DIRA improvements

Primary Industries Minister Nathan Guy has announced changes to the  Dairy Industry Restructuring Act 2001 (DIRA):

“When Fonterra was formed as the dominant market player, DIRA was established to ensure an efficient and innovative dairy industry to promote the long-term interests of farmers and consumers,” says Mr Guy.

“A report from the Commerce Commission earlier this year found that competition is not yet sufficient to warrant deregulation at this point. Once sufficient competition is in place, competitive pressure, rather than the DIRA regulatory provisions, should drive the efficiency of New Zealand dairy markets. Competition helps keep businesses efficient, giving individual dairy farmers more options and choice.

“Around 100 submissions were received on the Government’s subsequent proposals to amend DIRA. These were split between those who wanted further deregulation of Fonterra and those who said Fonterra was still in a dominant position.

“Having considered these submissions, the Government has now agreed to a number of changes to the DIRA regulatory regime.”

The changes are:

  • Prevent the efficiency and contestability provisions of the DIRA from expiring in the South Island, and require that the next review of the state of competition in the New Zealand dairy industry commence during the 2020/21 dairy season (20 years since DIRA began).
  • Enable ongoing monitoring of dairy markets.
  • Allow Fonterra discretion to accept applications to become shareholders from new dairy conversions from 2018/19.
  • Alter who is eligible for regulated milk from Fonterra, and the terms that it is available on. Specifically:
  • Fonterra will no longer be required to sell regulated milk to large, export-focused processors from the start of the 2019/20 season.
  • All processors purchasing regulated milk will have reduced flexibility in forecasting the volume of regulated milk they intend to purchase from Fonterra from the start of the 2018/19 season.

“Consultation provided new information about risks of some of the originally proposed changes to regulated milk – particularly for downstream markets and consumers. The Government is therefore deferring the consideration of those potential changes to regulated milk for Goodman Fielder and small or domestically focused processors.

“Officials will start a body of work to understand the complexities in this area and any outcomes will inform the next review.

“The next review will commence by the 2020/21 season – 20 years since DIRA was created. The scope of this review will be wider than just competition policy to take into account any impacts from the work on downstream milk markets,” says Mr Guy.

An Amendment Bill is likely to be considered by the Primary Production Select Committee in early 2017. The Select Committee process will provide further opportunity for public input. Changes to the Raw Milk Regulations will be made via Order in Council. . . 

The wrong question on business formation has been asked if government legislation is the answer.

However, the legislation was passed 15 years ago and the change to allow Fonterra to turn down applications from new suppliers is a welcome one.

The requirement to accept all applications from new suppliers has forced the company to pick up milk from farms in far-flung places. Without that requirement many of these farms would not have converted which would have been better for the company and possibly the environment.

This requirement has also forced the company to over-invest in processing.

No longer requiring Fonterra to supply the larger exporters which are its competitors will be better for it without harming them as they are well able to get alternative supplies.

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