incorporating Product Licensing and
         Offshore Supply Agreements

Objective:
        To enhance returns to the Australian industry through the licensing of new Australian
         varieties to Northern Hemisphere growers and in so doing control the quality of the
         product, the volume of supply and therefore the price received on a year round basis.

Option Description:
        In the past, Australian industry has demonstrated the ability to develop important new
         varieties such as Pink Lady;
        However, historically, new Australian varieties take many years to achieve a supply
         volume that creates critical mass in export markets. Small volumes of new varieties
         are released onto export markets for short periods of time during the Northern
         Hemisphere off-season;
        At best, demand is created for Australian apples for a limited portion of the year and if
         very successful, the variety is picked up and grown by Northern Hemisphere suppliers
         and marketed under a range of retail names and qualities;
        Premiums associated with the new variety are quickly competed away and the new
         variety becomes a commodity line; and
        Under this option, license agreements for new and enhanced varieties would be
         negotiated with Northern Hemisphere growers to secure an all year round supply of
         the new variety.

Rationale:
        The maintenance of strict quality standards and the marketing of the variety under a
         proprietary brand name would be a requirement of product licensing;
        Royalties for use of the product brand name would return to Australian growers and
         the relevant Australian R&D program;




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       The Australian industry would retain control of the variety including supply of product
        and volumes and methods of marketing. The branded product would be available all
        year round and this would help create a further premium from overseas retailers who
        are looking for consistency of both product and supply;
       In recent years the New Zealanders have been successful in pursuing this strategy.
        A strategy such as this is planned for the release of the “Pink Lady 2” variety and
        picks up on lessons learned from release of the original Pink Lady; and
       Increases returns to Australian growers, provides an opportunity to recoup R&D
        investment, increases the life of a new variety, provides consistency of supply to
        export clients and builds on lessons learned from successful programs such as Pink
        Lady.

Potential Difficulties
       Will require a commitment of resources to management and enforcement of product
        licensing and offshore supply arrangements; and
       Development of new varieties will require market analysis of future consumer
        requirements (i.e. attributes of apples that consumers are likely to demand), both
        domestically and overseas.

Acceptability:
           The option is highly acceptable to all facets of the Australian industry.

Delivery mechanism

Industry
The option would be delivered through AFFCO and other similar organisations. Established
breeding programs in Western Australia and Queensland would be important vehicles to
drive R&D into new and enhanced varieties. Commonwealth matching funding is provided to
R&D by HAL. Industry would benefit from the fact that HAL is responsible for both R&D and
promotion activities, providing the opportunity for greater coordination of efforts in these
sectors.

Government
       The AusIndustry R&D Start Program provides funds to assist Australian industry to
        undertake R&D and commercialisation through a range of grants and loans;
       Furthermore, the Commonwealth assists industry by administering the statutory
        levies system, by which funds are raised for both R&D and promotion; and
       Limited role for government and its agencies such as DFAT, AFFA and AUSTRADE
        with facilitation of Northern Hemisphere grower and retail networks.

Conclusions:
This option should be pursued by industry as a priority.




       Hassall & Associates Pty Ltd                                                     Page 116
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7.2.2    Improved Nursery Material (rootstock and varieties)

Objective:
        To promote greater production efficiency by providing Australian growers with access
         to nursery material of the highest international quality.

Option Description:
        Develop and implement arrangements to facilitate the importation of the best
         available stock; and
        Work with the nursery industry to promote improvements in the quality and availability
         of Australian stock.

Rationale:
        There is a perception within the industry that the quality of nursery trees produced by
         the Australian nursery industry is of significantly poorer quality and often more
         expensive than trees available in North America and Europe;
        Trees supplied by nurseries in North America and Europe are typically one or two-
         year-old trees that have been intentionally branched using nursery practices that
         ensure production in the second year after planting. This not only shortens the non-
         bearing period, but provides significant savings on labour costs associated with tree
         training in subsequent years and assists with controlling excess vigour – bringing the
         tree into vegetative and reproductive balance sooner and improving yields in
         subsequent years. The consequence of this is that there is a reduced delay in
         production and hence a significant improvement in the return on investment;
        The Industry funded Australian Pome Fruit Improvement Program (APFIP) is
         currently directing resources towards reducing the significant quarantine delays in
         introducing genetic material to the industry from overseas. By January 2002, a new
         quarantine protocol will be in place to reduce the current four-year program to fifteen
         months. From this point, a further 3-4 years will be required to verify the horticultural
         integrity of the imported material. This process will also confirm the suitability of
         imported varieties and rootstocks in the various production districts via a network of
         regional evaluation blocks currently being established throughout Australia (pers.
         comm., Garry Langford, National Coordinator, APFIP Pty Ltd);
        Trees supplied by European and to a lesser degree, North American nurseries, are
         usually of virus free status or free of the major known virus diseases. Research has
         demonstrated that there is yield reduction with the use of infected planting material.
         The health status of much of the nursery trees planted in Australia is unknown and
         assumed infected. The process of the introduction of overseas genetic material of
         known health status, along with varietal evaluation by regional assessment blocks
         managed by APFIP, will reduce grower confusion with respect to the choice of
         varieties for planting;
        In addition, there is a need for a training program for the industry, including the
         nursery industries, focusing on advanced nursery skills, thereby leading to better
         quality trees;




        Hassall & Associates Pty Ltd                                                    Page 117
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       The reduction in the period between the introduction, evaluation and release of new
        varieties and rootstocks to the industry will assist the domestic apple industry to
        remain competitive in international markets; and
       The role of APFIP in importing, evaluating and distributing varieties and rootstocks,
        traditionally undertaken by commercial nurseries, will inject more competition into the
        domestic nursery industry – thereby improving tree quality, price and accessibility.

Potential difficulties:
       Relaxation of quarantine restrictions to assist quicker entry of genetic material must
        take account of the risk of the introduction of fireblight and other pests and diseases.

Acceptability:
       The Australian nursery industry felt threatened at first, but over the course of time
        nurseries are realising that there are gains to be made from the activities of APFIP.
        Nurseries can source propagation material from APFIP and also reduce the risk
        associated with the importation of varieties into this country; and
       Growers will benefit, as they will have access to propagation material for their own
        use, if desired. As varieties will be distributed by APFIP, nurseries will need to
        compete more on the basis of tree quality, price and service rather than by access to
        exclusive patented varieties as they do now. Over time this will improve the quality of
        nursery trees.

Delivery Mechanism:

Industry
The APFIP will need to be the driving force behind this option through working to achieve:
       Acceptance of proposed modifications to post-entry quarantine measures, which will
        facilitate the flow of benefits to growers;
       Working with government agencies (including Farmbis State Planning Groups) and
        service providers to develop a training program for the industry, including the nursery
        industries, focusing on advanced nursery skills, thereby leading to better quality trees;
        and
       Identifying and supporting any specific research and development needs.

Government
Commonwealth and State agencies could contribute by:
       Working with industry and service providers through the AAA-FarmBis Program
        administered through AFFA to ensure the availability and promotion of training
        programs to improve nursery industry skills; and
       Growers would be eligible to apply for project funding under the Farm Innovations
        Program to implement innovative practices. Proposed projects would be assessed
        against program guidelines.

Conclusions:
This option is a priority for industry and is currently being driven by APFIP.




       Hassall & Associates Pty Ltd                                                    Page 118
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7.2.3         Orchard Intensification

Objective:
           To promote greater operating efficiency by assisting growers to undertake orchard
            intensification, where this is an appropriate management option.

Option Description:
Foster orchard intensification through promoting greater knowledge and awareness of the
benefits it offers industry through:
           R & D programs (which include activities by Industry Development Officers (IDO‟s);
           Partial funding of overseas study tours undertaken by growers; and
           Funding of visits to Australia by overseas professionals, and extension activity by
            government extension services, private consultants and nurseries.

Rationale:
           Orchard intensification has been a characteristic of production in many competitor
            countries for several decades (particularly in the Northern Hemisphere). In the face
            of international trends towards orchard intensification, Australian industry has lagged
            in the adoption of these more profitable intensive production systems, due in part to
            lack of available trees propagated on dwarfing rootstocks and also due to resistance
            to, and capacity to fund, change, amongst growers;
           Relative to semi-intensive orchards, intensive orchards result in:
               o Higher yields being produced earlier (improving the return on investment and
                   allowing adopters to capture price premiums associated with new varieties);
               o Higher and more assured maximum yields79;
               o Higher average packout or quality (via improved recovery of marketable fruit);
               o Improved capacity to respond in a more timely manner to changes in market
                   conditions and requirements (i.e. faster return on investment allows variety
                   change in line with demand shifts); and
               o Lower unit production costs, through savings in pesticide costs and labour
                   efficiencies in managing small trees.

Potential difficulties:
           Intensive systems have high up-front capital costs;
           Production risks (weather-related) are higher with intensive systems because of
            higher capital requirements;
           Intensification requires integrating machinery used for traditional and intensive
            plantings (i.e. narrower tractors and mowers etc (it is not practical to have different
            machinery for different planting systems);
           Semi-intensive rootstocks commonly used in conventional orchards have resistance
            to woolly apple aphid (WAA). Current commercially available dwarfing rootstocks do
            not have WAA resistance; and
           Not all districts and soil types in Australia are suited to the use of dwarfing rootstocks,
            which is the foundation on which intensive systems are based.

79
     With the option of using hail netting as a risk management strategy.


           Hassall & Associates Pty Ltd                                                      Page 119
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Acceptability:
        The Australian industry is presently experiencing a trend towards intensification of
         orchards.    This trend demonstrates that the industry has recognised past
         shortcomings, and is presently seeking to address these areas of concern; and
        Although there are demonstrated benefits from intensive orchard production relative
         to semi-intensive production, intensification is a contentious issue amongst some
         growers, mainly due to the trade-off between up-front capital cost and increased yield
         and production efficiencies that underlies the decision to move to an intensive system
         of production. Availability of quality nursery stock remains an impediment to
         intensification, but this is improving at a commercially viable speed given the current
         financial position of the industry.

Delivery Mechanism:

Industry/Government
        Supporting research and development programs (which include activities by Industry
         Development Officers (IDO‟s) to fully appreciate the range of issues associated with
         determining and adoption of optimal intensity tree planting strategies);
        Supporting extension and training activity by partially funding overseas study tours
         undertaken by growers (industry funding), industry funding of visits to Australia by
         overseas professionals and complementary activities by government extension
         services, private consultants and nurseries;
        The Commonwealth assists industry by administering the statutory levies system, by
         which funds are raised for both R&D and promotion; and
        Industry participants may apply for project funding under the Farm Innovations
         Program for developing and implementing new ideas.

   As intensification is already occurring within the industry, many of these activities are
   already occurring and would require expansion from present levels.

Conclusions:
This option is a priority for industry and is likely to be driven by the most innovative growers.

7.2.4    Farm Labour Training and OH&S

Objective:
        To further increase farm labour safety and decrease farm labour costs.

Option Description:
        The provision of additional labour training, especially for casuals employed in the
         industry during peak periods such as harvesting.




        Hassall & Associates Pty Ltd                                                    Page 120
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Rationale:
        Results from Tasmanian benchmarking revealed labour and labour management as
         the critical factor affecting net returns; and
        International benchmarking suggests that Australian labour costs are higher than
         those incurred by key Southern Hemisphere competitors (e.g. South Africa, Chile).

Potential difficulties:
        Benchmarking data shows New Zealand labour costs account for a similar proportion
         of total on-farm costs to those incurred in Australia.

Acceptability:
        The consensus of growers and industry representatives contacted during the study
         indicated that there was little scope for savings or improvements in this area.

Delivery Mechanism:

Industry/Government
Industry proposed programs for government funding under the AAA-FarmBis Program.

Conclusions:
This issue is not a priority for industry and is apparently considered by industry to have little
merit. Nevertheless, it should not be dismissed without consideration.

7.2.5    Improving Processing Sector Efficiency via Technology

Objective:
        To improve the competitiveness and market acceptability of Australian CAJ by
         promoting improvements in processing sector efficiencies.

Option Description:
        To promote Australian processing sector efficiency through research and
         development funding of innovative and best practice technology.

Rationale:
        One processor visited during the consultation phase of the study outlined plans to
         upgrade processing practice through the adaptation and adoption of new
         technologies applied to another, unrelated industry sector. The use of innovative
         technology provides the potential for some improvements in juice quality (purity),
         providing further opportunity for product differentiation; and
        Plays to Australia‟s strengths as a high technology nation rather than a low-cost bulk
         producer of processed products.




        Hassall & Associates Pty Ltd                                                   Page 121
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Potential difficulties:
          Australian processors are already efficient and the marginal gain is unlikely to offset
           the current market price differential even if a differentiated market is pursued;
          Existing operations may not have the capital backing to research and implement
           additional processing efficiencies; and
          Processors may not be receptive to sharing the results of their innovations and
           research and development with competitors.

Acceptability:
          Domestic processors may not be prepared to share commercial results and, if not,
           would not be eligible for funding under Government programs that support innovation
           and R&D.

Delivery Mechanism:

Government
This option could fit under AFFA‟s Agriculture – Advancing Australia (AAA) – Farm
Innovation Program. The main objective of this program is to ensure the adoption of
innovative practice, processes and products in agricultural, food, fishing and forestry
industries. Funding is provided to businesses that have demonstrated via research and
development innovation that increases profitability and/or sustainability. Businesses need to
have a turnover between $50,000 and $3 million per annum.

Alternatively, funding could be sourced via AusIndustry‟s Technology Diffusion Program.
This program helps industry to access and adopt new and leading edge technologies
developed in Australian and overseas.

Conclusions:
This option should be pursued by making information on funding options available to
processors identified in this study.

7.3       Element 3       Approaches to Handling and Processing that Achieve
                          Improvements in the Quality of Product Marketed

7.3.1      Improved Packout (Quality)

Objective:
    To improve packouts or recovery of fresh market apples from the harvested crop,
       thereby reducing the quantity of apples diverted to processing outlets and in turn,
       improving grower returns.

Option Description:
Increase grower awareness and uptake of production methods and technology that improve
packouts via:
          R&D efforts to inform and guide best practice adoption;
          Promotion to raise awareness; and
          Extension/training to facilitate adoption.


          Hassall & Associates Pty Ltd                                                  Page 122
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Rationale:
       The key profit indicators of apple production are: price, packout and yield, in this
        order of influence. Price is controlled by supply and demand characteristics of the
        market, whilst packout and yield are dependent on management issues, variety, and
        climatic conditions;
       Fruit is downgraded to a lower/processing grade for a number of reasons. These
        include:
             o   Weather related factors: sunburn; frost damage affecting fruit shape and fruit
                 finish (russet); and hail damage;
             o   Management related factors: damage by pest and diseases through poor
                 application practices; disease or pest resistance; poor fruit colour due to
                 incorrect variety, rootstock and plant density selection for the growing climate;
                 and poor tree management; and
             o   Handling and storage factors: bruising due to poor harvest supervision, staff
                 training and poor grading practices; fruit being too mature for handling;
                 storage disorders caused by incorrect storage conditions for maturity of fruit,
                 poor dipping practices and orchard nutrition practices; and fruit size with fruit
                 being too large or small for market due to poor crop load management.
       Most of the reasons for downgrading fruit at the packing level are either weather or
        management related. Some risk management options available for reducing the
        impact of adverse weather conditions include hail netting, hail insurance, frost
        protection systems (e.g. frost fans), overhead sprinklers and good site selection;
       Downgrading due to poor management is related to grower experience and skill
        levels. Although rapidly diminishing, state government advisory services historically
        provided information technology to improve the management skills of producers.
        Given the reduction and changing role of state government extension services, these
        services are now provided to industry to a small degree by industry appointed
        Development Officers, (partly funded by commonwealth funding) and private
        consultants; and
       Industry organisations have also been active in organising overseas study tours for
        growers and funding visits by overseas specialists to Australia for conferences and
        research projects etc. This raises grower awareness of modern production
        technology.

Potential difficulties:
       The cost to individual orchardists for the delivery of professional technical advisory
        services could be too high for some. State governments once provided this service
        free-of-charge.

Acceptability:
       Any assistance for improvement in packouts would be well received by producers.




       Hassall & Associates Pty Ltd                                                     Page 123
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Delivery Mechanism:

Industry
Industry could contribute by:
        Identifying best practice R&D, production methods and technology to deliver
         improved packout; and
        Technology transfer activities of industry IDO‟s, private consultants and technology
         transfer components of funded research programs.

Government
Government can assist by:
        Supporting R&D efforts to identify and develop best practice methods (The
         Commonwealth provides matching funding for R&D through HAL);
        The Commonwealth assists industry by administering the statutory levies system, by
         which funds are raised for both R&D and promotion; and
        Helping facilitate promotion, extension and training to raise awareness and facilitate
         adoption. Industry bodies and growers are eligible to apply for project funding under
         the Farm Innovations Program and FarmBis. Projects are assessed against program
         guidelines.

Conclusions:
This option has merit and is a priority for the industry.

7.3.2    Integrated Cold Chain Management

Objective:
        To improve the quality (and market performance) of apples available to customers at
         the retail level.

Option Description:
        Continue efforts directed towards raising awareness of and improving post farm-gate
         handling and storage techniques so as to improve product quality via integrated cold
         chain management. Measures to achieve this would focus on retail staff training
         programs that educate staff about best practice handling and storage.

Rationale:
        Growers claim incorrect handling and storage techniques result in product quality
         declining (apples being sleepy and floury due to not being stored in refrigeration)
         once product arrives at the wholesale/retail level;
        This problem is partially a result of retailers and wholesalers having insufficient cold
         storage space to correctly manage fruit such as apples, and partially a result of high
         staff turnover and undertraining at the retail level;
        As previously documented, HAL has had success with retail staff training programs
         and believe that more could be achieved with additional funding for rapid on-the-job
         training; and




        Hassall & Associates Pty Ltd                                                   Page 124
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          Training programs directed at staff may raise overall awareness of cold chain
           management.

Possible difficulties:
          Supermarkets have a high staff turnover, training assistance would need to recognise
           and target this fact.

Acceptability:
          All sectors of the value chain would benefit from an increase in apple product quality.
           Growers would be particularly supportive of efforts to increase quality, although
           retailers and wholesalers will need to accommodate training initiatives.

Delivery Mechanism:

Industry/Government
          The AAA Farm Innovations Program may be an appropriate delivery mechanism for
           this option, specifically improving product quality through storage. Collaborative R&D
           efforts with HAL would leverage available Commonwealth and industry funds; and
          Funding may be available via AusIndustry‟s Technology Diffusion Program to assist
           with the implementation of cold chain management practices. This program provides
           funding for industry to access and adopt new and leading edge technologies
           developed in Australia and overseas.

Conclusions:
This option is a high priority for the industry. Retail product quality is a major impediment to
both willingness-to-pay and volume consumed.

7.4       Element 4       Market Promotion and Differentiation
7.4.1      Cooperative Supply Arrangements and Enhanced Focus on International
           Markets

Objective
          To enhance market performance by establishing cooperative supply arrangements to
           improve the consistency and reliable availability of product to domestic and current
           and prospective international markets.

Option Description:
          Assisting growers to identify and develop cooperative supply-chain management
           arrangements to promote a more strategic marketing effort.

Rationale:
          All sectors of the value chain benefit from consistent supply of quality product;
          Ensuring consistent export supply will strengthen our comparative advantage in
           exporting relative to competitors. Supporting targeted export programs (of both
           apples and juice products) will also allow Australia to identify and supply high value,
           niche markets;


          Hassall & Associates Pty Ltd                                                    Page 125
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       Domestically, significant retail concentration exists within the Australian fresh fruit
        industry, with the two large retailers and large fruit and vegetable barns dominating
        the sector. Opportunities for growers to act as individual marketers of product are
        limited and growers are accepting the need to undertake coordinated marketing in
        order to establish supply contracts;
       Internationally, many large supermarket chains that are expanding into the Asia-
        Pacific region (including our key Asian markets) are bringing with them integrated
        supply chain management structures. Many of these supermarkets have long-
        established suppliers, often from Southern Hemisphere competitor countries. These
        suppliers (Chile, South Africa etc) are building long-term supply arrangements with
        both distributors and retailers in order to secure a market position. Similarly, AFFCO
        is developing alliances with growers in other countries to ensure year round supplies
        of the Pink Lady variety to the UK;
       An example of a successful Australian-based supply chain management structure is
        Panda Ranch white flesh nectarine exports to Taiwan. This commercial operator was
        able to establish relationships all the way to the retail level in Taiwan. AFFCO, AFFA,
        AAPGA and the AHC were key contributors to the successful establishment of this
        arrangement;
       It has been historically difficult to secure commitment from growers to supply export
        markets on an ongoing basis. Fluctuations in domestic production regularly result in
        export product being shifted to the domestic market when domestic prices exceed
        export prices;
       Whilst it is understandable that producers would seek higher short-term returns for
        this season‟s apples on the domestic market, longer term export market share is
        jeopardised due to supply disruptions. Experience in Singapore and Malaysia (late
        1990s) and India (2001) demonstrated this;
       Australia‟s key competitors (e.g. South Africa, New Zealand and Chile) have a strong
        export focus. To remain competitive on world markets, Australia must improve export
        focus. Enhancing export focus will involve establishing visible brand names for
        exports (HAL have recognised the need for this), supplying new export varieties into
        target markets (e.g. Gala into Asia), building alliances to ensure continual supply
        (both domestic-based alliances and alliances with competitor countries) and assisting
        individual exporters of juice products to establish alliances and effective supply chains
        into new and emerging markets.

Possible difficulties
       Difficulties associated with establishing an appropriate institutional arrangement that
        is durable and effective without being unduly restrictive and onerous on the individual
        enterprises;
       In times of domestic under-production, domestic prices for fresh apples will frequently
        exceed export returns. A change in mind-set to focus on longer-term returns rather
        than short-term returns would be needed to convince growers to forego higher
        domestic returns in some seasons for export market stability; and




       Hassall & Associates Pty Ltd                                                    Page 126
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         Although production variability will diminish somewhat with the adoption of varieties
          that have fewer tendencies to biennial production, it is likely that domestic fresh apple
          production shortfalls will continue to occur in Australia regardless of the marketing
          arrangements in place.

Acceptability:
         Efforts to enhance export focus are a high priority for industry;
         Provided trust (and an appropriate institutional/operating framework) can be
          established between players, this option should be acceptable; and
         Growers could be expected to be reluctant to agree to arrangements that had the
          potential for them to forego higher short-term domestic returns in favour of
          maintaining continuity of export market supply.

Delivery Mechanism:

Industry
         Industry groups such as AAPGA could assist in developing appropriate
          cooperative/institutional arrangements and initiating contractual supply arrangements
          between growers and the wholesale/retail sector; and
         There would be merit in exploring the approach adopted by other industries (both in
          Australia and overseas) in confronting similar challenges (we understand there has
          been considerable progress in the USA towards the development of “new generation”
          cooperatives”80 to better organise and coordinate agricultural producers).

Government
         The Food and Fibre Chains sub-program of the Supermarket to Asia Program was
          potentially an appropriate mechanism for delivering this option, however, applications
          for the last round of funding have closed. This program has been useful in delivering
          outcomes to date and future programs that deliver and strengthen this level of support
          would be beneficial for industry.

Conclusions:
This option has the potential to provide benefits across the Australian apple growing industry
and is considered to be a priority.




80
    A concept being developed and promoted by Professor Michael Cook from the University of
Missouri. "New Generation Cooperatives" are designed to address some of the characteristics of
traditional cooperatives that led to their underperformance and to counterbalance the growing market
influence of large multinationals e.g. Nestle and Cargill‟s. They tend to be more commercially
structured in terms of their capital base and membership/governance arrangements as well as being
more vertically integrated.


         Hassall & Associates Pty Ltd                                                     Page 127
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7.4.2      Expansion of Fresh Chilled Apple Juice

Objective:
        To expand the domestic fresh chilled apple juice market.

Option Description:
        Investigate the potential to produce, distribute and market additional fresh chilled
         apple juice in Australia.

Rationale:
        An alternative for processors losing market share to low cost imported CAJ, is to
         divert production away from the manufacture of concentrate and increase production
         of higher value fresh chilled product;
        It has been suggested by industry sources that there is potential for the Australian
         market to absorb additional fresh chilled juice;
        The product is highly differentiable in terms of both appearance and taste;
        Successful niche players already exist in the industry and one player, at least, has
         developed variety based fresh apple juices (“pink lady juice” “granny smith juice”, etc);
        The retail sector is prepared to stock and support Australian fresh chilled apple juice;
         and
        Industry sources with an interest in fresh chilled orange juice indicate that this product
         nets the company twice the margin of concentrate production. The fruit juice industry
         association indicates that while there are distribution issues with fresh product, there
         would seem to be additional market potential for fresh chilled apple juice.

Possible difficulties:
        Fresh apple juice production is not a volume business, the market is thought to be of
         limited size (currently information on market size or potential size is not available);
        Distribution of fresh product is potentially a constraining issue. Fresh product has a
         limited shelf life and needs a different and higher cost distribution system to that
         required for a long-life CAJ based product;
        While this market segment is growing and has real potential, there is a need to be
         mindful that there are many restrictions on fresh juice (e.g. the Australian and New
         Zealand Food Authority has legal definitions for fresh squeezed product that include
         shelf life, same day containerisation requirements, preservative and concentrate
         restrictions); and
        Supermarkets may demand higher unit returns from product sold through the dairy
         cabinet, and therefore returns might not be passed back to manufacturers and
         growers (this supposition needs good solid research).

Acceptability:
        Australian processors indicate that this option, along with further differentiation of
         their CAJ products, is their best opportunity to improve their competitiveness.




        Hassall & Associates Pty Ltd                                                     Page 128
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Delivery Mechanism:

Industry/Government
         To deliver on this option there is a need for targeted consumer research on
          willingness to pay, what consumers are looking for in a product purchased from the
          dairy section of the supermarket and the size and other characteristics of the industry.
          As mentioned in chapter 2, the Australian processing sector is characterised by a tier
          of small, even cooperatively owned, players;
         Both industry and Commonwealth should jointly support market research efforts.
          This occurs via HAL where Commonwealth matching funding is provided for R&D;
         Industry will benefit from the fact that HAL is responsible for both R&D and promotion
          and marketing, allowing for greater coordination of efforts in these two sectors.
          Formerly, these activities were undertaken by HRDC and AHC respectively; and
         Coordinated market research funded by apple industry levies and, if eligible,
          Commonwealth matching funds, would deliver economies of scale in research and a
          wealth of material that individual processors are unlikely to be able to afford if acting
          as individual operations. A precedent exists for AFFA funding of research through the
          Citrus Market Diversification Program (CMDP)81 (see Appendix One). While there are
          significant differences between the citrus and apple industries, the AAPGA have
          indicated their willingness to support this style of research and promotion through
          their limited endorsement funds. Within the current policy environment, the apple
          industry would need to present a strong case in order to secure government funding
          similar to that secured by the citrus industry.

Conclusions:
This option should be pursued as an industry priority.

7.4.3     Marketing Programs to Differentiate Australian CAJ Based on Quality

Objective
         To promote the economic returns to the Australian industry by differentiating
          Australian CAJ based on quality.

Option Description:
         Undertake market research to identify and evaluate the opportunities to market
          Australian made CAJ both domestically and internationally on the basis of quality
          differentiation.

Rationale:
         Australian industry currently benefits from exports of high quality product to Japan.
          The export markets for quality product do exist;




81
  It should be noted that the CMDP was primarily intended to assist with citrus industry structural
adjustment. Furthermore, the conditions within the citrus industry at the time of the implementation of
the program were quite different from those currently being experienced in the apple industry.


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       In the domestic market, product differentiation is the only sustainable option to
        improve Australian product competitiveness with respect to imported CAJ. Australian
        product will not be cost competitive based on price alone;
       Given the bulk commodity nature of CAJ and the many suppliers of imported product,
        quality can vary batch-to-batch. Consistency of supply can be a comparative
        advantage on the domestic market for the Australian industry relative to imported
        CAJ;
       Australian industry has had some success with this option already and potential
        points of differentiation include:
            o An absence of organic residues that create cloudiness and floating particles;
            o Product cleanliness;
            o Chemical residue limits;
            o More efficient processing techniques (using less heat - causes less damage to
                flavour and colour); and
            o Control of pests and diseases (e.g. coddling moth, patulin contamination, etc).
       Research is required to determine whether consumers and therefore converters are
        prepared to pay for different grades of long-life product. Orange juices are able to
        differentiate product on the basis of pulp content and added sugar. Information is
        needed on whether apple juice, a smaller market player, can achieve premiums for
        similar differentiation. The fact that domestic processors are able to export CAJ to a
        discerning market (Japan) would indicate that CAJ could be more than a single grade
        domestic commodity.

Possible difficulties:
       Quality differentiation may be a difficult concept to “sell” to converters who market
        product on the basis of least-cost (research is required to determine this).

Acceptability:
       Australian growers and processors will be supportive of efforts to differentiate
        Australian product;
       Converters may have competing interests, as they use both domestic and Australian
        product; and
       Historically, retailers have supported the promotion of quality juice products (e.g.
        orange juice).

Delivery Mechanism:

Industry/Government
       To deliver on this option there is a need for targeted consumer research on
        willingness to pay, what consumers are looking for in a product purchased from the
        dairy section of the supermarket and the size and other characteristics of the industry.
        As mentioned in chapter 2, the Australian processing sector is characterised by a tier
        of small, even cooperatively owned, players;
       Both industry and Commonwealth should jointly support market research efforts.
        This occurs via HAL where Commonwealth matching funding is provided for R&D;




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         Industry will benefit from the fact that HAL is responsible for both R&D and promotion
          and marketing, allowing for greater coordination of efforts in these two sectors.
          Formerly, these activities were undertaken by HRDC and AHC respectively; and
         Coordinated market research funded by apple industry levies and, if eligible,
          Commonwealth matching funds, would deliver economies of scale in research and a
          wealth of material that individual processors are unlikely to be able to afford if acting
          as individual operations. A precedent exists for AFFA funding of research through the
          Citrus Market Diversification Program82 (see Appendix One). While there are
          significant differences between the citrus and apple industries, the AAPGA have
          indicated their willingness to support this style of research and promotion through
          their limited endorsement funds. Within the current policy environment, the apple
          industry would need to present a strong case in order to secure government funding
          similar to that secured by the citrus industry.

Conclusions:
This option is a priority for industry to increase competitiveness and offset some of the
negative impacts of CAJ imports.

7.4.4       Improved Labeling for Australian Juice Product

Objective:
         To assess the impact of modified labeling to create market opportunities for
          Australian juice producers.

Option Description:
         Assess both country-of-origin and “fresh” versus “concentrated” labeling to secure
          improved market share for Australian juice product.

Rationale:
         Allows for differentiation and promotion of Australian (both CAJ and fresh) product;
         Growers and Australian processors identify current Australian labeling laws and
          regulations as permitting ambiguity in country-of-origin labeling.       Apple juice
          converters are able to label their product a blend of Australian and imported product
          without specifying the portions of each. Some industry players believe that the result
          is a token quantum of Australian product blended with a bulk of low-cost imported
          CAJ;
         Converters argue it is not possible to specify Australian content as this varies almost
          daily on the basis of price, and historically, on the basis of seasonal availability.
          However, converters would be able to list the minimum Australian content over a
          season, based on average use over time; and
         The AAPGA is consulting with the Australian Competition and Consumer Commission
          (ACCC) on the process of reviewing labeling laws.


82
   As noted above, the CMDP was primarily intended to assist with citrus industry structural
adjustment. Furthermore, the conditions within the citrus industry at the time of the implementation of
the program were quite different from those currently being experienced in the apple industry.


         Hassall & Associates Pty Ltd                                                       Page 131
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Possible difficulties:
       Many processors who use Australian product are also converters who utilise blends,
        and therefore have a strong disincentive to support labeling reform; and
       In the citrus industry, AHC ran a “fresh squeezed” campaign based on logos on
        bottles to promote fresh Australian product, but this has lost favour with processors,
        who also convert concentrates, and is gradually disappearing despite substantial
        Commonwealth investment.

Acceptability:
       As noted, processors will support this option, however, processor/converter
        conglomerates have competing interests; and
       In time, consumers may demand more information on labels to allow informed
        product choice.

Delivery Mechanism:
       Processes are already in train to investigate this issue via the ACCC, incorporating
        consultation with AAPGA.

Conclusions:
This option is potentially important for Australian growers and processors and should be
pursued once the outcomes of current ACCC investigations are made known.




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7.4.5    Develop a Label to Indicate Apple Freshness

Objective:
        To achieve improved market performance by encouraging retailers to be more
         conscious of the need to sell only fresh apples and ensuring customers are aware of
         the freshness of the product before they buy and consume.

Option Description:
        Develop a sticker that fades as a fresh apple ages. This would provide an indicator to
         retail staff and consumers of the age (and therefore quality) of the fruit.

Rationale:
        Maintenance of consistent fruit quality is a major issue for the industry at the retail
         level. Providing consumers with further information that helps determine product
         choice will value add apples as a product. Better product information for consumers
         would lead to better product selection and a better eating experience; and
        A more informed purchase decision would lead to better eating experiences.
         Enhanced consumer satisfaction has the potential to increase total sales.

Possible difficulties:
        Development costs are unknown and may be prohibitive; and
        It is not known whether consumers want a sticker on apples to provide information on
         freshness. Food safety concerns would need to be met.

Acceptability:
        Industry would be supportive of efforts to improve product quality; and
        Demonstrating benefits (e.g. trial programs, undertaking research to gauge consumer
         reaction) could be expected to engender further support.

Delivery Mechanism:

Industry
        R&D funding from HAL, which would include matching Commonwealth funding, would
         facilitate the R&D component of this option. In addition, promotion campaigns would
         be required to educate retailers and consumers on the new technology. A pilot trial of
         the new technology would be beneficial. Funding of a pilot could be sought from
         industry bodies and the retail sector; and
        Industry will benefit from the fact that HAL is responsible for both R&D and promotion
         and marketing, allowing for greater coordination of efforts in these two sectors.
         Formerly, these activities were undertaken by HRDC and AHC respectively.

Government
        The Commonwealth also assists industry by administering the statutory levies
         system, by which funds are raised for both R&D and promotion.




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Conclusions:
While the option may have merit, the first step is to establish whether this option is
technically feasible at a realistic cost.

7.5       Element 5       Exploring New Market Opportunities

7.5.1      New or Value Added Products

Objective:
          To offset the impact of imported CAJ by identifying and promoting market
           diversification opportunities.

Option Description:
          This option addresses the question as to whether there are emerging or new products
           with the potential to value add the apple crop by increasing overall demand for apple-
           derived products.

Rationale:
          There is potential for growers and processors impacted by importation of low cost
           CAJ to diversify into very high value alternative products, to diversify their output base
           and offset losses associated with processing. Options might include:
              o Apple crisps/chips as are currently produced by one Victorian operation;
              o Dried apple, currently produced in Tasmania;
              o Canned apple and catering/manufacturing products, Tasmania;
              o Oven ready deserts (pealed and cored with sultanas added);
              o Apple pectins and fibres for sale as health food ingredients;
              o Direct uses of CAJ (incorporating modified strength CAJ) such as apple syrup
                  products;
              o Polyphenols derived from apple thinning (i.e. marble sized fruit) used to
                  prevent food, especially meat and fish, from discolouring;
              o Further use of apple juice as a neutral (odorless and tasteless) natural for
                  packing canned fruit, producing confectionery and in soft drink manufacture;
              o Organic apple production; and
              o Production of cider specific apple varieties.

Possible difficulties:
          Most options are highly speculative and in the case of polyphenols, the breakeven
           cost of collection and packing for processing by apple growers is something like $800
           tonne;
          Markets for these products are unknown; and
          Many would appear to have the characteristics of cottage industries rather than
           genuine commercial opportunities

Acceptability:
          The right commercial opportunity would be acceptable to both growers and
           processors.



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Delivery Mechanism:

Industry
Industry could assist via exploring product potential through HAL‟s R&D program.

Government
Government can support the implementation of R&D outcomes through programs such as
AFFA‟s AAA – Farm Innovation Program. Further Government support can be provided
through matching funds for R&D.

Conclusions:
This option can be addressed under existing structures and processes on a case-by-case
basis. There is no need for a major new initiative.

7.6       Element 6       Trade Measures

7.6.1      Consider the Merit and Implications of Preparing an Anti-dumping Case

Objective:
          To ensure the integrity of the domestic industry is not undermined by unfair
           competition from imported CAJ.

Option Description:
          To consider the merit and implications of initiating an anti-dumping case.

Rationale:
          There has been an unprecedented and sustained rise in low priced imports of CAJ
           from China;
          There is some evidence to suggest that this product is being exported at below cost
           of manufacture;
          In May 2000, following an investigation by the US International Trade Commission,
           the US imposed dumping duties of 52 percent on imports of Chinese CAJ. This has
           supported the contention that dumping is being undertaken and has exacerbated the
           situation in Australia by diverting product hitherto destined to the USA to other
           markets, including Australia;
          The development of an application requires data collection for use as evidence. Any
           data collection would increase industry knowledge;
          A successful anti-dumping application would provide the industry with a 5-year
           window in which to respond to the threat of cheap imports (duties are imposed for 5
           years); and
          The option is short-term focused (i.e. could result in change in the near future, if
           successful). Most other options considered would have longer timeframes for effects
           to be exhibited.




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Possible difficulties:
          Growers are unable to prepare an anti-dumping application, although they are able to
           support it;
          Converters are likely to oppose an anti-dumping application, as they benefit from
           cheap CAJ imports; and
          Consumers may also benefit from cheap CAJ imports if cost production savings are
           passed on to consumers in the form of lower prices.

Acceptability:
          Converters would not be likely to support an anti-dumping suit against China, as they
           benefit from cheap imports of CAJ;
          Growers would be more willing to support an application, and efforts have been made
           in recent years by co-operative grower representatives to assess the support within
           the industry for an application; however
          The onus to prepare and submit an application rests with processors. Processors
           only account for a small proportion of the Australian juice production industry, with
           converters accounting for the majority of production. A sufficient proportion of the
           Australian industry must support the application.

Delivery Mechanism:
          The Australian Customs Service undertakes a dumping investigation. A formal
           investigation is commenced following the receipt of an application, which must
           provide prima facie evidence that dumping is occurring and is causing (or threatening
           to cause) material injury to Australian industry;
          Any person may lodge an application for dumping duties, providing it is made on
           behalf of the Australian industry producing like goods to those allegedly being
           dumped. Where processed agricultural goods are the subject of an application, the
           producers of the raw product may be included in the Australian industry for injury
           assessment purposes83 (Australian Customs Service, 1998).

Conclusions:
This option represents one of the few short-term focused options of all options canvassed.
As its success is dependent on industry support and requires evidence to be gathered, it
should be possible to assess the likelihood of a successful application fairly swiftly.
However, whether a sufficient proportion of the industry support the application is
questionable.

Further detail and background on this issue is provided in Appendix Two.




83
     Although as noted above, growers are unable to prepare and submit an anti-dumping application.


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7.7          Summary of Strategy and Options
This chapter presented a strategic approach to guide the process of achieving global
competitiveness and the development of an enhanced export focus. Elements of this
strategy, reflecting critical steps in the process of developing such a focus, were identified
from consultation with study stakeholders.

Recommendations for implementation of options where industry initiatives supported by
government programs could facilitate change include:


          Business Planning/Benchmarking for growers;
          Production systems management;
          Enhanced variety breeding programs, incorporating product licensing and offshore
           supply arrangements;
          Improved nursery material and new varieties;
          Integrated cold chain management;
          Cooperative supply arrangements and enhanced focus on international markets;
          Expansion of fresh chilled product; and
          Marketing programs to differentiate Australian CAJ based on quality.

Although industry is currently acting upon many of these options, a greater uptake and
intensification of effort is required in order to achieve the aim of increased global
competitiveness and enhanced export focus. Furthermore, in addition to the specific options
identified above, ongoing efforts must be directed towards core industry initiatives, including:

          Continual evolution and uptake of quality assurance programs such as EMS and IFP;
          Continuation of targeted domestic overseas marketing efforts through campaigns
           such as It’s Crunch Time; and
          Continuation of targeted export marketing efforts such as through the "AUSTRALIA
           fresh" program, incorporating efforts directed towards the identification of new
           markets.




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8. CONCLUSIONS AND STUDY RECOMMENDATIONS
The study has addressed three key terms of reference, namely to:

       Analyse Australian industry performance against international best practice
        performance;
       Assess the economic impact of apple juice imports on the Australian apple industry;
        and
       Develop options to improve industry performance through adoption of best practice.

Comparative Analysis of Australian Industry

Of twenty-seven countries, the World Apple Review (2000) ranks Australia twelfth in terms of
production efficiency and eleventh in terms of overall competitiveness. Despite ranking
higher than many important producing and exporting nations (e.g. China), Australian industry
performance was significantly behind key Southern Hemisphere competitors New Zealand,
Chile, South Africa and Argentina. Australia lagged in terms of best practice on planting
density, adoption of new varieties, orchard yield and infrastructure and inputs. Research as
part of this study has revealed major industry efforts on all three fronts.

In addition to these competitiveness rankings, a comparative analysis of on-farm costs
reveals:

       Australian on-farm costs per hectare ($5,900/ha) are less than those incurred in
        South Africa ($6,900/ha) and New Zealand ($8,500/ha); however
       On a per tonne basis, Australia compares unfavourably to these key competitors
        ($380/t relative to $182-185/t).

The reason for this outcome is significantly lower average yields in Australia relative to New
Zealand and South Africa. Australian yields are lower due to a reliance on traditional
Delicious varieties, as well as natural resource factors that favour high-yielding regions such
as Hawkes Bay in New Zealand. It is anticipated that Australian yields will increase in future
as traditional varieties such as Delicious continue to be replaced with new, higher yielding
varieties (such as Gala).

To realise the recovery the industry has set out to achieve, Australia requires a renewed
focus on regaining competitiveness relative to our key Southern Hemisphere competitors. In
addition to the goal of enhancing export focus, current industry activities that will improve
competitiveness include:

       The development and adoption of new varieties and rootstocks within orchards;

       Orchard intensification (i.e. dwarf trees grown on trellis systems with more trees per
        hectare);
       Greater efforts aimed at improving product quality through the adoption of quality
        assurance-based programs such as Integrated Fruit Production; and
       The establishment of supply chain cooperatives and other alliances to supply fresh
        apple and juice markets, both domestically and in export markets.


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Economic Impact of Apple Juice Imports

In 1999-00, Australia imported 15.1 million litres of CAJ with an equivalent customs value of
$21.9 million84. This represented a 20 percent increase in volume from the previous year.
China dominates total imports, accounting for 77 percent of volume and 70 percent of value.

Imported Chinese CAJ can currently be sourced in Australia at $1.20 per litre (landed value).
This compares with an estimated cost of around $2 per litre if converters were to source
equivalent domestically produced juice grade apples85.

There can be no doubt from the study that low cost apple juice imports have a serious
negative impact on processors of Australian apples and the price they pay growers for juicing
fruit. Apple juice converters, who make up the bulk of economic activity in the apple juice
beverage production sector, are beneficiaries from low cost apple juice imports. The impact
on other sectors of the industry is less clear-cut.

While economic theory would suggest that both consumers and juice exporters benefit from
increased competition and lower input costs, the extent to which cost savings reach these
sectors is unclear. From the limited data uncovered as part of this study there would appear
to be evidence that imported apple juice is entering Australia below the cost of production.
Evidence suggests that current import prices for Chinese CAJ ($1.20 per litre) may be
substantially less than the threshold level for profitable production incurred by processing
companies in China ($2.67 per litre).

Strategy to Improve Industry Performance

The development of an industry approach based on achieving global competitiveness and an
enhanced export focus represents the most important mechanism by which the Australian
industry can offset some of the losses we have incurred at the expense of our Southern
Hemisphere competitors in recent years. Industry-wide commitment to improved
competitiveness and a greater presence on export markets is crucial to ensure that
Australian producers are able to compete with Southern Hemisphere producers in export
markets and (in some cases) within the domestic Australian market in future as greater
domestic import competition evolves.

Achieving global competitiveness and an enhanced export focus will require:
         Benchmarking performance against international competitors;
         Striving to improve international competitiveness;
         Gearing domestic production towards export markets;
         Further developing and expanding overseas markets and committing to those
          markets for the long-term;
         Developing integrated supply alliances to facilitate efficient and effective exporting;
          and
         More generally, establishing an industry-wide approach that is focused on realising
          the opportunities that are presented in overseas markets (whilst simultaneously
          addressing domestic opportunities).

84
   It is worth noting that Australia exported 5.7 million litres of apple juice with a f.o.b. value of $7.8
million.
85
   Accounts for all processing and mixing costs.


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Without a commitment to global competitiveness and the development of an enhanced
export focus, the Australian industry will inevitably lose both export market share (particularly
to our key Southern Hemisphere competitors) and domestic market share (as competition
from other fruit and, possibly, imported apples increases over time). Opportunities for the
industry to grow in future will be curtailed unless greater emphasis is placed on exports and
marketing of Australian exports.

This report identifies a strategic approach to guide the process of achieving global
competitiveness and the development of an export focus within Australian industry. The
strategy has components that provide a range of options for each of the key elements of the
value chain, namely: business planning; agronomic practices; handling and processing;
promotion; market opportunities; and trade measures.

It is essential that the options be viewed as components of the process of achieving global
competitiveness and developing an export focus, rather than being viewed in isolation.
Options targeting each element of the value chain must be addressed together to ensure that
a strong commitment to global competitiveness is fostered throughout the industry. Failure
to commit to this process in one sector of the value chain will inevitably undermine the
benefits that would otherwise be derived from a focused, industry-wide commitment.
Similarly, if the adjustment process (embodied by the options) is undertaken with no
commitment to export markets, the opportunities garnered during the process will be
significantly diminished.

Elements of the strategy, reflecting critical steps in the process of developing an export
focus, were identified from consultation with study stakeholders. Recommendations for
implementation of options where industry initiatives supported by government programs
could facilitate change include:
       Business Planning/Benchmarking for growers;
       Production systems management;
       Enhanced variety breeding programs, incorporating product licensing and offshore
        supply arrangements;
       Improved nursery material and new varieties;
       Integrated cold chain management;
       Cooperative supply arrangements and enhanced focus on international markets;
       Expansion of fresh chilled product; and
       Marketing programs to differentiate Australian CAJ based on quality.

Although industry is currently acting upon many of these options, a greater uptake and
intensification of effort is required in order to achieve the aim of increased global
competitiveness and enhanced export focus. Furthermore, in addition to the specific options
identified above, ongoing efforts must be directed towards core industry initiatives, including
domestic and overseas marketing efforts, identification of new export markets and
benchmarking of Australian industry performance, in terms of both efficiency and
competitiveness. This report could form a component of a future national education and
benchmarking program for the industry.




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9. BIBLIOGRAPHY

Australian Apple and Pear Growers Association (2001) Miscellaneous Information Sourced
        From Internet website, www.aapga.com.au

Australian Apple and Pear Growers Association (1997) Comparing Apples with Apples,
        Benchmarking the Australian Apple Industry, Australian Apple and Pear Growers
        Association Inc.

Australian Broadcasting Corporation Rural News (2001) Apple shortage risks new market,
        Wednesday 9 May, 2001.

Australian Bureau of Agricultural and Resource Economics (2000a) Australian Commodity
        Statistics 2000, Commonwealth of Australia, Canberra.

Australian Bureau of Agricultural and Resource Economics (2000b) Australian Horticulture in
        the Global Environment, Commonwealth of Australia, Canberra.

Australian Bureau of Statistics (2001) Miscellaneous Production, Export and Import Volume
        and Value Data, provided upon request by ABS, Sydney.

Australian Customs Service (1998) Guidelines for Australian Industry: Application for
        Dumping and Countervailing Duties, B108 (7/98).

Australian Financial Review (2001) Foodland in bidding war with Woolworths, Tuesday 5
        June, 2001.

AFFA (2000) Getting Fresh with Europe, new retailing trends – new opportunities, the supply
      chain implications for Australian exporters of fresh fruit and vegetables,
      Commonwealth of Australia.

Baddiley K (2001) „My Patch and World Trade‟ in Pome Fruit Australia, March 2001.

Belrose Inc, (2000) The World Apple Review 2000 edition, Pullman, USA.

Codex Alimentarius Commission (2001) Proposed Draft Code of Practice for the Prevention
      of Patulin Contamination in Apple Juice and Apple Juice Ingredients in Other
      Beverages, Codex Committee on Food Additives and Contaminants, Thirty-third
      session, The Hague, The Netherlands, 12-16 March 2001.

Flemming G (2001) „Rootstock, are you keeping in touch?‟ in Pome Fruit Australia, March
      2001.

Global Agriculture Information Network (2000) Report into China’s Deciduous Fruit Industry,
       USDA Foreign Agricultural Service, GAIN Report #CH0618.




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Gordon, R (1994) The Bottom Line, An investment appraisal of two apple production
      systems, Batlow and District.

Horticultural Research and Development Corporation (2000) Annual Report 99-00, HRDC.

Horticulture Australia Limited (HAL) (2001) Apple industry marketing and communications
       plans 2000 and 2001 (draft).

Jakhade J. (2000) „Subsidies – necessity or evil‟ in The Financial Express, Friday May 5,
      2000.

NSW Agriculture (2001) Wholesale Apple Price Data, sourced from Flemington Markets,
     Sydney.

NSW Treasury (1997) NSW Government Guidelines for Economics Appraisal: Policy and
     Guidelines Paper, NSW Treasury.

Olsson J (1994) Subsidies: Are political, economic and social consequences justifiable?
      paper prepared for International Trade and Finance, Hawaii Pacific University.

RCS Group, (1998) China’s Apple Industry: A wake up call for the rest of the world, a review
     of China‟s production, processing and trade, Brisbane.

Sydney Morning Herald (2001) Exchange Rates, Tuesday 1 May, 2001.

The Fruit Grower‟s News (2000) Congress Approves $138 million in Assistance for Apple
      Growers.

United States Information Research Centre (2000) Press release from Greg Waldem (United
       States Congressman), Walden Applauds US Action Against Chinese Apple Juice
       Dumping.

United States International Trade Commission (2000) Certain Non-frozen Concentrated
       Apple Juice From China; Determination and Views of the Commission, Investigation
       No. 731-TA-841 (Final), USITC Publication No. 3303.

United States State Department (1998) Country Report on Economic Policy and Trade
       Practices: China.

World Apple Report (2001) South East Asia Overview, May 2001.

World Trade Organisation (2001) Miscellaneous material sourced from Internet website
      www.wto.org




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10. PERSONS CONTACTED AS PART OF THIS STUDY

Name                    Role
Paul Holden             Assistant Advisor, The Hon Warren Truss MP, Minister for Agriculture, Fisheries
                        and Forestry
Julie Austin            Senior Advisor, Office of the Parliamentary Secretary to the Minister for
                        Agriculture, Fisheries and Forestry
Howard Moxham           Horticulture Australia Limited (Promotion)
Evonne Lovric           Horticulture Australia Limited (R&D and Extension Officer)
Dan Ryan                Horticulture Australia Limited (Program Manager Apple and Pear)
Kevin Baddiley          Australian Apple and Pear Growers Association (President)
Jon Durham              Australian Apple and Pear Growers Association (CEO)
Elma Reynolds           Australian Apple and Pear Growers Association (Technical Officer)
Mark Salter             TAPGA
Graeme Dray             Appledale Processors Cooperative (Orange, NSW)
David Gartrell          Appledale Processors Cooperative (Orange, NSW)
Peter McClymont         TOWAC Fruit Export Cooperative (Chair)
Rolf Schufft            Australian Fruit Juice Association
John Lucey              Blackwood Valley Brewing Company
Viresh Patel            Fruitmark (Melbourne)
Max Burslem             Cascade Beverages (Hobart, Tasmania)
Richard Babcock         Cascade Beverages (Hobart, Tasmania)
Warren Atlas            Mountain Maid (Batlow, NSW)
Kelvin Kajowski         Nugan (Griffith)
Peter Valentine         Serve-Ag Pty Ltd
Ron Gordon              Apple Industry Consultant (Batlow, NSW)
Bruce McCallem          Chairman, Manufacturing Industry Taskforce on Anti-dumping
Professor Gus Hooke     Beijing-based macroeconomist, industry analyst and agricultural specialist.
Junying Chen            Australian-based China sector analyst
Richard Sedgwick        Grower (Batlow, NSW)
Darral Ashton           Grower (Batlow, NSW)
Bob Domato              Grower (Orange, NSW)
Ross Capobianco         Australian Country Orchards
Joe Capobianco          Australian Country Orchards




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11.      APPENDICES
Appendix One           Citrus Market Diversification Program

A brief summary of the Citrus Market Diversification Program (CMDP), an example of
Commonwealth Government Assistance provided in the past for industry adjustment in the
face of rising importation of low cost juice concentrates, is provided below. The Program
was referenced in the design of industry options (Chapter 7). When comparing initiatives
proposed in Chapter 7 to those listed below it needs to be remembered that the issues faced
by the Australian Valencia Orange industry as a result of rising import competition were
much more significant than those of the Australian Apple Industry. The CMDP was primarily
intended to assist the citrus industry with structural adjustment. Furthermore, orange juice
from Valencia oranges was the main product available to growers of these fruit whereas juice
and concentrate production from apples are more balanced co-products, where the main
output is production of fresh domestic and export apples. Lessons learned from the Citrus
Market Diversification Program, are however incorporated in recommendations arising from
the analysis completed in Chapter 7.

Objectives
1. The objective of the CMDP was to provide assistance to facilitate adjustment within, and
   improve the international competitiveness and long-term growth prospects of the
   Australian citrus industry.
2. To this end particular emphasis was placed on measures aimed at increasing exports of
   fresh citrus and fresh juice as well as import substitution.

Initiatives
Specific investments by the Commonwealth under this program included:
    Assistance with overseas market development;
    Australian Product Identification Logo with AHC;
    Promotion of “100 percent Australian Fresh Orange Juice” with AHC;
    Fruit Fly Awareness;
    Feasibility study into amalgamation of State citrus marketing boards;
    Industry visits to US;
    Thailand Export Implementation Committee;
    Indonesia Promotion Campaign;
    Networks for Cooperative Exports;
    Fruit Fly cold and hot disinfectation trials;
    Assistance to facilitate technical and varietal adjustments in orchards;
    AUSTRALIA fresh Promotion;
    Assistance to Implement Benchmarking findings;
    Quality Assurance Program;
    Best practice farm business and cost of production checks;


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    Disinfection;
    Scholarships;
    Varietal research for fruit fly resistance;
    Market intelligence research and
    EU market appraisal research.

The program commenced in 1994-95. While some projects are still to be completed, funding
is now fully allocated and no new projects will be commenced.




      Hassall & Associates Pty Ltd                                             Page 145
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Appendix Two           Preparing An Anti-dumping Application
This appendix provides further information to that outlined in Chapter 7 on the requirements
to prepare an anti-dumping case.

What is Dumping?
Dumping occurs when an exporter sells goods to Australia at a lower price than the same
goods are sold for in the exporter‟s domestic market. It is a form of price differentiation
between markets. Although it is not a prohibited practice under international trade
agreements, remedial action may be taken if it is shown that dumping causes material injury
to domestic industry86. Remedial action usually takes the form of a dumping duty imposed
on future imports, usually for a five-year period.

Who Can Commence an Anti-dumping Suit?
Producers of raw apples can only commence an anti-dumping application if there exists a
close inter-relationship between the raw product and the processed goods. Consistent with
the Customs Act, 1901, processed agricultural goods derived from raw agricultural goods are
not to taken to be close processed agricultural goods unless the Minister is satisfied that:

     a) The raw agricultural goods are devoted substantially or completely to the processed
        agricultural goods; and
     b) The processed agricultural goods are derived substantially or completely from the raw
        agricultural goods; and
     c) Either
            i) There is a close relationship between the price of the processed agricultural
                goods and the price of the raw agricultural goods; or
            ii) A significant part of the production cost of the processed agricultural goods,
                whether or not there is a market in Australia for these goods, is, or would be
                constituted by the cost to the producer of those goods of the raw agricultural
                goods.

With reference to (a), since apples (the raw agricultural good) are not devoted substantially
or completely to the processed agricultural good (CAJ), growers are unable to prepare an
application for an anti-dumping inquiry. The onus rests on processors to prepare the
application. Growers are allowed to support the application, however, they are not allowed to
be the protagonists of the application.

How is This Relevant to Australia?
Australian imports of CAJ have increased from 6 million litres in 1993 to in excess of 15
million litres in 2000. China has driven this rapid increase in imports and now accounts for
77 percent of total volume and 70 percent of total value. At present, imported Chinese
concentrate can be sourced in Australia for $1.20 per litre (landed value, pre local clearance
duties). If converters were to source domestically produced juice grade apples, it is
estimated that it would cost around $2 per litre once all processing and mixing costs are
taken into account87 (pers. comm., Vitesh Patel, Fruitmark, Melbourne).

86
   In May 2000m following an investigation by the US International Trade Commission, the US
imposed dumping duties of 52 percent on imports of Chinese CAJ.
87
   Assumes domestic growers are paid approximately $100-$120 per tonne for juice grade apples.


      Hassall & Associates Pty Ltd                                                  Page 146
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RCS Group (1998) stated that an official from the Chinese Ministry of Light Industry indicated
that Chinese factories could not profitably produce concentrate when the international price
for concentrate fell below $US1,000 per tonne. At this point, it was stated that factories
would face no alternative but to shut down until favourable international prices returned. An
examination of the present operating environment would suggest that Chinese processors
are in fact continuing to operate at prices below this threshold level. Given a typical CAJ
density of 1.36 kg/litre, this would yield an effective breakeven price of US$0.74 per litre.
Based on the present exchange rate of US$1 = A$0.51 (Sydney Morning Herald, 1 May
2001), this equates to an effective breakeven price of A$2.67 per litre. As noted above, the
current landed price for Chinese CAJ is estimated to be $1.20 per litre. This would indicate
that Chinese processors are continuing to export CAJ to Australia at prices that are
substantially below that which the Ministry of Light Industry indicates is a breakeven level of
profitability for Chinese processors.

Demonstrating Material Injury
Factors that may demonstrate the threat of material injury include:

       An increase in sales of dumped imports, indicating the likelihood of substantially
        increased levels of imports;
       The capacity and likelihood of the exporter substantially increasing the volume of
        dumped exports to Australia;
       Whether import prices significantly depress or suppress domestic prices;
       Whether import prices are likely to cause an increased demand for further imports;
        and
       Inventories of the goods concerned (Australian Customs Service, 1998).

Other effects that need to be demonstrated include price effects, volume effects, profit effects
and other injury indicators (e.g. production volumes, capacity utilisation, return on
investment).




       Hassall & Associates Pty Ltd                                                   Page 147
The Australian Apple Industry Squeeze

								
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