Adjusting to apple imports

Transcription

1 Adjusting to apple imports Part 2: Economic Impact Statement Prepared for Apples and Pears Australia Limited Commerical-in-confidence Centre for International Economics Canberra & Sydney December 2010

2 The Centre for International Economics is a private economic research agency that provides professional, independent and timely analysis of international and domestic events and policies. The CIE s professional staff arrange, undertake and publish commissioned economic research and analysis for industry, corporations, governments, international agencies and individuals. Centre for International Economics 2010 This work is copyright. Persons wishing to reproduce this material should contact the Centre for International Economics at one of the following addresses. Canberra Centre for International Economics Ground Floor, 11 Lancaster Place Majura Park Canberra ACT 2609 GPO Box 2203 Canberra ACT Australia 2601 Telephone Facsimile cie@thecie.com.au Website Sydney Centre for International Economics Suite 1, Level 16, 1 York Street Sydney NSW 2000 GPO Box 397 Sydney NSW Australia 2001 Telephone Facsimile ciesyd@thecie.com.au Website Disclaimer While the CIE endeavours to provide reliable analysis and believes the material it presents is accurate, it will not be liable for any party acting on such information.

3 ADJUSTING TO APPLE IMPORTS 3 Contents Glossary 5 Summary 6 Australia s competitive position 6 The impact of imports on the Australian apples industry 8 1 Background and introduction 10 Increased competition from imports 10 This report 12 2 Australia s competitive position 13 Australian industry profile 13 Recent productivity trends 18 3 Estimating the effects on prices of quarantine restrictions 24 Quarantine restrictions affecting the Australian horticulture industry 24 Estimating price effects of quarantine restrictions 25 Summary 34 4 Impact of apple imports 36 Economic impacts 36 Summary 41 References 43 APPENDICES 45 A Wholesale prices 47 B Regional analysis 50 C Quarantine measures on apples imports 57 D Price differentials for fresh fruit 62 Boxes, charts and tables 2.1 Factors affecting orchard profitability The base case with no apple imports: area, tree numbers and production The base case with no apple imports: average yield, tree density and farm size 21

4 4 ADJUSTING TO APPLE IMPORTS 2.4 Comparison of export prices and domestic wholesale prices Key quarantine import restrictions in Australia Price differential calculations for Chinese apples Price differential calculations for New Zealand apples Average nominal FOB export prices for New Zealand apples Price differential calculations for US apples Estimated price differentials supported by current quarantine restrictions on other fruit Estimated price differentials supported by quarantine restrictions summary Determinants of price differentials for NZ, Chinese and US apple imports Summary of impacts of imported apples Impact of apple imports on farm prices Impact of apple imports on wholesale prices Impact of apple imports on consumption Impact of apple imports on domestic production Impact of apple imports on farm income Impact of apple imports on farm value added Summary of potential impacts of apple imports 42 A.1 Melbourne wholesale market prices for first quality product 48 A.2 Average wholesale price of first grade apples in Melbourne wholesale market 49 B.1 Characteristics of key apple producing regions 56 C.1 Summary of price differential for Chinese apples under new arrangements 58 C.2 Summary of price differential for New Zealand apples under new arrangements 59 C.3 Summary of price differential between US and Australian apples under new arrangements 61 D.1 New Zealand banana imports from the Philippines 63 D.2 New Zealand imports of Chilean table grapes 65 D.3 Volume and value of stone fruit from Chile imported to US 66 D.4 Australian wholesale equivalent price of US stone fruit imports 67 D.5 Estimated price differentials for stone fruit imports from Chile 68 D.6 Estimated price differentials for stone fruit imports from the United States 69 D.7 Summary of estimated price differential for stone fruit 70

5 ADJUSTING TO APPLE IMPORTS 5 Glossary ABS ALOP APAL AQIS BA CIE CIF FOB IRA kg kt NZ PNW RFP SPS Agreement UN US USDA VFD WTO Australian Bureau of Statistics Appropriate level of protection Apples and Pear Australia Limited Australian Quarantine Inspection Service Biosecurity Australia Centre for International Economics Cost, insurance and freight Free on board Import risk assessment kilogram kilotonne New Zealand Pacific North West Request for Permit Agreement on the Application of Sanitary and Phytosanitary Measures United Nations United States United States Department of Agriculture Value for duty World Trade Organization

6 6 ADJUSTING TO APPLE IMPORTS Summary The relaxation of quarantine restrictions is expected to see the introduction of imported apples from China, New Zealand and the United States within the next few years. This represents a significant challenge for the Australian apple industry. This Economic Impact Statement is intended as supporting analysis for the transition strategies developed in Part 1 of this study. It contains estimates of the impact on the Australian apple industry of imports from these countries. Australia s competitive position The Australian apple industry is uncompetitive by international standards. Specifically: Australian growers lag behind international competitors on a number of indicators of orchard productivity; product quality is inconsistent, which reduces demand in both domestic and export markets and lowers the price received by growers; and the supply chain is highly fragmented preventing Australian producers from taking advantage of economies of scale in packing and marketing. Key productivity trends Based on ABS data and industry consultation, we identify recent productivity trends within the industry. Based on these trends we then develop a base case scenario against which to assess the impact of imports. The base case is a statistical representation of the Australian industry in the absence of imported apples. The base case scenario is based on the following trends at the national level. The number of trees is projected to increase at a rate of 1 per cent each year. An increase in the average tree density of orchards is partly offset by a reduction in the orchard area. An increase in production of 1 per cent each year as a result of an increase in the number of trees and a slight improvement in the yield per tree. The number of establishments decreases at a rate of 3 per cent each year. A gradual transition towards more commercially favoured varieties, such as Pink Lady, Gala, Granny Smith, Jazz and Fuji.

7 ADJUSTING TO APPLE IMPORTS 7 Price differentials supported by quarantine restrictions Because quarantine restrictions limit imports, they allow domestic producers to charge higher prices than they could if the restrictions were not in place. In this study we have estimated the price differential supported by those restrictions that are likely to be relaxed, and used these to analyse the impacts of the relaxation of those restrictions on the domestic market and producers. The differentials are estimated by comparing current domestic prices with the likely price of imported apples at a comparable stage in the distribution chain. Price comparisons are made for products of comparable quality. The estimated price differentials supported by restrictions on imports of apples from New Zealand, China and the United States are presented in table 1. Since there are currently no apple imports, we cannot observe a landed price for apples from these countries. These prices have to be estimated. Consequently there is significant uncertainty surrounding these price differential estimates. We therefore provided a low and high estimate which represent a lower and upper bound as well as what we consider the most likely estimate. 1 Estimated price differentials supported by quarantine restrictions Low estimate Most likely High estimate % % % China New Zealand United States Source: CIE estimates. In addition to the quarantine restrictions on apples, the domestic apple industry is also affected by quarantine restrictions on other fruits, which are a substitute for apples. We also estimate the price differentials for other fruits supported by those restrictions, and use them in modelling the overall effects of change on the apple industry. Table 2 summarises the determinants of the estimated price differentials in the most likely case. The price differential is determined by the difference between the domestic wholesale price and the wholesale equivalent import price, as a share of the wholesale equivalent import price. CIE estimates of various costs incurred throughout the value chain, when combined, result in the wholesale equivalent import price. The main cost components that have a bearing on the wholesale equivalent import price, and therefore the price differential, are the FOB price, shipping costs and compliance costs. There are a range of different market observations from which an estimate for the domestic wholesale price could be attained. A series of judgements are required to determine an appropriate estimate of the price against which imported apples will

8 8 ADJUSTING TO APPLE IMPORTS most likely compete. These judgements are significant as they have a tangible impact on the price differential (see table 2). 2 Determinants of the price differential for NZ, Chinese and US apple imports Units NZ apples Chinese apples US apples FOB price A$/kg Shipping costs A$/kg CIF price A$/kg Cost of complying with IRA A$/kg Inspection costs (AQIS) A$/kg Transport, unloading, port charges A$/kg Wholesale margina A$/kg Wholesale equivalent import price A$/kg Domestic wholesale price A$/kg Price differential b % a The wholesale margin is a constant 12.5 per cent. b Calculated as the difference between the domestic wholesale price and the wholesale equivalent import price expressed as a percentage of the wholesale equivalent import price. Note: This table refers to most likely estimates. Source: CIE estimates. Domestic apple prices will continue, to an extent, to be supported through quarantine requirements that add to the cost of exporting to Australia. The relative isolation of Australian markets to international producers, particularly the United States, will also offer some support. The bottom line is that imported apples are likely to be more competitive in Australian markets after quarantine restrictions are relaxed to an extent which permits trade. Importantly, the ability of the consumer to differentiate Australian varieties on the basis of quality or other characteristics will have a significant bearing on the price differential. It should be noted that the seasonal window in which apple imports compete in domestic markets will also affect the size of the price differential between foreign and imported product. The impact of imports on the Australian apples industry The immediate impact of the increased import competition that will result from relaxing quarantine restrictions will be to lower the domestic price. We use the Hi_Link model to estimate the various adjustments that are likely to occur in response to estimated price changes. Relative to the base case, we estimate that relaxing quarantine restrictions on apple imports from China, New Zealand and the United States will have the following impacts on the Australian apple industry by around 2014: farm gate prices will be around 21 per cent lower; wholesale prices will be around per cent lower;

9 ADJUSTING TO APPLE IMPORTS 9 apple consumption in Australia will be around 17 per cent higher; imports will achieve a market share of around 22 per cent; domestic production will be around 11 per cent lower; farm income will be around 32 per cent lower; and farm value-added will be around 33 per cent lower.

10 10 ADJUSTING TO APPLE IMPORTS 1 Background and introduction The Australian apple industry faces significant challenges in the period ahead. A key immediate challenge is the threat of import competition. The industry has largely been protected from import competition through strict quarantine restrictions. However, recent developments on this front are likely to expose the industry to much greater competition as early as within the next 12 months. Increased competition from imports Industries that are protected from imports for a long period tend to exhibit slow productivity growth. The protection afforded to the Australian apple industry has meant that it is relatively uncompetitive in international terms. For example, the productivity of Australian orchards, estimates range from around 14 to 31 tonnes per hectare, lags well behind leading competitors, such as New Zealand where orchards produce around 51 tonnes per hectare (Belrose Inc., 2010). The Australian apple industry has largely been focussed on the domestic market. Import competition is therefore a major threat to the industry. As a World Trade Organisation (WTO) member, Australia is obliged under the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) to consider all import requests from other countries concerning agricultural products. 1 The quarantine implications of these requests are considered by Biosecurity Australia (BA) through its Import Risk Assessment (IRA) framework. Decisions to permit or reject an import application can be made only on sound scientific grounds. In recent years, Australia has received import requests for apples from: China; New Zealand; and the Pacific North West of the United States (the states of Idaho, Oregon and Washington). Recent developments on each of these requests are outlined below. 1 Biosecurity Australia, Accessed 1 September 2010.

11 ADJUSTING TO APPLE IMPORTS 11 China The final IRA report recommends that the importation of fresh apple fruit from all commercial production areas of China be permitted, subject to a range of quarantine conditions, including verification of pest status in the areas nominated to export apples to Australia. The report identifies 16 pests requiring quarantine measures to manage risks to a very low level to achieve Australia s appropriate level of protection (ALOP). Specifically, requirements include for measures to maintain and verify the phytosanitary status of consignments. This would include the presence of an Australian Quarantine Inspection Service (AQIS) officer to inspect and verify pest freedom prior to export. In addition, the Chinese apple producers would be required to conduct inspection, control and remedial measures if pests are detected. The final IRA revises downwards the unrestricted risk estimate of several pests, fungi and disease to very low, thereby removing quarantine requirements. Effectively, these measures are expected to considerably reduce the effective rate of protection of the Australian apple industry which is predicted to increase imports and competition almost immediately within the low value apple market. New Zealand The final IRA report on New Zealand apples was released in 2006, detailing a range of risk management options required to reduce risks to a very low level, consistent with Australia s ALOP. The report included a range of conditions placed on New Zealand apples, including pre-clearance arrangements with AQIS officers, management and treatment at various stages of production, and the inspection of a random sample of apples within New Zealand. In addition, where no satisfactory risk management procedures could be identified for apple scab disease, imports of New Zealand apples into Western Australia are not permitted. In March 2007, BA released a statement concerning the determination of a policy to permit the entry of apples from New Zealand to Australia subject to phytosanitary measures specified in the final IRA. The Australian Government also expressed their intention to develop a detailed operational work plan with New Zealand. In 2007, the New Zealand Government made a complaint to the WTO. The panel established by the WTO s Dispute Settlement Body released its report on 9 August The report found that the quarantine measures imposed by Australia in relation to fire blight, European canker and apple leaf curling midge were inconsistent with the SPS Agreement and recommended that the Dispute Settlement Body request Australia to bring these measure into conformity with its obligations under the SPS Agreement.

12 12 ADJUSTING TO APPLE IMPORTS The Australian Government has appealed the decision; however, appeals tend to have a low success rate. This WTO decision is therefore expected to result in further steps to reduce quarantine measures in the near term. United States Pending the final IRA determination for apples from the Pacific North West of the USA, the United States apple industry may soon be able to supply high quality apples to Australian consumers at highly competitive prices over the off season potentially forcing Australian apples into low value export and processing markets. The draft IRA proposes a combination of risk management measures and operational systems to reduce the risk associated with the importation of fresh apple fruit from the Pacific North West (PNW) states into Australia to achieve Australia s ALOP. No satisfactory risk management procedures could be identified for apple scab disease. Therefore, it is proposed that imports of apples from the PNW into Western Australia would not be permitted. This report Using the apple and pear research and development levy and matched funds, at the request of Apple and Pear Australia Limited (APAL), Horticulture Australia Limited (HAL) commissioned the CIE to: develop a Transition Plan to support the industry in undertaking critical actions to deliver long term sustainable improvements to the productivity, perceived and actual product quality, and international competitiveness of the apple industry; and prepare a supporting Economic Impact Statement on import competition from New Zealand, the United States and China. This report is the Economic Impact Statement. The analysis is intended to support the Transition Plan contained in the companion report Adjusting to Apple Imports: Developing a Transition Plan for the Apple Industry. The remainder of the report is structured as follows. Chapter 2 describes the competitive position of the Australian apple industry and outlines recent productivity trends at the national and regional level. Chapter 3 estimates the price differentials supported by quarantine restrictions that are expected to be relaxed, resulting in increased imports over the next few years. Chapter 4 estimates the impact on the Australian apple industry of reducing those quarantine barriers.

13 ADJUSTING TO APPLE IMPORTS 13 2 Australia s competitive position As is often the case in industries protected from import competition, the Australian apple industry has become relatively uncompetitive by international standards. To understand the impact of imports, it is important to first understand the current competitive position of the Australian apple industry, relative to key competitors. In this chapter we develop a profile of the Australian apple industry at a national level, based on Australian Bureau of Statistics (ABS) data and the CIE s consultation with local experts within each of the major apple producing regions. We also identify key recent productivity trends. We then use these trends to develop a base case against which the future impacts of apple imports will be assessed. The base case, or status quo, is a statistical representation of the industry profile in the absence of imports. Australian industry profile This section provides an overview of the competitiveness of various aspects of Australia s apple industry, compared to key competitors. Orchard productivity There are a range of factors affecting the competitiveness and therefore the profitability of Australian apple growers. These include: product quality consumers are willing to pay a higher price for higher quality product. Product quality can be improved through transition to more commercially acceptable varieties, modernising orchard production systems, better orchard management, and better handling and storage practices; yields and pack out rates improvements in the quantity of fruit produced on a per hectare basis (yield) and percentage of fruit which is marketable to first and second grade markets (pack out rates) amount to a reduction in the cost of production on a per kilogram basis. Yields and pack out rates can be increased, amongst other strategies, through transitioning to more productive varieties and sports that colour more quickly, increasing orchard density and netting and better orchard management; and efficiency of input use the efficiency of inputs, in particular the highly constrained inputs such as labour and water, impact the cost of production and

14 14 ADJUSTING TO APPLE IMPORTS subsequently, profitability. It can be improved through variety transition and better production systems and management. Industry competitiveness is also affected by external factors such as climate and input prices. These factors are outside the control of growers. The interactions between controllable and external factors affect the profitability of apple growers at the orchard level. These interactions are summarised in chart Factors affecting orchard profitability CONTROLLABLE FACTORS Variety Production systems Quality Pack-out rate Yield Efficiency of input use EXTERNAL FACTORS Climate Input prices KEY DRIVERS OF PROFITABILITY Price Cost of production Data source: The CIE. In this section, a number of broad factors that may indicate industry trends and the status of industry productivity are identified. This section provides a synopsis of the extent to which these factors indicate progress in industry competitiveness. High density plantings High density planting should lead to productivity improvements when combined with more intensive or more effective orchard management. The potential gains from transitioning to high density include: higher yields per hectare; better labour and water efficiency;

15 ADJUSTING TO APPLE IMPORTS 15 higher pack out rates; and more consistent fruit size, resulting in a higher proportion of fruit that meets size specifications. Australian producers have been slower than a number of international competitors, particularly a number of European countries and New Zealand, in transitioning to higher density production. Variety transition Variety transition is another significant benefit associated with replanting. Transitioning varieties to grow apples preferred by consumers may provide higher returns to Australian producers. Australia rates relatively well by international standards on the transition to new varieties. According to the World Apple Report 2009 (Belrose Inc., 2009), approximately 52 per cent of production is of new varieties compared to an average of the group of ten most competitive countries (as ranked in the report) of approximately 46 per cent of total production. However, New Zealand produces a significantly higher percentage of new varieties (88.5 per cent) than Australia which indicates, given similarities in target markets and consumer preferences, that further transition of varieties is desirable. The traditional distinction between old and new varieties as an indicator of competitiveness may be overly simplistic. Whilst older varieties are diminishing in Australia, they still play a role in diversifying grower portfolios and spreading risk over different seasonal windows. Older varieties such as Granny Smiths are reported to achieve higher-thanaverage yields in Australia and consumer acceptability of Granny Smiths tends to be relatively high. On the other hand, Sundowners (a relatively new variety) have a relatively low level of consumer acceptability. Australia produces a significantly higher share of Sundowners as a percentage of the product mix than the world average (Belrose Inc., 2009). Nevertheless there remains further scope for productivity improvements through variety transition. Input costs Australian producers tend to have higher production costs compared with competitors, due largely to the cost of labour. Labour costs comprise approximately two thirds of total costs. On-farm labour costs equate to approximately one third of

16 16 ADJUSTING TO APPLE IMPORTS total variable costs whilst post-harvest costs comprise approximately half of total costs, with the largest component packing and packaging (which has an embedded labour component) equated to 40 per cent of the total variable costs. While the cost of inputs are generally outside the control of growers, higher input costs can be partly offset by more efficient use of inputs which result, for instance, in higher yields. This may be achieved through moving to more efficient production systems such as high density orchards combined with utilising more intensive or more effective skilled labour. Small reductions in orchard production costs may also be possible through improving or increasing the use of spray thinning to reduce pruning and hand thinning costs. Total and first quality yield Yield per hectare is one of the leading indicators of the current competitiveness of the Australian industry. Many costs on a per kilogram basis fall as yield improves. Yield has a strong link to profitability because as the tonnage per hectare rises so too does the first quality yield for which producers receive a higher return. In Australia, second quality product receives between (approximately) 35 and 75 per cent less than first quality product depending on the variety. Strong performing enterprises have pack out rates around 85 per cent, with approximately 75 per cent of product recovered in class one markets. The percentage product graded first quality has been relatively high in Australia compared to competing nations. However, this may be because of less stringent specifications on a range of important indicators of eating quality. We discuss this further below. Domestic and export consumption The competitive position of the Australian apple industry is ultimately reflected by the price, determined by supply and demand. One important determinant of the price of apples is the level of domestic and export demand. Although apples compete with other fruit in the Australian market, we can only utilise domestic prices to assess the demand relative to alternate products available in Australian markets. Export prices in international markets show more accurately how Australia is performing relative to world standards. The change in demand and prices obtained in domestic and export markets are useful indicators of Australia s competitive position, and are discussed in more detail later in this chapter. Summary of orchard productivity In summary, variety transition and the replacement of low density orchards and lessproductive orchard systems are necessary for producers to improve their competitive

17 ADJUSTING TO APPLE IMPORTS 17 position. There is evidence that Australia lags behind key competitors on these measures. However, the effectiveness of management and extension determine the extent to which improvements will be achieved through orchard replacement. Prices, pack out rates and yields are better than the variety mix and average density as indicators of industry competitiveness. Orchard replacement is just one aspect of orchard improvement. The cost of production, measured on a per kilogram basis, may indicate industry productivity, because it is linked to outputs such as yield and pack out rates. The cost of production, measured on a per hectare basis, would not adequately reflect industry productivity, because a higher cost of production may be a reflection of better practices and performance. However, outputs such as yield and pack outs do not adequately reflect the level of quality; which is more unequivocally linked to demand. Product quality Product quality is an important determinant of industry competitiveness. A number of factors associated with the value chain and market structure are potentially having an impact on product quality (and farm gate prices). There is a high degree of variation in quality assurance processes and requirements, which is compounded by the difficulties consumers face in identifying the level and standard of product quality. As a result, product quality is not performing to consumer expectations. There are currently no uniform structures in place for maturity assessment. Quality indicators vary from state to state. The availability of services for the industry to assist in promoting harvest at the optimal time of year also varies. Pack houses are influenced by quality assurance standards set by the major retailers, which account for an estimated 40 per cent of fresh apple sales. Narrow product quality standards, based on colour and blemishes, do not have specifications with respect to important quality indicators such as sugar, starch and firmness. As a result, this does not encourage practices which have a beneficial impact on eating quality. Supply chain efficiency Supply chain efficiency is an important component of industry productivity. With little available and current data on supply chains, supply chain efficiency is difficult to measure. The value of exports is an appropriate proxy to the degree of supply chain integration. Other, more qualitative sources of information also provide an indication of how Australia is performing relative to key competitors.

18 18 ADJUSTING TO APPLE IMPORTS Australia s competitors have rationalised supply chains, achieved greater efficiency and reduced costs (Australian Apple and Pear Growers Association, 1997). By contrast, there appears to have been increased investment in packing sheds in Australia. This is impacting the cost of production as well as quality outcomes. There is an abundance of small pack houses without the size to invest in expensive equipment capable of improving the consistency in product quality. In the Australian apple industry, very few pack houses utilise near-infrared technology, capable of internal blemish detection. Although there are commercial incentives for pack house consolidation and investment in this technology, due to the narrow quality parameters in the retail market for apples, it has not been a necessity. There are other indicators that Australia has lagged behind its competitors in terms of supply chain integration. As a result of the distance to markets, freight costs paid by Australian exporters are inherently higher than other apple-exporting countries. Whilst New Zealand is also relatively isolated from international markets it has been able to minimise this disadvantage through utilising charters. Chartering a ship involves the coordination of a significant volume of product, supported by wellintegrated supply chains and effective marketing and distribution channels in export markets. These capacities are not yet developed within the Australian apple industry. Similarly, the United States has added value to its apple industry through utilising integrated grower-packer-shippers that have evolved to supply the needs of major retailers for twelve months a year (Belrose Inc., 2009). Recent productivity trends In this section we provide an overview of recent productivity trends in the Australian apple industry. These trends are then used to guide the development of a base case scenario that assumes the continuation of no apple imports, against which we assess the impact of apple imports. Our assessment is based on data, where available, as well as consultation with industry stakeholders in key apple growing regions. We use the information to establish regional profiles of major apple producing regions to verify and inform data inputs to the model. Each year the ABS collects data on agricultural production through the Agricultural Survey. The survey provides estimates on apple production, total tree numbers (and some detail about tree age) and tree yield at a regional level (from onwards), which is published in Agricultural Commodities (Cat. no ). In addition, detailed small area data was previously purchased by APAL over the period 2003 to This data contained detailed information on tree numbers by age (including new tree plantings), the number of hectares and production by variety. The CIE utilised semi-structured engagement with industry experts including growers, consultants and departmental officials to assess changes to the regional profiles since Information sought throughout this process included trends with

19 ADJUSTING TO APPLE IMPORTS 19 respect to: tree plantings the variety and density of these plantings; area; tree numbers; the density of trees pulled; average pack out rates by variety; and yield in terms of tonnes per hectare. Several participants also provided feedback on how the estimates in the ABS data were inconsistent with their understanding (and in some cases data) of the region. The regional profiles that were aggregated into the national picture are provided in appendix B. Key trends in orchard productivity and developing the base case At the national level, the base case is based on the following key trends. The number of trees increases by 1 per cent each year. This is driven by an increase in the average tree density, which is marginally offset by a reduction in the area of trees planted. The total orchard area declines by approximately 2 per cent each year. Tree plantings as a share of total trees has ranged between 2.1 per cent ( ) and 6.8 per cent ( ). Plantings are forecast to continue at a rate of 4 per cent of total trees, gradually approaching five per cent due to rising planting densities. Although apple production has fluctuated over the past decade, due to variable rainfall, there has been a trend decline of around 2 per cent each year over that period. However, production is forecast to increase by approximately 1 per cent each year in the future as a result of an increase in the number of trees and a marginal improvement in the yield per tree. The number of apple orchards has decreased over the past eight years at an average rate of 3 per cent each year. We assume that the industry will continue to consolidate and the number of establishments will continue to fall at a rate of 3 per cent each year. There have been two adjustments to the ABS data that should be highlighted. Firstly, an important adjustment was made to the area of land reported in the ABS surveys. This was undertaken to correct what we believe is a systematic problem in the reporting of the area of trees planted through these surveys. This is supported by the divergence between estimates of the area of orchards reported in the ABS and estimates provided during consultation. Based on the extent of these over-estimates the reporting error is expected to overstate the actual area of orchard by 20 per cent. This potential overestimation has had two important implications: national estimates on the average tree densities of apple producing regions around Australia are expected to be lower than actual tree densities; and

20 20 ADJUSTING TO APPLE IMPORTS national estimates on the average yield in tonnes per hectare are also expected to understate actual amounts. The CIE has revised downward the estimated national average orchard area in from hectares to 9018 hectares in 2010 (accounting for incremental changes over the past few years). This has resulted in a shift in the national estimates for the average tree density from less than 900 trees per hectare to approximately 1200 trees per hectare (which takes into account industry activity over the past few years). Importantly, due to the reduction in the estimated orchard area it is expected that the actual yield in tonnes per hectare in was approximately 31 tonnes per hectare, compared to unadjusted estimates of 25 tonnes per hectare. Furthermore, the reduction in area has an impact on the average farm size. The average farm size is considered small, with the average acreage around 9.4 hectares per enterprise. In addition, a necessary but minor adjustment was made to ABS estimates of total tree numbers. The ABS estimates that the total tree numbers in were approximately million. A very small adjustment was made to ensure that the total tree numbers over time as new plantings mature to trees aged two years, three years and four and over were consistent. Following an adjustment to ensure internal consistency, it is estimated that there were million trees in Adjustments resulted in an increase in tree numbers by between 4 and 9 per cent. Key base case parameters are shown in tables 2.2 and 2.3. Apple varieties and domestic wholesale prices A further productivity trend that has been occurring over recent years is the transition to more profitable varieties. Variety transition can be a key benefit of replanting, since newer varieties with higher consumer acceptability are likely to provide higher returns to growers. According to stakeholder consultation, the dominant varieties that have been planted over the past three years are Pink Lady, Jazz, Gala and Granny Smith and to a lesser extent, Fuji. Less favoured varieties such as Sundowners and Red Delicious continue to be planted, however this is thought to be at a relatively low rate. The domestic wholesale price used in the base case implicitly reflects the variety mix. The model employs estimates from the ABS for wholesale prices and the gross value of production. Value of Agricultural Commodities Produced Australia (Cat. no ) reports average wholesale prices and the total value of agricultural production for crops including apples. Where this includes both fresh and processed apples, combined with ABS data on the production of fresh and processed apples

21 ADJUSTING TO APPLE IMPORTS The base case with no apple imports: area, tree numbers and production Area Trees under one year Trees Production ha 000 s 000 s Kt Note: Adjustment factor applied to ABS area data of 20 per cent. CIE adjustment to ABS total tree estimates to ensure internal consistency over time. Source: ABS data and CIE calculations. 2.3 The base case with no apple imports: average yield, tree density and farm size Average yield Tree density Average farm size kg/tree t/ha trees/ha ha Note: Adjustment factor applied to ABS area data of 20 per cent. The CIE adjustment to ABS total tree estimates to ensure internal consistency over time. Source: ABS data and CIE calculations.

22 22 ADJUSTING TO APPLE IMPORTS (Cat. no ) this data is utilised to determine an estimate of the wholesale price of fresh apples. The average wholesale price of fresh fruit over the past three years is estimated to be approximately A$2.12 per kilogram. Importantly, this includes both first and second grade product. The data used in the model has been cross-checked at an aggregate level to test the appropriateness against two data sets: the monthly price of apples sold to the Melbourne wholesale market across major apple varieties; and production data provided to the CIE by APAL. This analysis shows that the ABS estimates for the average wholesale price used in the model representing a weighted share of first and second grade product are appropriate. Details of this cross-checking exercise are provided in appendix A. Exports and export prices In 2009, Australia exported 4.5 kt of apples to overseas markets, equivalent to just 1.5 per cent of the total production. Prior to 2004, exports were significantly higher averaging between 8 per cent and 13 per cent of the total production. In the base case scenario (in the absence of import competition), we do not expect a significant increase in exports for two main reasons: producers can earn a higher price in the domestic market than they can in export markets; and the Australian industry is likely to remain uncompetitive by international standards. The relevant comparison with the export price received by producers is the domestic wholesale price, since they are an equivalent point in the value chain. Table 2.4 shows the simple and weighted averages of export prices and the weighted average domestic wholesale price for the past five years. The differential between the simple and weighted averages, which is significant, indicates there are several higher value markets with relatively thin trade volumes. The average domestic wholesale price over the past five years has fluctuated above and below the average export price. 2.4 Comparison of export prices and domestic wholesale prices Simple average export price Weighted average export price a Domestic wholesale price A$/kg A$/kg A$/kg a derived by the sum of export prices multiplied by export quantity as a share of total export volumes Note: Calendar years are averaged to derive estimates in financial year terms.

23 ADJUSTING TO APPLE IMPORTS 23 Source: Australian Bureau of Statistics and HAL analysis. Analysing the average volume and prices of Australian apples sent to overseas markets highlights the existence of a number of higher value markets. These include: the United Kingdom, which accounted for an average of 13 per cent or 0.58 kt of apples. The average price received over this period was A$3.27per kilogram; Indonesia, which received approximately 13 per cent of total export volumes or 0.58 kt of apples. There is a premium for this market, with export prices averaging A$2.57 per kilogram over the period; and other markets such as Thailand and Hong Kong where prices have been relatively high but trade volumes have been insignificant. Thus, the volume of apples sent to higher value markets over the past three years has been only a small portion of approximately one quarter of the total export volume. Approximately 68 per cent of apples that were exported over the past three years were valued at less than A$1.80 per kilogram and approximately 39 per cent were valued at less than A$1.20 per kilogram. Furthermore, almost half of apples exported in the past three years were Red Delicious (from Tasmania). Typically, these are less favoured in the Australian market and oversupplied in export markets. Given these factors, we expect export quantities to continue to average between 4 and 5 per cent of total production. The incentive to establish supply chains to facilitate the development of reliable export markets may be greater in a free market, where domestic apple prices are likely to be lower.

24 24 ADJUSTING TO APPLE IMPORTS 3 Estimating the effects on prices of quarantine restrictions Relaxing quarantine restrictions to allow apple imports will have a number of effects on the local market: the main driver of the impacts on local producers will be the effect on the prices they receive. So to analyse potential impacts, a first step is to estimate how much higher domestic apple prices are as a result of the quarantine restrictions on imports that are likely to be relaxed over the next few years. Since other fresh fruits are a substitute for apples, quarantine restrictions on those fruits also affect demand for apples. For those fruits whose quarantine restrictions are also likely to be relaxed, we estimate the effect on prices of those quarantine restrictions. The Hi_Link model is then used to explore the effect of reducing apple and other fruit prices by the estimated differentials supported by current restrictions, compared to the base case developed in the previous chapter. Quarantine restrictions affecting the Australian horticulture industry Under current plant protection regulations, exporters in foreign countries wishing to send fresh fruit or vegetables to Australia must first lodge an application with the Australian Government. The quarantine implications of these requests are considered by BA through its IRA framework. Decisions to permit or reject an import application can be made only on sound scientific grounds. These arrangements mean that Australia s domestic industries are insulated from import competition until a competitor has been through the IRA process and appropriate quarantine arrangements have been put in place. Relaxing the quarantine restrictions on fruit and vegetable imports opens the way for the domestic industry to be subject to competition from imports. The degree of restriction on imports created by current quarantine arrangements on a range of horticulture products is expected to be progressively lowered over time as a result of applications that are currently going through the IRA process, or are expected to in the near future. Some key horticulture products that are expected to be subject to increasing competition from imports and the likely sources of these imports are shown in table 3.1.

25 ADJUSTING TO APPLE IMPORTS Key quarantine import restrictions in Australia Product Apples Bananas Stone fruit Table grapes Mangoes Likely source of imports New Zealand, United States, China Philippines Chile, United States Chile Thailand, Philippines Pineapples Philippines Note: Avocados from Chile are also subject to quarantine restrictions. However, with unrestricted imports from New Zealand it is likely that Australia is already facing the world price. For this reason, avocados have been excluded from this table. Source: CIE. Estimating price effects of quarantine restrictions For the purposes of modelling the effects of relaxing quarantine restrictions, we need to estimate the difference between the domestic wholesale price and likely landed price of the fruit under consideration, expressed as a percentage of the wholesale equivalent price. Since quarantine restrictions currently prevent imports from the relevant countries, the landed import prices are not observable. There are various approaches that can be used to estimate what the landed import price might be if the quarantine restrictions were relaxed. One approach, where relevant, is to use the landed import price in New Zealand as a proxy for the import price in Australia. Given its proximity to Australia, transport costs to New Zealand are likely to be similar for northern hemisphere producers. Tariff rates in New Zealand are also generally low. In cases where information on landed prices is not available, data from New Zealand can still be useful for assessing the likely transport costs through analysing the difference between the value for duty (VFD) price and the CIF (landed) price. The VFD price is essentially the free on board (FOB) export price in the exporting country. The difference between the FOB and CIF price is, therefore, a reasonable estimate of the transport and insurance cost. Another approach to estimating the price differential is to start with the export price for each exporting country for exports to other similar markets and then build up the costs associated with getting the product to the Australian market. These costs typically include: freight and insurance; inspection costs in Australia; transport, unloading and port charges; a wholesale margin; and the cost of complying with any remaining quarantine restrictions.

26 26 ADJUSTING TO APPLE IMPORTS Export prices are available from the online database, UN Comtrade, or the US Department of Agriculture trade database. Estimates for freight and insurance costs, AQIS charges, port and handling charges and other ex-port transportation charges were provided to the CIE through consultation with exporters. The landed price of imported products also depends on the cost of any inspection and treatment protocols required for exporting to Australia. These arrangements are at various stages of being finalised, which means there is a high level of uncertainty around these costs estimates. A final important consideration in estimating price differentials is to determine the appropriate domestic wholesale price against which to compare the landed import price. There is not a generic apple price in the Australian market. Domestic wholesale prices vary across a range of factors, such as variety, quality, location and season. Selecting the appropriate domestic wholesale price therefore requires some subjective judgement. We consider a range of factors, including: the main export varieties of each importing country; the likely quality of the fruit; and the season in which imports from each importing country are likely to hit the Australian market. Due to the significant uncertainty surrounding each cost and price parameter used in their calculation, there is a high degree of imprecision surrounding the price differential estimates. We therefore provide a range of estimates. The low estimate is based on the least conservative estimates for each cost element and price used in the calculation. This can therefore be thought of a lower bound for the price differential. The high estimate is based on the most conservative estimates for each cost element and price used in the calculation. This can be thought of as an upper bound for the price differential estimate. We also specify the most likely price differential. This is estimated through making a series of informed estimates of average prices and costs related to the relevant good or service. Where there is limited or no market observations from which to draw, a judgement about an appropriate proxy is required. For instance, FOB prices for Chinese apple exports vary between markets. It is necessary to assess a range of factors and contextual information to determine which estimate or data source is most indicative of the average price or cost. Thus, the most likely estimate will not always refer to a simple average of market observations and is derived through the addition of the various value chain estimates.