Law for dairy creates ‘perverse outcomes’

FONTERRA farmers say the current law governing the dairy sector has created perverse outcomes for the industry and that the cooperative needs to be free to act in shareholders’ interests.

Parliament’s primary production select committee is currently reviewing submissions on proposed changes to the Dairy Industry Restructuring Act, passed in 2001 to set rules to regulate Fonterra’s dominant position after its formation and help foster a competitive market. A Government review deemed the law was still fit for purpose but could be better.

While the proposed changes would give Fonterra more flexibility, farmers said they didn’t go far enough.

‘‘Open entry should fall away entirely,’’ said Otorohanga dairy farmer Duncan Coull in his written submission. The regime had resulted in ‘‘perverse outcomes for the industry and the country as a whole,’’ he said.

Open entry compels Fonterra to take supply from new or returning farmers. The proposed changes would allow Fonterra to decline membership to farmers who were unlikely to comply with its terms of supply.

Fonterra shareholders Brent and Jennifer Geddes — who have 830 dairy cows in Christchurch — said the open entry rule should be removed completely. ‘‘Fonterra should have the right, like any private business, to choose who their suppliers are based on quality and quantity of milk on offer.’’

The Fonterra Shareholders’ Council also lobbied for a complete end to the open entry provisions.

‘‘Major changes have occurred in the domestic dairy processing market in the 18 years since Fonterra was formed, meaning the issues that open entry was designed to address are no longer relevant,’’ it said in its submission.

Farmers also argued that farmers who left Fonterra shouldn’t be allowed to come back whenever they chose.

‘‘Why should Fonterra farmers be required to indefinitely ensure processing capacity for those who have chosen to walk away?’’ the council said.

According to the council, the ability to return to Fonterra at any time on standard terms meant the risks of leaving were underwritten by the farmers who stayed.

The Geddes said it was too easy for farmers to walk away from Fonterra and have the backstop of returning if things didn’t work out with a new company.

The shareholders’ council warned open entry had created a significant risk of overcapacity.

New Zealand is widely regarded to have reached peak milk, it said. Indeed, recent Government proposals concerning freshwater management and agricultural greenhouse gas emissions significantly increased the likelihood New Zealand would experience falling milk volumes, it said.

If the Government remained concerned about competition at a regional level, then, at the very least, the open entry requirements should be amended to remove it in areas where there was competition for farmers’ milk, it said.

Regarding access to regulated milk, the council acknowledged that the proposals would tighten eligibility conditions for access to regulated milk for large processors. However, it submitted that those amendments did not go far enough.

‘‘Why should Fonterra farmers be required to subsidise foreignbacked dairy processors? Why would the New Zealand Government persist with legislation which promotes the continued transfer of dairy processing capacity from domestic to foreignbacked ownership?’’

According to Fonterra’s submission, 18 years after the passage of the original legislation, there were 10 competitors operating 15 manufacturing sites across the country. All milk processing companies, with the exception of itself and the Tatua, were either fully or partly owned by offshore interests.

Mr Coull, who retires as council chair next week, also said the ‘‘time for any processor to have access to regulated milk has to come to an end. Without exception, new processors are backed by offshore entities that run their domestic operations on a costplus model with downstream value extracted in the market where the profits are generated.’’

The Geddes said, to ‘‘supply milk to competitors who are exporting milk, particularly those with foreign ownership, is shooting ourselves in the foot.’’ — BusinessDesk