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Fonterra seeks further changes to dairy act

Monday 21st October 2019

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The Dairy Industry Restructuring Act needs to stop tilting the playing field in favour of foreign-backed competitors with significant capital resources, Fonterra Cooperative Group says.

Eighteen years after the passage of the original legislation, there are 10 competitors operating 15 manufacturing sites across the country and Fonterra’s market share has reduced from 96 percent in 2001 to around 82 percent in 2018, it said in its submission on proposed changes to the law.

The act was passed in 2001 to enable the formation of Fonterra. Since Fonterra would have a near-monopoly over the local dairy market, it set rules to regulate Fonterra’s dominant position and help new competition enter the market. The current government launched a review to see whether the act was still fit for purpose and concluded it was still necessary but required some changes.  

Fonterra said those changes don't go far enough. 

“The level of competition and number of processors shows that the requirement on Fonterra to supply milk, effectively at cost, to new processors focused on exporting must end,” Fonterra said in the submission. 

All milk processing companies, with the exception of itself and the Tatua cooperative, were either fully or partly owned by offshore interests. They were backed by significant offshore capital, and were typically producing simple dairy ingredients for export which were already manufactured across New Zealand, it said.

“The proposed legislation continues to help them into the market by providing regulated milk supply, with no offsetting benefit to New Zealand."

If the act continued to favour foreign-backed competitors the dairy industry ran the risk of over-capacity, it said.

Parliament's primary production select committee would consider a range of amendments to the legislation. Among them was a proposal to end Fonterra's supply obligation to large, export-focused processors that source 30 million litres of their own raw milk a year.

Fonterra said the amending bill doesn't go far enough. 

It wants the government to remove the supply requirement to independent processors who have a capacity to process more than 30 million litres per year and who export more than 20 percent of their processed volume, or have their raw milk toll-processed by other companies and export more than 20 percent of their processed volume.

“If export-orientated companies wish to participate in the New Zealand dairy industry, they should seek their own milk supply. Our cooperative members should not have to carry the risk for overseas processors,” it said.

“Continuing to encourage more processors to operate in New Zealand does not benefit farmers. It does not benefit workers, and it does not benefit the New Zealand economy,” it said.

Instead of farmers’ capital being used to help more export-driven independent processors, the legislation should evolve to ensure the future success of the local industry, it said.

“We do not need more processors in New Zealand,” Fonterra said. A majority of Fonterra farmers were within range of an independent processor with the exception of those farming in Northland and Tasman, it said.

Another proposed change would allow Fonterra to decline membership to farmers who were not likely to comply with its terms of supply.

“We ask that the bill go further. We request the end of open entry and would like the right to decline all applications to supply our cooperative.”

Fonterra said that if the committee did not accept this change, then it wanted the ability to decline applications to supply the c-operative in regions where significant competition exists – where its market share has dropped below 75 percent.

Its third preference would be to strengthen the proposed legislation so that it no longer be required to collect milk from new conversions and those who were unlikely to meet its terms of supply.

On new conversions, the proposed legislation would implement a five-year rolling window for the exception to apply. In other words, a new dairy farm established at any time after the bill came into force could become a Fonterra supplier provided it had been supplying another processor at some point in time in the five years prior to application

“We ask that the committee strengthens this provision and from the date of Royal Assent we should no longer be required to accept milk supply from new conversions,” it said.

It said that the government’s bid to seek additional oversight by giving the Minister of Agriculture the ability to nominate an appointee to the milk price panel was unnecessary as the Commerce Commission provided adequate oversight. It also called for greater transparency regarding how all processors determine the milk price.

“All milk processors should be required to publish the average price they pay farmers, the key parameters of their milk price, and examples showing the payout farmers would receive for different parameters,” it said.

On Goodman Fielder, it said it did not object to Goodman Fielder receiving 350 million litres but asked for the legislation to be amended to ensure that it must be used for sale in the domestic market.

Among other things, it also wanted more money for sourcing.

When supplying raw milk, an additional fee of 12 cents per kilogram of milk solids - rather than 10c/kgMS  - should be charged and it should apply to all independent processors, Fonterra said.

"All independent processors take a flat supply and benefit from our additional costs of running a milk sourcing operation and this is just a small contribution towards those costs," it said.


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