Acceptance obligation key to review: Fonterra

AUCKLAND: Fonterra says being compelled to accept all milk from new farms will be a ‘‘critical’’ part of the Government’s review of legislation governing New Zealand’s $18 billion dairy industry.

Agriculture Minister Damien O’Connor has announced terms of reference for the review of the Dairy Industry Restructuring Act, introduced 17 years ago and little changed, while the industry itself has altered significantly.

The Act was passed in 2001 to deregulate the export dairy industry and regulate Fonterra, created that year from an industry merger which gave it 96% of milk production at the time.

Today, with emerging processing competition, it collects 82%, though figures due out next month are expected to show a decline.

Fonterra, a farmerowned cooperative with listed units, has long pushed back against the Act’s requirement that it take all milk offered to it.

That has resulted in the company having to spend hundreds of millions on new stainless steel processing capability as annual milk production climbed in recent years.

Fonterra argues this capital requirement erodes its strategy to move from processing commodities to valueadd products, and is helping its internationallybacked competitors.

Fonterra said in a statement the review was ‘‘well overdue’’ but parts of the Act, particularly the milk price regime, were still important.

The industry had become ‘‘highly competitive’’, particularly with the relatively large number of new overseas entrants in the last five years.

‘‘These international new entrants are often backed by deep capital and global businesses.

‘‘They do not need an extra legup via milk from New Zealand farmers,’’ the statement said.

‘‘Given this new competitive environment, the issue of open entry, which means having to accept all milk from new suppliers, is a critical part of the review.’’

‘‘Open entry limits our farmershareholders and the industry’s ability to maximise value for New Zealand. It distorts investment decisions and leaves Fonterra’s farmers underwriting risk for competitors who cherrypick their suppliers.’’

Listed Synlait said it supported the Government’s comprehensive scope of the Act’s review and was pleased it would look beyond the present regulatory framework to address some of the fundamental issues facing the industry’s future.