Fonterra’s frothing won’t win friends

When the government announced proposed changes to the Dairy Industry Restructuring Act, Fonterra started frothing.

I agreed with the company and said so in a couple of post here and here.

But after further consideration of the proposals I’m having second thoughts.

One of Fonterra’s complaints was that the changes to the DIRA would mean it is subsidising foreign-owned companies. But on closer-reading I don’t see any danger of that.

The company’s competitors are Goodman Fielder which supplies the domestic market; six relatively large exporters (two farmer cooperatives, two companies with a majority of New Zealand ownership and two majority overseas-owned companies); and 19 mostly small, food processors and cheese makers – included in these are boutique cheese and ice cream companies.

One of the proposals is to set a three-year limit on access to raw milk by Fonterra’s competitors who collect a certain amount of milk from their own farmer suppliers.

That means it’s probable that all six of the large exporters would lose access to raw milk at the end of the 2014/15 year. That would reduce the amount of raw milk that Fonterra has to supply its competitors by 250 to 300 million litres so it would be supplying less milk to competitors not more..

I can’t see what Fonterra has to fear from that, especially when the 50 million litre maximum each competitor can take would be maintained.

The proposal also aims to ensure that Fonterra’s largest competitors must take the raw milk in line with the  seasonal production curve.

This is to ensure that competitors can’t take less milk when farm production is high and more in the shoulders of the season when production is lower.

Fonterra is concerned that the wording in the proposal would leave the company to cope with the added expenses of the extra capacity needed to deal with peak milk without its competitors facing the same costs.

If that is the case, then Fonterra would be subsidising other companies to some extent. But it has the opportunity to explain its concerns and offer a fairer solution while the proposals are open to consultation.

Apart from the possibility of having to accept an unfair share of the peak-milk costs, which Fonterra shouldn’t have any trouble changing, I don’t see any grounds for the complaint that it would be subsidising independent processors.

They will continue to have to pay the farm gate milk price which Fonterra pays its suppliers as they have been.

The more I look at the proposals the less I understand Fonterra’s force 10 opposition to them.

The strong reaction will get up the government’s nose and is unlikely to gain any support from the public who generally have little sympathy for the company.

Today is the last day for submissions and Fonterra has been encouraging its shareholders to make their concerns known.

But the company might have been too successful in getting farmers upset. There is a danger many are so riled they will reject the company’s proposals for Trading Among Farmers which is also covered in the proposals up for consideration.

The company has been grappling with a solution to redemption risk – shareholders redeeming shares when the price is high – for some time.

It believes that allowing farmers to buy and sell among themselves would reduce this risk.

Shareholders haven’t been particularly enthusiastic about this proposal although I am sure that fears this will be the first step towards a public float are groundless.

Any share trading will be restricted to suppliers and it won’t be any easier to get from there to a public float than it would be from the current position.

However, Fonterra’s frothing has been successful in getting shareholder oppostion to proposals for the supply of raw milk to competitors and if it’s not careful they will be just as opposed to the company’s TAF proposals.

The public will have no interest in that and given Fonterra’s  over the top reaction to the DIRA proposals it’s unlikely to have any sympathy from the government if that happens.

2 Responses to Fonterra’s frothing won’t win friends

  1. Meg says:

    The three year limit will do nothing unless a clause is added to ensure shell companies aren’t set up to claim the DIRA milk. There is no requirement to be able to process the milk, only have storage. So as long as you can keep setting up new companies you can keep on claiming dira milk.
    The other issue with the october rule removal on top of the subsidisation you mentioned, is that at peak milk fonterra processes the fastest product it can being milk powder. The shoulder milk is where value add products are made. All that needs to be done is a change in the wording to ensure that the companies claiming DIRA milk are taking it as a percentage of the total. This way they too have the seasonal changes. Removing the 10c on the milk price is also unfair, It was put there for good reasons and those reasons still stand.

    On the foreign companies, while at the moment there is only some foreign ownership here, there is nothing stopping more foreign owned companies from setting up. Why should we be supplying them? If you want to set up a business go and find your own suppliers instead of claiming for a government hand out.

    The proposal in it’s current form only requires a few changes to bring it in to line with what fonterra farming families want. Without these changes it means more costs, and more regulation on our most successful exporting company. The only ones who benefit from the DIRA raw milk regs are the companies that are overseas owned and directed by national party friends.

    On TAF, why does this need to be in the legislation? leave fonterras capital structure to fonterra the government has no business here. The National party boasts limited government as one of it’s core principles, why then does it insist on regulating one of our most sucessful industries?

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  2. Tom says:

    Meg,

    do you even understand the DIRA – it gives Fonterra exemptions from the Commerce Act – it is a privlige that it was allowed to form. In doing so, Fonterra had to give a little in return.

    Look at what the Commerce Commission has done to Telecom whom did not have protection…

    Fonterra is so dominant, new entrants, that are efficient and/or inovative need a leg up in order to be able to enter and survive – otherwise Fonterra could act anti-competivley and block them out for no good reason.

    A company could not keep setting up subsidaries and purchase reg milk year on year.

    DIRA needs amendments to allow for TAF. Without Govt involvement there will be no change to the capital structure – Fonterra cannot breach the Act that allowed them to form in the first place.

    Lastly – I hear farmers saying these other companies never make any profit, that they consistently make losses – if thats the case, there should be no worry about ‘profits going to foreigners’ – they dont make any!

    Its a complex legislation/regulation, I dont think you, and most farmer are as informed as you think.

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