Unless otherwise indicated, the reference for this section is the Industry Commission's report on the tobacco growing and manufacturing industries.(34)
The tobacco growing industry in Australia is currently regulated at federal and state level. The Australian Tobacco Marketing Advisory Committee (formerly the Australian Tobacco Board) is a statutory authority of the Australian Government, established under the Tobacco Marketing Act 1965. It has the formal responsibility of advising the Minister for Primary Industries and Energy on interstate and export marketing of tobacco leaf, and with the Minister's consent, of advising the State Tobacco Leaf Marketing Boards (established under legislation in those states which produce tobacco) on the same matters. The Australian Tobacco Marketing Advisory Committee (ATMAC) is also responsible for the administration of the main instrument of regulation, the Tobacco Industry Stabilisation Plan (TISP). A key component of the Plan has been the Local Leaf Content Scheme (LLCS). Together these arrangements have controlled supply and guaranteed sale of Australian leaf to local manufacturers at a pre-arranged price. Provisions of the TISPs and the LLCS are described in more detail below.
In November 1988 the Federal Minister for Primary Industries and Energy announced that there would be one more TISP, terminating in October 1993, after which protection for Australian leaf would substantially decline. The Plan was subsequently granted an extension to the end of September 1995. The tobacco growing industry is now entering a period of major readjustment.
Under current arrangements, growers and manufacturers agree, through ATMAC, on annual aggregate marketing quota level, grades of leaf to be marketed, and price. The production and sale of tobacco leaf is administered through state-based Tobacco Leaf Marketing Boards. These Boards allocate quota (the entitlement to grow tobacco) to individual growers, who must then obtain a selling entitlement (an entitlement to sell quota tobacco, up to a fixed limit) from ATMAC. Provided the crop reaches a minimum grade, all tobacco grown within the limits of the farmers' selling entitlements is acquired by the state Boards, and marketed directly to the manufacturers on behalf of the growers. In 1993 quota sales amounted to 12.7 million kilograms of green leaf, with a total value of $78.2 million.
First introduced in 1965 and reviewed five-yearly, TISPs have controlled marketing and pricing practices for leaf, in great measure protecting the Australian crop against the comparable but generally more cheaply produced overseas crops. The TISPs have required ATMAC to recommend a national marketing quota, considering variables such as rates of tobacco consumption and management of leaf stocks.
TISPs have guaranteed the sale of locally grown leaf to Australian manufacturers, and have set a minimum price for sales. Earlier TISPs required manufacturers to fulfill 50% of their leaf requirements with the local crops, but since 1977, all three Australian manufacturers have voluntarily agreed to purchase 57% of their leaf requirements locally. In return, they may buy additional imported leaf at a concessional tariff. This system of tariffs, known as the Local Leaf Content Scheme (LLCS), ensures sales for most of the Australian crop. However in doing so it has also compelled Australian manufacturing companies to buy the majority of their leaf at a substantial price premium. According to Rothmans, this premium is around 36%, equivalent to a further subsidy to the growing industry of around $20 million, based on 1993 sales.(36)
Under increased pressure from the Industry Commission (see below), during the 1980s, TISPs introduced a number of changes intended to make the growing industry more efficient. In November 1988, the industry was informed that the TISP in its current form would terminate in October 1993. A far greater degree of competitiveness would be demanded of the Australian tobacco leaf growers, although some tariff assistance would continue. Coinciding with the 1988 announcement, the Australian Tobacco Board was renamed as the Australian Tobacco Marketing Advisory Committee (ATMAC), in recognition of the new role it would take in developing market oriented selling arrangements to apply after the conclusion of the TISP. The operation of ATMAC is to be reviewed in 1995.(121)
In response to a request from ATMAC, the operation of the final TISP (including the LLCS) was subsequently extended to 30 September 1995, and provisions were further modified in an effort to make the Australian growing industry competitive and equipped to meet market requirements. However, marketing quotas, administered pricing arrangements and the requirement for manufacturers to use 57% local leaf were retained.
Following the termination of the TISP, any new marketing arrangements will require authorisation under section 88 of the Trade Practices Act 1978. One set of proposals put forward by the Australian Tobacco Leaf Corporation, a private corporation established by ATMAC, has been rejected by the Trade Practices Commission on the grounds that the anti-competitive effects of the proposed scheme outweighed any public benefits. What further tariff support the industry might appropriately be given has been the subject of an Industry Commission review, discussed below.
Successive reports of the Industry Commission (IC) have shown that tobacco growing has been one of the most highly assisted agricultural industries in Australia, and have levelled strong criticism at the TISPs.(122,123,124) In September 1987, the IC recommended that the TISP be phased out over a five-year period, after which Australian tobacco leaf should compete in the world arena without subsidy or other protection.(123) In a subsequent annual report, the IC stated that taking into account statutory marketing arrangements, tariff concessions and all other measures of government support, tobacco was by far the most assisted agricultural activity in Australia, with assistance at around six and a half times the rate of other horticultural activities, and over 12 times the average rate for all agricultural activities.(124)
The IC's 1994 review of the tobacco growing and manufacturing industries provides a thorough examination of the current standing and viability of tobacco growing in Australia. The IC makes the following observations about the effect of successive TISPs on the tobacco growing industry:
ð TISPs and the LLCS perpetuated an artificial market environment in which growers and manufacturers had been insulated from the discipline of the market.
ð The schemes have been primarily responsible for the development of an inefficient tobacco growing industry structure now on the verge of collapse.
ð The arrangements gave growers no opportunity to compete on quality, type of leaf, or price, but encouraged the production of as much leaf at as low a cost as possible .
ð Competition was also stifled among the tobacco manufacturers who, under the TISPs, were offered an identical mix of grades of leaf at a common price.
ð Reduced demand for tobacco in response to declines in consumption has left most growers with substantial excess capacity.
The IC makes a number of recommendations on future tariff arrangements and the time period over which they should be phased in. Chief among these is the proposal that imported tobacco be taxed at an ad valorem rate (a tax levied on the value of the product), instead of the specific weight-based tariff currently in use. The specific tariff (along with the weight-based excise) has tended to disadvantage imports and distort import patterns, as well as encourage Australian manufacturers to produce lighter cigarettes, a factor which also affects the export market potential of Australian tobacco products. (See also Chapter 7 for a full discussion of taxation issues). The IC recommendations are that:
1. On termination of the TISP and/or the LLCS, all imported tobacco leaf (with the exception of unmanufactured leaf used in the manufacture of cigars, cheroots or cigarillos) be dutiable at an ad valorem general tariff rate of 25%. It is recommended that unmanufactured leaf used in the manufacture of cigars, cheroots or cigarillos continue to be dutiable at 'free'.
2. On termination of the TISP and/or the LLCS, all imported manufactured tobacco products (with the exception of cigars, cheroots and cigarillos) be made dutiable at an ad valorem general tariff rate of 5%. It is recommended that imported cigars, cheroots and cigarillos be dutiable at 'free'.
3. Where applicable, the developing country (DC) margin of preference for all tobacco leaf and tobacco products be set 5 percentage points below the general tariff rates recommended to apply on termination of the TISP and/or the LLCS, and that these goods be then included in the general phasing out of DC preference margins.
4. With the exception of imported unmanufactured leaf used in the manufacture of cigars, cheroots or cigarillos and imported cigars, cheroots and cigarillos, the target long term ad valorem general tariff rate for all imported tobacco leaf and manufactured tobacco products be 5%.
5. The target long term tariff rate of 5% on imported leaf be phased in, from the initial tariff of 25%, over a period of seven years at a rate of 5 percentage points at the end of year 1 and 2.5 percentage points at the end of each of years 2 to 7.
6. Assistance for tobacco leaf and tobacco products be converted to tariff-only support, in accordance with its other recommendations, prior to implementation of the agreement reached for the conversion of local content schemes under the Uruguay Round of trade negotiations.
These tariff rates bring tariff assistance to the tobacco growing industry into line with that afforded to the vast majority of other Australian manufacturing and agricultural industries. The seven-year phase-in period is intended to enforce change without driving viable growers out of the market or causing unmanageable social pressures.
Future prospects for tobacco growers are likely to be confined to supplying a smaller share of local manufacturers' requirements for tobacco leaf. The Industry Commission has identified several problems facing Australian growers:
ð The difference in labour costs (and to a lesser extent some other input costs) between Australia and many other exporting countries is great, and likely to be an ongoing reason why Australian growers will not be able to compete on simple price comparisons. The IC has calculated that between 1990 and 1993, the average price disadvantage for Australian leaf was 37%.
ð Fluctuations in overseas currency exchange rates (especially devaluations which may be deliberately manipulated by trading nations to keep their prices competitive) may make competition even more difficult.
ð Although there are factors which could lead local manufacturers to pay a premium for local leaf (for example particular leaf qualities to which the Australian consumer is accustomed), the level of that premium is not known.
ð Although there is an international market for tobacco leaf of the type grown in Australia, the high cost of production and distances from major markets have precluded the export of Australian leaf.
ð Australian manufacturing companies are subsidiaries of overseas corporations, and in response to unattractive local conditions, they could consider the option of moving off-shore entirely. The immediate and long term well-being of Australian tobacco growers is firmly in the hands of the manufacturers.
In its submission to the Industry Commission, Rothmans of Pall Mall (Australia) Ltd suggests that good quality Australian tobacco leaf could find 'niche' export markets, especially in east, south east and south Asian countries.(36) The Company also states that it would be prepared to continue purchasing a substantial volume of suitable Australian leaf at a 'small' premium, in recognition of the advantages a local growing industry can offer.
Tobacco growers themselves have expressed uncertainty that they can survive in a deregulated market.(125,126) A study commissioned by the then Australian Tobacco Board estimated that in 1988-1989, only around one-fifth of tobacco farms were efficient enough to withstand adjustment pressure following the dismantling of the TISP.(120) It is clear that the industry is heading for a major period of rationalisation. When this occurs, the IC observes that:
income distribution within the [tobacco growing] regions will change dramatically. Those growers who remain in tobacco growing, and are able to achieve a higher level of capacity utilisation, have the prospect of a reasonably rapid return to profitability. Those who can successfully diversify into other crops may have a further period of low income until new crops, such as grapes, reach maturity. But others who are unable to continue growing tobacco face long periods of under or unemployment. Developments such as these will place considerable strain on existing social services in these regions
The Victorian state government has provided $3 million in a once-off offer to assist with restructuring the tobacco growing industry in that state. The money is to be used to purchase back (or 'retire') quota from growers who agree voluntarily to leave the industry. The intention is to assist growers to leave the industry if they wish to do so, improving the viability of those who remain.(127)
In Canada, where tobacco growing has declined due to decreased tobacco usage, a group of farmers has formed a coalition to sue the government for their losses. They state that while they have no quarrel with the government's aim of creating a tobacco free Canada by the year 2000, they would like to receive compensation and assistance in developing alternative crops.(128)
A further way in which governments have assisted tobacco growing is through providing financial support for research and development. A collaborative arrangement between the federal government, growers and the industry has existed since 1955, when the Central Tobacco Advisory Committee, (now known as the Tobacco Research and Development Council), was established. Up until July 1991, the government matched funds raised by growers and manufacturers from a levy based on the quantity of Australian leaf sold and purchased. The Commonwealth contribution has since been virtually halved, in a policy decision affecting all government agricultural research funding.(129) The Tobacco Research and Development Council (TRDC) was allocated $413,000 in Commonwealth funding in the 1991-92 budget. Funding allocations are paid at a level of 0.5% of the gross value of production of leaf.(129)
The tobacco growing industry has also received assistance at a state level. The Victorian state government decided in June 1984, to phase out state funding for tobacco research over a three-year period,(130) but maintained funding for research into alternative crops. The Ovens Research Station near Myrtleford is now substantially funded by the TRDC, but managed by the Victorian Department of Agriculture. The Southedge Research Station, outside Mareeba, Queensland, is partly funded by the TRDC and is managed by the Queensland Department of Primary Industry.(129)