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Allens Arthur Robinson

Food Update – March 2004

Welcome to Allens update on food legislation, policy, news and cases.

Feature articles

In this issue: We look at the US-Australia Free Trade agreement and its potential implications for the food industry; the connection between obesity and food marketing to children; and at the advertising of foods containing alcohol.

The US-Australia Free Trade Agreement

In brief: If the recently announced Free Trade Agreement between Australia and the United States comes into force, different sectors of the Australian food industry will be affected to varying degrees. Articled Clerk Daniel Woods and Partner Richard Hamer report.

Agriculture generally

Two-thirds of all agricultural tariffs would be eliminated immediately. This is of particular importance to the producers of lamb and sheep meat the United States is currently the fastest growing market for Australian lamb and sheep meat, and the removal of tariffs should speed this growth.

A number of industries that are currently excluded would gain access to the US market. For example, peanut imports would be allowed (in the first year, a quota of 500 tonnes would be imposed, which would increase over time). Tariffs in the wine industry would gradually fall to zero over eleven years.

All tariffs on seafood would drop away as the Free Trade Agreement (FTA) came into force. Tariffs on canned tuna would drop from 35 per cent to zero. To put this into perspective, a South Australian tuna processing facility with a current annual turnover of A$35 million estimates that its turnover would increase by A$15-20 million each year.

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Beef and dairy

The FTA makes few concessions regarding US tariff barriers in the beef and dairy industries. Beef is Australia's number one export to the US, but would continue to be limited to an existing World Trade Organisation quota (378,000 tonnes in 2004). In the second year of the FTA, the quota would increase by 15,000 tonnes of beef, increasing to 70,000 tonnes in year 18 of the FTA. However, the increased beef export entitlement would apply only to low-grade manufacturing beef (for example, hamburger meat), rather than higher value chilled beef cuts. Tariffs within the quota would be eliminated as the FTA came into force, and duties over the quota would be phased out from year 19.

Dairy quotas would also be increased (and would continue to increase over the life of the FTA), and products that have been excluded previously from the US market would be allowed access. Examples of these products are particular cheeses, butter, milk, cream, whole milk powder and ice cream products. There would be no change to tariffs on dairy products that are already subject to quotas.

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Sugar

Domestic pressure in the US, where sugar is a highly protected industry, meant that sugar was excluded from the FTA. Australia will continue to be restricted to the quota negotiated during the WTO's Uruguay Round (for 2004, Australian sugar imports into the US are limited to 87,402 tonnes).

Despite protests from the Australian sugar industry, this decision may actually benefit the wider food industry. Relatively low prices for sugar in Australia (compared to the artificially inflated prices in the US) mean that manufactured sugar products could be produced here, and then exported, duty free, to the US at prices that undercut similarly manufactured US products.

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Manufactured goods

Customs duties on the majority of manufactured goods would be removed under the FTA. In 2003, Australia-US trade in manufactured goods was valued at A$5.84 billion. Further market penetration has been prevented by high US tariffs on key products. As noted above, manufactured sugar products, in particular, would enjoy a favourable competitive advantage over their US equivalents.

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Foreign investment

The FTA would remove a number of the barriers facing US investors looking to the Australian food industry. While the existing foreign investment review policies would be retained, procedural concessions for US investors would be introduced. All US foreign direct investment in new Australian businesses would be exempt from Foreign Investment Review Board (FIRB) screening and the thresholds for acquisitions of existing businesses by US investors in non-sensitive sectors (such as the various food industries) would be raised from A$50 million to A$800 million. This would mean that most US investments in the Australian food industry would be permitted without FIRB approval.

Non-US foreign investment in Australia's food industry may also increase. The FTA would introduce comprehensive rules of origin tests based around a 'substantial transformation' test that would be objective and simple to apply. This would mean that Australia may become a more attractive destination for regional manufacturers wishing to access US markets.

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Quarantine

Australia's strict food safety and quarantine requirements have long been a concern of US exporters, many of whom are currently prevented from accessing Australian markets. For example, while Australia places zero tariffs on most imported pork products, it does not accept US pork for food safety reasons. The FTA would provide for a new regime for food inspection, with the aim of opening up Australia's markets. In addition to the US pork industry, food inspection is a particular issue for US exporters of citrus, apples and stone fruit.

Imports of Australian meat into the US are also subject to food safety requirements. If the meat contains residues of drugs that are not approved by the US Food and Drug Administration (FDA) for use in the US, it is rejected. This can become a particular issue where meat contains traces of vet products for pests or bacteria that are peculiar to Australia, and, as a result, have not been subject to the FDA approval process. The FDA Center for Veterinary Medicine controls this process and the FTA is unlikely to affect it.

Australia's quarantine procedures would remain. A scientific cooperation procedure would be established to resolve quarantine issues, including a technical working group whose role would be to ensure cooperation in the development of science-based measures at the earliest point in each country's regulatory process.

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Fast food marketers spared the force of law

In brief: The National Obesity Task Force has stopped short of regulating fast food advertising but the global outcry against marketing to children is getting louder. Partner Peter O'Donahoo and Articled Clerk Tami Dower report.

Obesity costs Australia $1.3 billion and is 'rising fast'

Fast food marketers and manufacturers can breathe a small sigh of relief at least for the moment. Despite consistent pressure from health professionals and lobby groups for restrictions on food advertising to children, the National Obesity Task Force has stopped short of recommending regulatory action.

Instead, the Task Force's first report, Healthy Weight 2008 Australia's Future: A National Agenda for Young People and Their Families, outlines a proposal to monitor and assess the effectiveness of the existing Children's Television Standards and revised regulatory framework for food and drinks advertising to children and, if necessary, implement modifications. It also recommends that research be undertaken to assess the impact of advertising practices on obesity levels.

The Obesity Task Force was established by the Australian Health Ministers' Conference in November 2002, in response to mounting evidence of a national obesity crisis.

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A modern epidemic

Childhood obesity levels in Australia are now among the highest in the world. The Task Force found that obesity levels of Australian children had trebled between 1985 and 1995, with an estimated 1.5 million Australians under the age of 18 now falling into the categories of overweight or obese. The cost of treating obesity and related health problems is currently putting a hefty $1.3 billion annual dint in public funds and the bill is steadily rising.

The battle of the bulge is not just being waged in Australia, but throughout the developed world. The International Obesity Task Force estimates that, if the current trend continues, by the year 2025 levels of obesity could be as high as 45-50 per cent in the United States and between 30-40 per cent in Australia and England.

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Does advertising actually influence children's food choices?

While it is true that the burgeoning obesity crisis is multi-faceted, public sentiment is becoming increasingly unforgiving of food industry representatives who attempt to dodge the blame by resorting to arguments of peer group pressure, sedentary lifestyles and parental choice. The evidence of a direct link between advertising and childhood obesity is still open to debate, but the movement against fast food advertising to children is clearly gathering global momentum.

In particular, a recent report commissioned by the British Food Standards Agency, Does food promotion influence children? A systematic review of the evidence, concluded that food promotion affected children's eating preferences, consumption and buying behaviour. A team of scientists and nutritionists at Strathclyde University compiled the study, which was the first to claim a direct link between television advertisements and the type and amount of food that children eat. One of the options canvassed by the report to deal with the problem was a ban on food advertisements aimed at preschool children. The report also suggested setting criteria for commercial broadcasters on the number and types of food advertisements for less healthy foods to be shown during children's television programs.

The report has been the subject of much debate among the Health Select Committee of the British House of Commons, which has been conducting hearings on the issue of obesity since July last year. The Committee is expected to release its report next month.

The Food Standards Agency report has also given force to a UK Private Member's Bill banning television advertisements for foods with high fat, sugar or salt content during preschool television programs. The Children's Television (Advertising) Bill was introduced last year by the Minister for Stourbridge, Debra Shipley. A similar ban has existed for many years in Sweden.

At the international level, the World Health Organisation (WHO) has condemned food and beverage advertisements that 'exploit children's inexperience or credulity'. In its Draft Strategy on Diet, Physical Education and Health, released in December last year, the WHO stated that messages that encourage unhealthy dietary practices or physical inactivity should be discouraged. The WHO called upon governments to work with consumer groups and industry to develop appropriate approaches to deal with the marketing of food to children.

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Public pressure putting the squeeze on food advertisements

In 1996, a Consumers International survey identified Australia as having the highest average number of food advertisements 12 per hour of any Western country. According to the Royal Australasian College of Physicians, young Australians see an average of 75 advertisements per day, or 27,000 per year. The majority of these are for soft drinks, fast foods, sugary breakfast cereals and confectionary.

However, there are already signs that the food industry in Australia is starting to take the hint, with McDonald's taking the lead in shifting the prevailing industry ethos. In January 2003, McDonald's cut its advertising by 40 per cent during the hours in which children generally watch television. The CEO of McDonald's Australia, Guy Russo, introduced the change, along with a range of healthier menu items, in response to the growing public 'demonisation' of fast food operators.

Public relations aside, the industry has been warned that if it does not take the problem of obesity seriously, regulation of advertising could be on the horizon. Speaking at a Kid Power marketing conference in July last year, the Federal Minister for Children and Youth Affairs, Larry Anthony, told the industry, 'If you are not prepared to act responsibly, then community pressure will force the government to regulate the industry'.

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The way forward

The scope of what is acceptable in marketing to children is clearly on shifting ground, not just in Australia, but internationally as well. The signs are on the wall and food industry leaders are beginning to stand up and take note. In the not-too-distant future, those who have failed to heed the warnings may be risking a consumer backlash, government regulation or, even worse, they may find themselves on the wrong end of a US-style obesity class action.

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'Booze biscuits' spark public outrage

In brief: Arnott's controversial new alcohol-laced biscuits have become a focus of political scrutiny. Partner Peter O'Donahoo (view CV) and articled clerk Tami Dower highlight some of the regulations applicable to the advertising of alcoholic products.

A public furore has erupted since Arnott's Tim Tam Tia Maria and Kahlua Slice biscuits (variations on old favourites Tim Tams and Mint Slice) hit Australian supermarket shelves recently. Federal Parliamentary Health Secretary Trish Worth has even asked the Department of Health to check guidelines for the promotion and placement of alcoholic products.

It will be interesting to see what they find.

Obviously the anti-alcohol lobbyists are hoping that the Department will dig up a law or regulation to give force to their arguments that the biscuits, which contain no more than 0.1 per cent alcohol, should be banned and removed from the shelves. But those doing the searching might be hard-pressed to find what they're looking for.

Various restrictions apply to advertisements 'directed to children' or television advertisements appearing during children's programs, but Arnott's has made it quite clear that its target market is women aged 25 to 40, not children. It's highly unlikely that we will be seeing advertisements for liqueur-laced biscuits in the middle of the popular children's television program, Hi-5.

According to the Australian Association of National Advertisers' (the AANA) Code for Advertising to Children, 'advertisements to children' include those which, 'having regard to the theme, visuals and language used, are directed primarily to children'. Advertising for the Tim Tam Tia Maria biscuit describes it as having a 'wicked flavour', while the Kahlua Slice is said to be 'sent from heaven'. A spokesman from the Australian Drug Foundation has argued that this sort of language is 'designed to attract young people'. Clearly that's not the stated aim of Arnott's and it seems a rather long bow to draw to suggest that such advertising is aimed primarily at children.

Others have argued that Arnott's is 'spiking' biscuits that have become a household name for children. Although the AANA's general Advertiser Code of Ethics states that 'Advertisements shall not depict material contrary to prevailing community standards on health and safety', it is at about this point where the argument starts to look a lot more like one of morality rather than legality. Judging by the mixed public responses to the new biscuits, the boundaries of 'prevailing community standards' are far from well-defined.

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News

Australia, US agree Free Trade Agreement

9 February 2004 – Australia and the United States agreed a Free Trade Agreement, providing immediate duty free access for 97 per cent of Australia's manufacturing exports and 66 per cent of its agricultural exports.

Trade Minister Mark Vaile described the agreement as 'overwhelmingly in the Australian national interest.' (For more information on the Free Trade Agreement, see our Feature Article).

[Source: just-food.com]

Government grants to food manufacturers

16 February 2004 – The Parliamentary Secretary for Agriculture, Fisheries and Forestry announced the successful recipients of the fourth round of Food Innovation Grants (FIG). Six Australian food manufacturers will receive more than $4.8 million to help them improve innovation and increase research and development. Field Fresh Tasmania, Murray Goulburn and Amcor, Weston Technologies, Uncle Toby's Company, Tandou Wines and Lemnos Foods have each received grants ranging from $345,900 to $1.3 million.

The FIG program is an Australian Government initiative that will provide almost $35 million over five years to significantly improve levels of innovation by the Australian food industry.

The Secretary announced that another $14 million would be available for future programs.

[Source: Ferret.com.au]

Monsanto applies for approval to market GM Foods

15 February 2004 – Monsanto Australia Limited has applied to Food Standards Australia New Zealand (FSANZ) to approve food derived from a genetically modified (GM), herbicide-tolerant wheat. FSANZ standards require that GM foods undergo a pre-market safety assessment before they may be sold in Australia and New Zealand. If approved, food derived from the GM wheat may enter the food supply in Australia and New Zealand only via imported products. There is currently no permission to grow GM wheat in Australia or New Zealand.

[Source: Food Standards Australia New Zealand]

Australian company leader on Omega-3

13 February 2004 – A Queensland company claims to be the first in the world to develop a way of incorporating Omega-3 DHA into everyday foods without the need for genetic modification.

Brisbane-based Nu-Mega Ingredients, a joint venture between Food Spectrum and Public Company Clover Corporation, has developed a technique for making a powdered form of Omega-3 DHA sourced from natural tuna oil. Nu-Mega Ingredients has developed a world-first technique using a new process called 'microencapsulation' for transforming Omega-3 fatty acids into a stable dry powder that can be added to processed food products without affecting their taste or smell.

[Source: Ferret.com.au]

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Coke to launch flavoured milk

12 February 2004 – Coke has announced its intention to enter the flavoured milk market, with Coca-Cola South Pacific managing director Gary Williams saying: 'We need to be in the flavoured dairy market by summer 2004-05 at the very latest, otherwise we will probably be left too far behind.'

Last year, the average Australian drank 9.5 litres of flavoured milk more than the average for any other country, but down on 10.6 litres four years ago.

[Source: Sydney Morning Herald]

Food manufacturers enthusiastic about FTA

10 February 2004 – The Australian Food and Grocery Council (AFGC) welcomed the announcement on the Free Trade Agreement between Australia and the United States.

The AGFC chief executive, Dick Wells, said the industry would benefit from the removal or lowering of tariff, non-tariff and procedural barriers to trade for key food products.

'The AFGC expects that the Agreement will increase the potential for Australian food manufacturers to expand their exports to Australia's second biggest food export market by millions of dollars a year,' Mr Wells said.

[Source: Ferret.com.au]

Southcorp shows profits, will not sell businesses

18 February 2004 – The Australian wine giant, Southcorp, has unveiled half-year EBITA profit of A$72.3 million, up 39 per cent. The operating profit before tax was A$49.4 million, a leap from the A$8.7 million in the last reporting period. Southcorp also announced that it does not intend to sell any of its businesses in 2004.

[Source: Just-drinks.com]

Coles Myer posts strong Q2 sales growth

12 February 2004 – Coles Myer reported a 14.5 per cent rise in second-quarter sales, in excess of market forecasts. The rise was helped by Coles Myer's discount fuel business.

'Our food and liquor business has reported its best quarter in 18 months, and has closed the comparative sales gap with our major competitor,' chief executive John Fletcher said.

[Source: Reuters]

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