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Who is the report targeted at?
The report is directed at all NAP industries. All industries are affected by growing regulations that encourage adoption of formal traceability systems.

Background The annual value of livestock and products traded from the NAP industries exceeds $200 million with about 50 per cent exported. The sub-sector is growing at more than 5%/year and is emerging as an important enterprise option for producers seeking diversification of on-farm investments. Many of these animal species have shown themselves to be somewhat adaptable to variable climatic conditions. For the future, however, operators in these industries will confront increasing demands to demonstrate they have effective traceability systems that enable trace-back from retailers through processing to farm production and supply of inputs.

Aims/Objectives
The purpose of this research project was to conduct a study of the requirements for establishing improved traceability systems for the industries covered by the NAP program. The study examined options for business models and priorities for traceability systems that have to contend with small numbers of operations in the industries, small sized firms, different valued animals and diverse species and production systems. The study aimed to improve the level of understanding about supply chain operations and market needs, as well as regulatory issues, and explores the possibilities for unified traceability systems across several new animal product industries.

Methods used
The following activities were undertaken:

• Identification and analysis of all relevant information on agricultural traceability systems in Australia and overseas, with interpretation placed on the implications and relevance for NAP industries.
• The study gained an understanding of supply chain operator needs and constraints, noting that some vertically integrated NAP supply chains have advanced animal health security management systems and some have very little security systems in place.
• Business model options were identified and the vision and goals of traceability for industry development examined.
• Identification of the constraints to adoption and priority areas for development.
• Description of requirements in systems definition, data collection, organizational development  and implementation.
• Identification of a program of future research for positioning the NAP industries to take advantage of traceability systems.

Results/Key findings
The European Food Law and US Bioterrorism Act are setting higher requirement targets for traceability and the trend is spreading to both importing and competitor countries. China, for example, has now introduced a new Animal Husbandry Law requiring farmers to maintain records of breeding, feed use and other inputs. While there are several drivers of the growing adoption of livestock traceability systems the report finding was that the single most important influence is the introduction of regulations to meet consumer concerns about the health and security of livestock and food in the supply chain. Although some animal species such as poultry may be viewed as higher risk groups than others because of links with infectious human disease, the research during this project showed that it would be a very high risk strategy to ignore having some form of traceability system for other animals, especially with bio-security emerging as an important driver of consumer preference and willingness to pay for food security. Associated with the regulatory underpinning there is the quest for international competitiveness, including market access and gaining an edge over firms with either non-existent or inadequate traceability systems.

Implications for relevant stakeholders
One of the most neglected areas of research into traceability systems is the measurement of user’s willingness to pay (WTP). This is a critical requirement for any sustainable business model, yet many industries and countries seem prepared to implement mandatory traceability systems in an ad-hoc way without this information and often with poor compliance processes, few checks and safeguards and little understanding of linkages required along the supply chains. A brief international survey that we conducted online found that over 80% of stakeholders across countries are dissatisfied with their existing traceability systems. The limited research that is available from the US, Canada, UK and Japan found that segments of consumers would pay a premium of as much as 7-9% at the retail level for traceability in beef, though associated characteristics (e.g. animal welfare treatment and meat safety) are even more highly valued than just simply satisfying traceability requirements. The price premium of 7-9% was well above the estimated 1.33% cost of implementing and operating the traceability system. While consumer WTP was estimated to be significantly positive on average there were also significant numbers not prepared to pay any price premium. This underlines the importance of understanding market segments and especially those with a willingness to pay price premiums because most of the NAP industries cannot compete on cost against either traditional industries(with their economies of scale advantage) or developing countries with their labour cost advantage.

Contrary to some beliefs traceability systems do not have to be based on the latest technological wizardry. They can be manual or automated and automated systems can be based on barcodes or Radio Frequency Identification (RFID). What is important, however, is to have a process that members understand and are willing to comply with. The Australian chicken meat industry has a barcode system and processors indicate they can respond to a disease event within 2 hours. An industry protocol enables this type of system to work and without all the fanfare that seems to accompany other systems.

Recommendations
For the future the NAP industries have an opportunity, if it’s not already seized, to start gradually developing traceability systems. RIRDC can play an important role in the development process by helping industry start the development process and improving their capacity to develop effective, market driven systems. This could start with the formation of NAP Industry Working Groups on Traceability Systems. Initially, it may be practical to include all industries in the working groups, but as more information becomes available and unique industry requirements emerge then it’s likely that specialist specific-industry sub-groups would be needed.

As a general guideline to further development it is recommended that a preference be given to nonmandatory, market driven measures, which enhance brand development through private investment in traceability systems. Many previous efforts to justify mandatory traceability systems on the grounds of market failure have failed themselves or are simply failing to remove the market failure.

In this case there is the distinct possibility of emerging with a high cost regulatory driven system that not only fails to correct market failure, but also impedes private brand and commercial supply chain efficiency and development. Mandatory systems introduce these new problems:

• lack of attention to integration along the whole supply chain.
• lack of response to technological change.
• lack of accountability for performance outcomes including costs, benefits and control of performance.

Perhaps the best role for a regulator is to simply insist that industry has to come up with a traceability environment with a high level of adoption and acceptable time for responding to a disease outbreak and then leave it to industry firms to reach a agreement on an acceptable protocol and implement solutions accordingly.

The following steps are envisaged as a way forward towards adoption of traceability systems

1. Establish an industry based Traceability Working Group (this would comprise members across species and along the supply chain: feed materials to production, processing and retail).
2. Assign responsibilities to members according to expertise.
3. Analyse the current situation and outlook for traceability systems among domestic and international markets.
4. Initiate willingness to pay market research to identify market segments and precise requirements.
5. Identify and examine the organizational (including regulations) and technological options and their respective costs and benefits and make a choice to proceed or not.
6. Reach industry agreement on the recommended solutions.
7. Implement the recommended solutions.
8. Monitor, review and revise progress and the solution.

It is recommended that RIDC assist the NAP industries to implement the steps outline above. These steps fit within the existing NAP 2006-07 strategies which include:

• to encourage further interaction between enterprises in the value chain by increased liaison, planning and implementing R&D.
• to continue to encourage national and international linkages for industry and research personnel.

 Further funding should also be made available through extending the NLIS to other species including those covered by the NAP. At present, most of the government funds to assist the development of traceability systems have been allocated to beef, sheep, goats and pigs, seemingly on the basis of industry value. Yet it is poultry (including ducks and turkey and squab and wild birds) that constitutes the main threat through avian flu. In the context of the threat posed by avian flu there is a strong case to help the smaller industries improve their capacity to respond to such an event.

The following graph shows a framework for a quick picture or scenario of issues confronting development of a traceability system.

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Last updated: February 2008
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http://www.rirdc.gov.au/reports/NAP/08-011um.html