Guy looks to trim access to Fonterra's raw milk for big processors in deregulation review

Primary Industries Minister Nathan Guy is seeking feedback on proposals to reduce the amount of raw milk Fonterra Cooperative Group [NZX: FSF] has to sell to large independent processors in the latest step toward full deregulation of the dairy sector.

The minister's discussion paper on proposed changes to the Dairy Industry Restructuring Act was triggered last year when independent processors in the South Island passed the threshold needed to review the law. Mr Guy's preferred options would amend regulations for raw milk so Fonterra didn't have to sell to large, export-focused processors and reduce the volume of raw milk available to other processors by 60% over three years. Submissions close on June 29.

"As the industry progresses towards deregulation, this review progressively builds on changes made in 2012," Mr Guy said in a statement released yesterday. "We will see five large independent processors no longer eligible for DIRA milk from June this year."

Last season, independent processors collected 22% of all milk solids in the South Island and 9% in the North Island, triggering the expiry of the provisions in the South Island by no later than May 31, 2018. The Commerce Commission was tasked with investigating whether Fonterra's 86% share of the local market gives it too much dominance as part of the legislation governing the sector, and the minister had 90 days to respond to its report with his proposals.

The regulator didn't think the sector was ready for deregulation, with its biggest concern over the lack of competition at the factory gate, which is what processors pay other processors to source product.

Mr Guy also wants to remove the requirement for Fonterra to collect milk from new dairy conversions, something the Commerce Commission raised in its report, even though it found no evidence the cost involved to the dairy company was material.

Fonterra today welcomed the proposals on raw milk but wants to see greater legislative change.

"The requirement to accept all milk acts as a disincentive to Fonterra to invest in the right kind of assets and undermines the industry's ability to grow value-add business and maximise returns to NZ farmers, as we are all committed to doing," Fonterra group director cooperative affairs Miles Hurrell said in a statement. The move on new dairy conversions "is a step in the right direction but doesn't address the full issue of being required to take milk from all comers, even when it doesn't make commercial sense to do so."

The Ministry for Primary Industries said removing eligibility for large, export-focused processors to source regulated raw milk would affect those firms that enter the local market without their own supply and may not develop the factory gate market with new entrants in the future, while the reduction of the volume of raw milk available would hit ingredients firm Goodman Fielder the most.

"This option would likely have the most impact on the factory gate market, as some processors using regulated milk, particularly Goodman Fielder, may need to consider alternative sources as the available regulated milk volume dropped," MPI said. "This option could support the eventual deregulation of New Zealand's dairy markets as it would gradually decrease the reliance on the raw milk regulations and encourage processors like Goodman Fielder to look to either the factory gate or farm gate markets for their supply of raw milk."

Mr Guy also proposed increasing the threshold in the North and South islands to 25% market share to trigger a review of the sector, less than the 30% recommended by the Commerce Commission.