Fonterra to be given discretion over accepting new dairy conversions from 2018/19

Thursday 16th March 2017

Fonterra Cooperative Group will get to choose whether to accept supply from new dairy conversions from the 2018/19 season in new legislation governing the country's biggest company.

Primary Industries Minister Nathan Guy today tabled the Dairy Industry Restructuring Amendment Bill in Parliament, which will give Fonterra discretion to accept shareholder applications from new dairy conversions, although the move wouldn't come in as early as Guy foreshadowed in a discussion paper last year. Fonterra is obligated to accept all new milk offered, something it has said was no longer necessary or efficient, which the Commerce Commission also raised in its report as a precursor to last year's consultation, despite finding no evidence the cost involved to the dairy company was material.

The legislation will keep the Dairy Industry Restructuring Act regime for the time being, with a review scheduled in 2020/21, and will also drop Fonterra's obligation to sell regulated raw milk to large export-focused processors from the 2019/20 season, and reduce the flexibility rival processors have in projecting the volumes of raw milk they want to buy from the start of the 2018/19 season.

The government backed away from an earlier intention to also reduce the volume of raw milk Fonterra has to make available to other processors by 60 percent over three years on advice that removing eligibility for large, export-focused processors to source regulated raw milk would affect firms that enter the local market without their own supply, and may not develop the factory gate market with new entrants in the future, while the reduction of the volume of raw milk available would hit ingredients firm Goodman Fielder the most.

"The consultative process provided new information about risks of some of the originally proposed changes to regulated milk - particularly for downstream markets and consumers," Guy said in a statement. "The government is therefore deferring the consideration of those potential changes to regulated milk for Goodman Fielder and small or domestically focused processors."

In 2015, independent processors collected 22 percent of all milk solids in the South Island and 9 percent in the North Island, triggering the expiry of the provisions in the South Island by no later than May 31, 2018. The Commerce Commission was tasked with investigating whether Fonterra's 86 percent share of the local market gives it too much dominance as part of the legislation governing the sector, and found there still wasn't enough competition to warrant full deregulation.

Guy dropped the market share thresholds to trigger a new review of the act, instead adopting the need for a review in 2020/21. If the minister deems the regime needs to stay in place, another report on competition will have to take place within the following five years.

BusinessDesk.co.nz

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