New dairy law ‘anti-competitive’, say Fonterra rivals
Fonterra says it creates “a more level playing field”, small dairy industry companies say it gives even more power to a near-monopoly — Parliament might have agreed on new legislation for New Zealand’s $17 billion dairy industry, but that’s where the consensus ends.
The Dairy Industry Restructuring Amendment Bill has passed into law, and depending on whether you’re a Fonterra farmer-owner, or a supplier to the so-called “independents” like Miraka and Open Country Dairy, it has either modernised a 2001 law or set the local milk market back years.
Eleventh-hour lobbying of Agriculture Minister Damien O’Connor by the independents against the most significant change — removal of Fonterra’s obligation to accept milk from any farmer willing to cough up for shares, and to allow a farmer who leaves the big farmer-owned cooperative to re-enter — was to no avail, said Miraka chief executive Richard Wyeth.
“It was a fait accompli. It had bipartisan support so there was no shifting it.”
Independents are concerned the move will deter farmers from leaving Fonterra to supply new or expanding independents, particularly those starting up in regions like Northland where Fonterra has no competition.
Open Country Dairy chairman Laurie Margrain said the removal of the open entry and open exit obligations imposed on Fonterra in 2001 were “anti-competitive” and “extremely disappointing”. Nineteen years after being formed from a megaindustry merger under special legislation, Fonterra today still collects just under 80 per cent of the country’s milk.
But outgoing Fonterra chairman John Monaghan told shareholders of New Zealand’s biggest company that the “modernised” legislation created “a more level playing field for our coop and ultimately will keep more of the value created by Kiwi dairy farmers back here in New Zealand”.
Fonterra has long lobbied against the regulated compulsion to take all milk offered to it and to sell milk to competitors at a regulated price, obligations set in 2001 when it was formed and had 96 per cent of the country’s milk.
For Fonterra, the downside was that by having to accept all milk offered to it, it was forced to continue being a commodity producer because of the seasonal volume of milk it had to process.
Monaghan’s reference to “back here in New Zealand” is an echo of the exporter’s refrain that some of the independents have an element of foreign ownership.
It ignores the fact that some large Fonterra shareholders, including its largest, Dairy Holdings, have foreign stakeholders — and that Fonterra, like many large New Zealand businesses, is indebted to foreign-owned lenders.
The removal of open entry to Fonterra is effective from June 2023 and other changes start coming into force from June next year.
Miraka, Open Country and listed company Synlait met O’Connor this week to put their concerns but Wyeth said it appeared the Government was set on “supporting Fonterra in a postCovid world”.
However, it seems from Monaghan’s statement that Fonterra has this week done a u-turn on one aspect of milk supply acceptance.
As the Herald reported on July 12, O’Connor had asked Fonterra “to consider amending its constitution to reward the loyalty of its farmers when it comes time to sell their farms, by honouring its existing commitment to collect milk from these properties”.
Fonterra told the Herald then that its answer was no.
It said changing its constitution would be a significant process, and unnecessary given Fonterra has recommitted to an agreement made with Federated Farmers in 2017.
That was: “Should the open entry provisions be removed from Dira [the Dairy Industry Restructuring Act], Fonterra will continue to accept applications to supply from all farms that are, at the time of the application, supplying Fonterra on a share-backed basis, until the remainder of the procompetition provisions in Dira fall away”.
Monaghan’s statement to farmers yesterday said the company would propose that a commitment to accepting supply from a Fonterra farm that changed ownership should be included in the company’s constitution. Farmers would be asked to support the proposal at this year’s annual meeting.
Fonterra has yet to respond to the Herald’s question asking why it had changed its mind.
The proviso for the acceptance was that supply to Fonterra had to be continuous and the new owner met normal terms and conditions of supply.
O’Connor said in a statement on the passing of the amended legislation that he had agreed with the select committee’s recommendation on removal of open entry to Fonterra.
“This Government is determined to ensure we move milk up the value chain. This change will enable Fonterra to invest in that higher-value end.”
The new law provides for reviews of Dira every four to six years, limits Fonterra’s discretion in regard to setting a key assumption in calculating the base milk price, provides for the Minister of Agriculture to nominate one member of Fonterra’s milk price panel, and removes the obligation on Fonterra to supply regulated-price milk to independent processors with their own supply of 30 million litres or more in a single season.
It also updates the terms on which Fonterra supplies regulated-price milk to food company Goodman Fielder, Fonterra’s only significant competitor at supermarket chillers.