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O'Connor wants broad review of Fonterra's enabling legislation, sector dynamics

Thursday 8th February 2018

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Agriculture Minister Damien O'Connor says putting on hold changes to Fonterra's enabling legislation will allow a broader review of New Zealand's dairy sector and whether it is adding enough value to the nation's biggest export commodity.

The previous administration had legislation ready to amend the Dairy Industry Restructuring Act that would have retained easy entry and exits for Fonterra's supplier shareholders but gave the cooperative discretion on accepting milk from new dairy conversions and would've phased out the need to sell regulated raw milk to large rival processors. Those proposals followed a Commerce Commission review triggered by Fonterra's share of South Island milk falling below a DIRA threshold which concluded Fonterra's market dominance still warranted regulation. The issue would have been revisited in 2020/21. 

O'Connor says National's bill "did look at some of the important issues" but "had been too gutless" on tackling others. Two important sticking points were Fonterra's obligation to pick up all milk and its obligation to supply competitors. He intends introducing legislation this year to amend DIRA and prevent "efficiency and contestability provisions" of the Act expiring in the South Island on May 31. Terms of reference for the review, which needs to be agreed by the Cabinet, will be released "soon" and he hopes the review will be completed within 12 months.

"I've taken the opportunity, given that the industry is going through some major changes and evolutions and I believe there are issues outside of the DIRA bill that need to be looked at," he told BusinessDesk. "It's such an important industry. It is crucial we get it right. Fonterra is our biggest and best company but it shouldn't take for granted the advantages it has through legislation."

On the obligation to collect all milk, O'Connor said that Fonterra "as a cooperative has to be true to its purpose in protecting the rights of its suppliers" and any loss of those rights would need to be very carefully considered. On supplying milk to rivals, O'Connor said there was a reasonable expectation Fonterra shouldn't be forced to supply milk to rivals directly competing in its export markets but there was an obligation in terms of supplying Kiwi consumers.

First NZ Capital analyst Arie Dekker said he was "somewhat surprised" by O'Connor's call for a new review of the dairy industry given a bill was already in place and a review recently completed. 

"The Labour-led coalition clearly sees sufficient issues in dairy to prioritise a new wide-ranging review," Dekker wrote. "The review may consider whether the right regulatory, capital and other incentive structures are in place to optimise the returns from dairy for the NZ economy." 

That hasn't been the case in the past 20 years, he says. NZ milk production has increased 108 percent in that time, effective hectares are up 35 percent and cows per hectare up 12 percent. Production has also been driven by genetics and improvements in other inputs. But that hasn't fed through to improved returns for farmers, he says.

"Despite some elevation in the payout evident for periods over the last 10 years it is hard to argue that the creation of a national champion in [Fonterra] has led to sustained material upwards impact on the farm gate returns received by farmers over the past 20 years," Dekker wrote. Rising revenue for farmers has reflected increases in milk supply as herds and farms have grown and become more efficient, rather than "any strong evidence of material benefits from the New Zealand industry's push into value-add."

Asked whether he thinks New Zealand's dairy industry hasn't performed well under the Fonterra model and whether it is time to ask if there's a better way, O'Connor said the review process "will raise this issue. The debate about value versus volume will be considered in the review though I'm not sure we'll get the answer."


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