Review could change openentry regulation

JUST five years ago, a scenario where Fonterra got to choose its farmersuppliers would have sent a chill up some spines.

It was reckoned to have too much market muscle already, without being free to pick and choose its farmers.

The legislated obligation for it to take all milk offered to it was seen as righteous, as it was given nearmonopoly domestic market power by the state back in 2001.

The regulation was one of several imposed on Fonterra to rein in its domestic market clout and encourage processing and exporting competition.

But with that competition now emerging at pace and national milk growth flatlining, Fonterra’s wish to jettison the obligation now looks a good bet to find officials’ support in February.

That is when Agriculture Minister Damien O’Connor wants ready a review of the Dairy Industry Restructuring Act (DIRA) and the state of the sector. It is the month those intending to supply Fonterra for the following year need to sign up by.

Fonterra says the obligation — called ‘‘open entry’’ by DIRA — distorts its capital investment options and has slowed the pace of its strategy to produce more valueadded goods.

It has had to throw up hectares of costly new stainless steel for commodity production to handle a highly perishable product as production has soared.

It also claims its deeppocketed, often internationally backed competitors are getting an advantage.

The voices that have long dismissed this as selfserving nonsense are becoming fainter.

As Federated Farmers dairy chairman Chris Lewis says, private companies get to choose their suppliers so it is not fair that Fonterra cannot — unless they are heinous farmers or environmental vandals. Mr Lewis supplies Fonterra’s biggest competitor, Open Country Dairy.

‘‘Fonterra came in as a monopoly so it needed a few extra rules,’’ said Lewis.

‘‘But it’s time it was fair to everyone. Fonterra’s going to have to compete for milk. They’re already getting competitive. Their staff have been here to ask me to come back to Fonterra.’’

Mr Lewis and Federated Farmers vicepresident Andrew Hoggard, a Fonterra supplier, say the previous risk in Fonterra being able to duck the obligation was to isolate farmers whose milk was deemed uneconomic to pick up.

But a detente midlast year between the federation and Fonterra proposed a staged removal of open entry requirements. Fonterra agreed to keep the tankers coming to existing supply farms, even if a farm was sold.

Mr O’Connor himself has said the openentry rule will get close attention in the review. But economist and dairy industry specialist Peter Fraser says Fonterra’s desire to end open entry is ‘‘very dangerous in a world of static milk growth’’.

A former Ministry of Agriculture principal adviser on dairy industry issues, he says the rule needs to stay that ‘‘farmers choose Fonterra not Fonterra chooses farmers’’.

‘‘The issue here is ‘open reentry’, or if a farmer leaves they can come back, because if they can’t come back they won’t leave in the first place.

‘‘Also remember that farmers need to buy shares to match their supply growth, so additional milk volume provides its own processing capital.

‘‘The argument about capital and valueadd is rubbish.

‘‘The reason they don’t valueadd is they don’t have the money and the reasons for this is their capital structure is flawed and they don’t retain sufficient earnings.’’ — NZME