Fonterra wants out of system forcing it to supply rivals

Fonterra Cooperative Group [NZX: FCG], the world's largest dairy exporter, said it should no longer be required to accept all milk from new suppliers or to have to make milk available to large processors, apart from Goodman Fielder.

In submissions to the Commerce Commission, which is undertaking a government-ordered review of the industry's competitiveness, rival processors have said they either want the status quo or the regulations tightened.

Fonterra said it recognises part of the Dairy Industry Restructuring Act (DIRA) continues to benefit the dairy industry and New Zealand but some parts are no longer "necessary or efficient" given significant industry changes since 2001, particularly the continuing entry of well-resourced competitors.

Fonterra said it was even more important to make sure the regulatory environment helped the company and the rest of the industry operate as efficiently as possible given the increasingly volatile global dairy environment where milk prices have tanked and greater domestic competition.

The cooperative's share of the farmgate milk market has gone from 96% in 2011 to about 85%. It's considerably less in the South Island – having dropped 10% to 78%, triggering the expiry of DIRA's pro-competition provisions by no later than May 2018. Its North Island share is 91%.

Some independent processors had significantly higher share in their collection zones, with Westland's share in Hokitika at 95%, Synlait has 20% of dairy farms within 75km of its Canterbury processing plant, and Tatua has 34% of farms within a 1km radius of its Waikato processing plant.

The profile of competitors had changed as well, Fonterra submitted, with a mixture of Kiwi cooperatives, private companies and large vertically integrated global companies with intentions to expand. These independent processors would be sustainable without DIRA, it said.

Both Trading Among Farmers and the milk price regime introduced three years ago with Commerce Commission oversight added additional market transparency and efficiency, it said.

"Fonterra firmly believes that it should no longer be obliged to make milk available to larger processors [other than Goodman Fielder], including those looking to establish a foothold in the New Zealand market," it said.

French dairy giant Danone Nutricia, which is currently suing Fonterra for damages from the botulism scare, said it would reconsider its future development in New Zealand if the dairy regulations were removed because that would limit its ability to expand. Furthermore, if Danone Nutricia's supply of raw milk is compromised, it would be forced to consider leaving New Zealand in favour of countries with more suitable raw milk markets, it said.

Under the three-year exception rule, Fonterra doesn't have to supply raw milk to independent processors after 2016 if their own supply in each of the three consecutive seasons was 30 million litres or more and Danone says that should be extended to five years so new entrants are better able to compete.

Fonterra also wants more discretion on accepting milk from new suppliers because, effectively, suppliers have a free option to take risks with another processor with the costs of this being carried by Fonterra and its farmer shareholders. "It means Fonterra must live with additional uncertainty about the volume and location of future milk."

Synlait submitted that it's concerned Fonterra's cooperative support programme for farmer shareholders, announced last week, could interfere with fair entry and exit provisions within DIRA.

The loan allows farmer shareholders to borrow up to 50 cents per kilogram of milk solids on an interest free loan for up to two years.

Synlait said it doesn't have an issue with Fonterra lending its farmers a bail-out loan through what is a difficult period for all dairy farmers but it was concerned details have not been made publicly available and by the time they are, farmers will already be locked into supplying Fonterra for a period longer than allowed under DIRA. Fonterra has been concerned about losing suppliers to competitors who don't require them to buy shares.

Under the raw milk regulations, farmer shareholders are allowed to allocate up to 20% percent of their weekly production to independent processors throughout the season without exiting Fonterra.

The cooperative said the practice has not been and is still not widely used, and that, while not a priority for change, the 20% rule appears to be redundant and of little importance in the farmgate market.

That's not the view of several small processors, who have submitted they would go out of business if the 20% rule is dropped. Whangarei cheesemaker Grinning Gecko Cheese and Waikato-based Over the Moon Dairy said, without the option of collecting milk under the 20% percent rule, their businesses would not survive, while Karikaas Natural Dairy Products said the 20% rule was important not only to the actual businesses currently collecting milk this way but also as a pathway to continue to develop the cheese industry.

Gisborne cheese producer Waimata Cheese submitted that it was concerned with the limited scope of the review and that its terms of reference suggest "a bias towards deregulation."

"In our view, ineffective regulation does not in itself provide evidence of sufficient competition," it said. "In our experience, Fonterra is not adverse to using its market power to stifle competition."

Waimata said the path to deregulation should require Fonterra to be restructured into separate entities to manage its export commodities, export value add, and domestic processing and sales.

(BusinessDesk)