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Fonterra must still comply with raw milk regs

Tuesday 3rd August 2010

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The regulations requiring dairy giant Fonterra to supply a minimum quantity of raw milk to competing dairy companies are to be extended following government concerns that there would not be sufficient competition to protect the long-term interests of farmers and consumers.

Agriculture minister David Carter said the government is committed to reviewing the eligibility criteria for access to regulated milk supply.

When the Dairy Industry Restructuring Act came into being in 2001, farmers were given a choice as to whom they supply milk to, and also provided an incentive to price milk competitively.

“When Fonterra was formed, it was placed in a privileged position as the dominant market player,” Carter said.

“This required rules to ensure a competitive and innovative dairy industry.”

DIRA contains triggers, or sunset clauses, that could have been met some time next year.

“The government has agreed to set new triggers at a Fonterra market share of 80% in the North Island and in the South Island, excluding the area covered by the Westland Regional Council,” Carter said.

“At that time, a full review will look at the ongoing need for the DIRA.”

Carter said Fonterra’s proposed changes to its capital structure, including trading of shares among farmers, will require further significant changes to the DIRA to ensure ongoing competition in the sector.

“This extension to the act provided regulatory certainty while the government awaits the capital structure proposals,” he said.

Fonterra welcomed the review of eligibility criteria for access to regulated raw milk, under which the co-operative is required to supply up to 600 million litres a year. It currently supplies milk to 25 different companies on this basis, and Fonterra accepts its role in supplying regulated milk to help start-ups and processors without their own milk supply, said chief executive Andrew Ferrier.

“A significant proportion of milk supplied under the regulations goes to larger competitors who have their own local milk supply, are increasingly foreign-owned, and are competing with us in overseas markets,” he said.

“All of these competitors use the DIRA regulations to fill their processing plants at times of the year when milk supply is low.”

This erodes profits back to its New Zealand farmer-shareholders, with the gains increasingly going to foreign shareholders, Ferrier said.

While he is disappointed that the government intends to extend the DIRA conditions, Fonterra looks forward to providing input to the government’s review of eligibility criteria in the supply of raw milk.

Ferrier said it is important to remember that the DIRA was established to enable New Zealand to capture an important opportunity, namely the creation of a dairy business of sufficient scale to compete internationally.

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