Guy removes Fonterra raw milk access requirements for big exporters

Friday 21st October 2016

The government is suggesting Fonterra Cooperative Group will no longer have to sell raw milk to large independent processors from the 2019 season onwards.

Primary Industries Minister Nathan Guy announced the proposed changes to the Dairy Industry Restructuring Act today, after a discussion paper was triggered last year when independent processors in the South Island passed the threshold needed to review the law.

Guy said submissions on the government's proposed changes had been split between those who wanted Fonterra to be further deregulated and those who said the country's largest dairy processor was still dominant. The Commerce Commission report found that competition wasn't yet sufficient to warrant deregulation, with Fonterra still holding 86 percent of the local market.

Under the proposed changes, Fonterra would no longer be required to sell regulated milk to large, export-focused processors from the start of the 2019/20 season, and all processors purchasing regulated milk will have reduced flexibility in forecasting the volume of regulated milk they intend to purchase from Fonterra from the start of the 2018/19 season.

But the government has backed off its intention to also reduce the volume of raw milk Fonterra has to make available to other processors by 60 percent over three years. That followed Ministry for Primary Industries' 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.

"Consultation provided new information about risks of some of the originally proposed changes to regulated milk – particularly for downstream markets and consumers," Guy said. "The government is therefore deferring the consideration of those potential changes to regulated milk for Goodman Fielder and small or domestically focused processors. Officials will start a body of work to understand the complexities in this area and any outcomes will inform the next review."

Guy would also allow Fonterra "discretion" to accept applications for new dairy conversions to become shareholders from the 2018 season. It is still required to accept all other new milk offered.

Fonterra said removing the requirement it sell raw milk at cost to large, export-focused processors was "a small step toward creating a level playing field for all farmers" but overall the proposals are "a lost opportunity to address the artificial constraints that are holding Fonterra and its farmers back from delivering maximum value to rural communities and the wider New Zealand economy."

Chief operating officer Miles Hurrell said the New Zealand dairy industry had "changed immensely" since DIRA was introduced 15 years ago, with internationally-backed competitors now investing in New Zealand.

"The current requirement for Fonterra to take all milk forces us to build large scale commodity plants instead of investing capital into assets that produce higher-value consumer and foodservice products," Hurrell said. "This is the wrong outcome as it constrains our ability to create maximum value for our farmers and their rural communities. It also means that Fonterra farmers continue to underwrite normal business costs and risks on behalf of our competitors."

The proposed changes would also prevent DIRA provisions from expiring in the South Island, meaning another state of competition review in the 2020/21 season.

"The scope of this review will be wider than just competition policy to take into account any impacts from the work on downstream milk markets," Guy said.

An amendment bill will be considered by the Primary Production Select Committee in early 2017, Guy said, with public submissions possible in the select committee stage.

BusinessDesk.co.nz

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