DIRA update disappoints

Proposed changes to the Dairy Industry Restructuring Act are a missed opportunity:

. . . Fonterra Chairman, John Monaghan says that while the Government has recommended tweaks to the rules under which Fonterra has to give its farmers’ milk, effectively at cost price to foreign-backed competitors, the playing field is still tipped against New Zealand dairy farmers.

“Our farmer-owned Co-operative wants an industry that promotes investment across regional New Zealand and where profits are kept in New Zealand.  We stand for an industry where New Zealand farmers are paid well for their milk and the unique attributes of our environment are protected and enhanced.

“Given the significant increase in competition within the New Zealand dairy industry, we’re disappointed the Government did not recommend removing the requirement for us to supply our farmers’ milk to large, export-focused businesses altogether.

Farmers now have plenty of choice of processors and other companies should no longer need the safety net of Fonterra milk.

We welcome the Government’s decision to give Fonterra the right to refuse membership to our Co-op where a farm is unlikely to comply with our terms of supply, or where the farm is a new conversion. These changes will support our Co-op’s ability to meet our customers’ demands and continue leading the industry toward a sustainable future for our farmers and the rural communities in which they live and farm.” . . 

Forcing Fonterra to collect milk from anyone, anywhere has encouraged farm conversions in places where, had there been a choice, Fonterra would have turned them down. It has also given the company too little latitude with farmers that don’t meet its standards.

Fonterra Shareholders Council is disappointed with the proposed changes:

Today our farmers will be feeling ignored and frustrated. Despite their efforts to engage in meaningful consultation on changes to DIRA their voice has largely gone unheard as we continue to kick the can down the road with respect to essential change to this important piece of legislation. We do however acknowledge that we are only one of many stakeholders whose interests need to be considered.

This was an opportunity to focus on the wider industry, not just Fonterra, and to optimise value creation for New Zealand from the dairy sector. We are concerned the opportunity to shift DIRA’s purpose to the future and to enable the highest value creation from our milk hasn’t been fully taken up.

The proposed changes to open entry and exit, whilst helpful, do little to address the concerns of our farmers. Recognising the importance of dairy to regional New Zealand, the changes do not go far enough to address the current strong competition for milk and the risk of over-capacity. It’s disappointing that the industry wide solution to enable the removal of open entry, which was developed with Federated Farmers, has not been taken up.

The proposed changes to the milk price regime are of deep concern. Government having the right to nominate a member to the Milk Price Panel is a step too far and gives rise to a direct conflict with the independent oversight of the regime by the Commerce Commission.

MPI also had concerns aobut this:

. . . O’Connor plans to limit Fonterra’s ability to determine a key assumption in setting the base milk price, known as the asset beta.

He will also be able to nominate a member to Fonterra’s milk price panel, although that wasn’t taken to cabinet in the paper and regulatory impact assessments.

MPI did say external appointments to the panel were proposed in submissions but not considered.

“MPI considers that this would create issues of confidentiality and commercial sensitivity, potentially placing Fonterra at a competitive disadvantage,” it said. . . 

Back to the Shareholders Council:

There was strong farmer support for better milk price transparency from other processors and this has not been heard.

Our farmers support the need for a strong domestic market for consumers. However, access to regulated priced milk for all export focused processors should have been removed.

We are disappointed there is no firm position on the expiry of DIRA and when the New Zealand market for milk collection – whether national or regional – will be considered sufficiently competitive. And there is also no transition pathway to de-regulation. . . 

Fonterra’s dominance justified regulation when DIRA was first enacted but there is now sufficient competition from and strength in other companies to begin looking towards eventual deregulation.

Federated Farmers sees useful changes and a missed opportunity in the proposals:

“We’re disappointed that open entry provisions won’t be changed, other than relating to new conversions,” Feds Dairy Industry Group Chairperson Chris Lewis says.

“It’s nearly 20 years since this legislation was passed to ensure that with the formation of Fonterra, competition for farmer milk supply, and dairy product choice for consumers, was preserved.  The market is now mature enough, and competition among a host of processing companies robust enough, for Fonterra to be given some discretion over who it is required to pick up milk from.”

Today’s decisions announced by Agriculture Minister Damien O’Connor will give Fonterra some leeway over accepting milk from land newly converted to dairy, “and that’s good,” Lewis says.  “We await detail on what the definition of a ‘new conversion’ is.

“We’re also pleased that the amended DIRA will give more clarity on when Fonterra can refuse supply when a farmer is well below industry standards relating to the environment, animal welfare, greenhouse gas emissions and the like.

“There are some farmers who have demonstrated their unwillingness to come up to the standard of all the other shareholder/suppliers out there.

“As with other aspects of the government’s announcements, the devil will be in the detail,” Lewis says. . . 

The government had the opportunity to make major changes to the DIRA, recognising changes in farming and the expansion of processing since the company was established in 2001.

Instead it’s just tinkered, leaving Fonterra and its shareholders to carry the costs of supplying competitors, most of which are overseas companies.

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