Fonterra slams milk regulation proposals

Government proposals to clamp down on milk pricing and make more Fonterra milk available to its competitors has been met with mixed reactions from both sides.

Recommendations include requiring Fonterra to publicly disclose information about its milk price setting and introducing annual monitoring by the Commerce Commission.

Fonterra would also have to sell an additional 200 million litres of milk at a regulated price to other dairy companies, increasing the total quantity available to about 5% of Fonterra’s milk supply.

However, the proposals call for a three-season limit for independent processors who source milk directly from farmers.

Primary Industries Minister David Carter said government consultation of these preferred options would be in the form of a draft Bill and draft set of regulations and include changes to enable Fonterra to move to its proposed Trading Among Farmers (TAF) scheme.

Should Fonterra not proceed with TAF, or farmers reject the capital restructure plan, then the government recommends Fonterra price its shares at “fair” value.

Fonterra livid
Fonterra was quick to lash out at the planned increase in raw milk regulations.

“The government’s move to require more raw milk to be handed over to increasingly foreign-owned dairy companies operating in New Zealand will impose nearly $200 million of additional costs over the next three years alone and work against our efforts to reduce the price of milk in New Zealand,” Fonterra chairman Sir Henry van der Heyden said.

“The proposed changes will see windfall profits head straight into the pockets of increasingly foreign-owned dairy companies and will hinder, rather than help, New Zealanders get access to affordable milk.”

Sir Henry said the extra 200 million litres of milk " will head straight offshore as the increasingly foreign-own competitors simply ship it as milk powder to their lucrative overseas markets.

Fonterra chief executive Theo Spierings said the proposal would weaken Fonterra's ability to compete and win overseas.

"It doesn’t make sense to penalise New Zealand’s home grown co-operative at a time it is bringing in more than a quarter of the nation’s export earnings," he said.

“Why penalise the most productive sector of the economy? Farmers have taken many generations to build up something really unique for New Zealand through hard work, risk taking, and building on New Zealand’s natural advantages.”

Open Country Dairy responds
But Laurie Margrain, chairman of independent dairy company Open Country, welcomed most of the proposals.

While he hadn’t fully digested the documents, he said on the surface the proposals were encouraging, especially with regard to greater transparency of the milk price.

“We are encouraged that the ministry seems concerned to ensure that there is more transparency in the fixing of milk prices and that it needs to fully reviewed and done fairly and appropriately and not in an anti competitive way,” he told NBR.

However, proposed changes to the Dairy Industry Restructure Act (DIRA) raw milk regulations were both good and bad.

While he believed it appropriate to increase the available milk quantity, limiting access to three seasons was counter intuitive.

“The increase is appropriate because the overall milk market has continued to grow, so an increase to 5% of Fonterra’s milk is what should happen.

“That of course is significantly countered by the fact that the existing suppliers have only three years of access before their ability to get themselves in a competitive position is turned off.

“I think that on the surface it doesn’t take into account that you will not become an internationally competitive dairy processor in three years, particularly when you are competing with a 90% market share player.”

Govt shouldn't "subsidise" competitors
Fonterra Shareholders’ Council chairman Simon Couper backed Sir Henry in saying the government was putting the interests of foreign-owned milk processors ahead of the country’s economy and the New Zealand public.

“Competition is good as it ensures our Co-operative stays lean, efficient and competitive, however, there is no successful example in economics where a business is forced to subsidise its competitors, says Couper.
 
“The Government’s legislation proposes that New Zealand subsidise increasingly foreign-owned competitors while doing little or nothing to ensure milk is available to those processors who need it most or who assist the domestic market.
 
“Fonterra Co-operative has shown a willingness to provide milk where it is needed and ensure milk consumption in New Zealand increases, evidenced by our Milk in Schools and KickStart breakfast programmes.”