Fonterra attacks government's proposed Dairy Act changes that will see it forced to supply another 200 mln litres of milk to competitors

Fonterra attacks government's proposed Dairy Act changes that will see it forced to supply another 200 mln litres of milk to competitors

The government is proposing to make Fonterra supply more raw milk to its independent competitors at cheaper rates, bringing a strong response from the dairy co-operative, which says the changes would be a backwards step in the way New Zealand's dairy industry is regulated.

However, the proposed regulations would mean Fonterra's competitors would only be allowed to access the co-op's raw milk for another three years once those competitors' supply of milk from their own farmers reached a given threshold. The co-op's competitors are each currently allowed to access up to 50 million litres of raw milk a year from Fonterra with no time limit or ties to their own production.

Other proposals would require Fonterra to publicly disclose information relating to its farm gate milk price setting, and embed its current milk price governance arrangements in legislation. There would also be an annual milk price monitoring/oversight regime undertaken by the Commerce Commission, which would publish an annual qualitative assesment of Fonterra's milk price setting.

Minister for Primary Industries David Carter today announced the government's preferred set of options for amendments to the Dairy Industry Restructuring Act (DIRA), the piece of legislation that created Fonterra in 2001, allowing it to control 96% of the nation's milk supply.

Under the DIRA's Raw Milk Regulations, Fonterra had been forced to make up to 5% of its raw milk available to competing processors, although current regulations set the maximum to 600 million litres, or about 4% of its raw milk, the government says in a discussion document. The government's proposed changes would increase those regulations to make Fonterra supply the full 5%, which the co-op says would amount to an extra 200 million litres of milk.

The price Fonterra's competitors paid for the raw milk would also be changed, with the government proposing to remove a 10 cent margin currently added to the farm gate price to compensate Fonterra for providing raw milk to its competitors.

Carter called for submissions on the government's proposed changes to the DIRA by February 24. See a government Q&A sheet on the proposals here.

'Making the industry more competitive'

The government's proposals aimed to ensure the DIRA and the Raw Milk Regulations remained a durable platform for the continuing growth of a competitive and innovative dairy sector, Carter said in a press release.

“Importantly, the amendments will result in a regulatory regime that promotes a more transparent and efficient dairy market,” he said.

The review of farm gate milk prices found that although Fonterra’s approach was consistent with that expected in a competitive market, lack of transparency remained an issue, Carter said.

Make them use their own cows

Under the Raw Milk Regulations, Fonterra's competitors are currently allowed to access 50 million litres of raw milk a year from the co-op as well as using milk supplied from their own farmers, with no limit on how long they can access the raw milk.

The proposed changes would mean that once their own farmers supplied more than 30 million litres of milk a year, these processors would be allowed to access Fonterra's raw milk for another three years before being cut off from the Fonterra supply.

Fonterra's competitors include Open Country Dairy, Synlait, Tatua and Westland Milk Products.

'Backwards step'

Fonterra Chairman Sir Henry van der Heyden said the proposed changes to Raw Milk Regulations would not work and would have New Zealanders subsidising increasingly foreign-owned dairy processors that did not sell milk in New Zealand and who sent their products and profits offshore.

“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 NZ$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,” van der Heyden said.

“That’s because not one of the six other major dairy processors supplies milk to New Zealanders. 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,” he said.

The extra 200 million litres of milk the Kiwi owned co-operative would be required to supply competitors each year would head straight offshore as the increasingly foreign-own competitors simply shiped it as milk powder to their lucrative overseas markets.

“We are all for strong competition around the price of milk in New Zealand and we are happy to supply competitors who share our commitment to getting the price of milk down for Kiwis. But it makes no sense for Fonterra’s farmers to do the hard yards producing this milk, only to be forced to hand it over to companies who then ship it straight offshore and pocket the profits,” van der Heyden said.

“Our Fonterra farmers are angry that their 1500 submissions have been ignored and that they are being press-ganged into this great milk subsidy that is poorly targeted and stands to miss the people it’s meant to help - Kiwi families," he said.

 “International competitors will be laughing at New Zealand, and it will be all the way to the bank. When they hear about this easy milk pipeline in New Zealand, more of them will be queuing to get in the door and skim off the easy profits of effectively buying up to 770 million litres of Fonterra produced milk, at a subsidised price and with no risk. The Government expects us to take all the risk and let competitors take milk from us when it suits them. It’s a nonsense - we can’t turn our cows off and on."

Fonterra Chief Executive Theo Spierings weighed in by saying handcuffing Fonterra at home would weaken its 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," Spierings said.

“Shortly after joining the Co-op last year I signalled that I wanted to take a fresh look at milk pricing in New Zealand and find ways to provide more affordable milk for New Zealanders, in the face of continuing high international prices. Our efforts to make milk more accessible and affordable are already showing results. Late last year we announced the Milk for Schools programme intended to provide free milk every day to every primary school child in New Zealand commencing in early 2013, and further efforts are already in train to remove costs from the supply chain for milk for New Zealand," he said.

“Fonterra is competing fiercely in international markets against tough, foreign competition. It makes no sense to hit it with $200 million in extra costs with regulations that have no benefit for New Zealand consumers. 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.”

Van der Heyden said the proposed changes needed to be modified for the good of all New Zealanders and the country’s economy.

“Instead of waiting three years for changes to eligibility, we should start weaning off established independent processors in stages," he said.

This could be achieved by having them reduce one third from 1 June 2013, one third from 1 June 2014, and gone entirely from 1 June 2015.

“Who knows what the political landscape will be in three year’s time? Independent processors will be even more dependent on cheap milk then than they are now, and will back themselves to get further extensions," van der Heyden said.

“The 10 cents per kgMS seasonal milk pricing on DIRA milk needs to remain. One competitor has publicly stated that it makes around 25 cents per kgMS on DIRA milk and the seasonal milk pricing goes some of the way to covering the higher price that Fonterra pays for milk in some parts of the year. The Government introduced this measure for good reasons two years ago and these reasons remain valid," he said.

“The Government needs to stop the gaming of the Raw Milk Regulations. At the moment companies can set up ‘virtual processors’ or shell companies with no plant on the ground, and order up additional milk from Fonterra. If the proposed changes are implemented as they stand, the big losers will be all New Zealanders and the New Zealand economy. We can’t stand by and let this happen – especially at a time when we are doing everything we can to make it easier for Kiwis to enjoy the benefits of milk."

(Updates with Fonterra comments)

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Excellent news , Fonterra's domestic market domination is not good for New Zealanders.  Their actions as a monoply ( or at the very least as price fixing a cartel ) would be criminal in some countries.  

Boatman: Given not a single one of Fonterra's processing competitors supply the domestic market with liquid milk, how do these changes help NZ consumers? 
Where is the fairness in Fonterra being forced to continue to supply Open Country, Tatua, Synlait etc, who are all established processors with their own suppliers, with cheap milk for the next 3 years?  One competitor has stated that they make 25c/kg from their DIRA milk.  As a Fonterra farmer, why should I subsidise them? I have no problem supplying milk for the domestic market, but to have to supply competitors with milk to compete with me on an export market, just isn't cricket. No other country in the free world forces a company to supply competitors with raw product to then enable the receiver to compete with the giver in export markets.  But then why should we be surprised - some pollies firmly have their snots in this trough.
If the Crafar farms go to the Chinese, given their stated aim of processing their milk in NZ and exporting it to China, then expect much more of NZ farmland to be sold to China and much more milk to be stripped from Fonterra so that new processors can then use DIRA milk to compete with Fonterra on overseas markets.
I haven't read the detail yet but a quick skim through doesn't seem to require a new processor to ever secure their own supply.  In that case it is likely that Fonterra would have to supply them with milk forever and a day - cheap milk with no requirement for it to be sold on the domestic market.

What a red herring. Competition even when forced is only a good thing.
The  "too big too fail" days are ending for Fonterra.  

Good for who, seriously who wins from a cheap supply of milk? Who says Fonterra is to big to fail?

Yet farmers continue to support National. Key is determined to undermine Fonterra for the benefit of who knows in the financial world. However Fonterras direction and leadership is hardly inspiring; their insistence on transmorgrifying Fonterra into a corporate through TAF plays into the hands of of John Key and the fundamentally flawed and skewed neo classic economic model proping up this shonky world. Why can't we pull together and return to co-operative roots and principles, supply NZ consumers reasonably priced milk, and to hell with the foriegn competitors and their government lackies.

The recommendations smack of undermining a privately held company because we didn't agree to list.  On reading the Q & A MAF have put up in relation to TAF, I can't see shareholders voting for it. We have a district shareholder meeting on the 2 Feb here - could be a very interesting night.
You may find that Fonterra suppliers do pull together over this Omnologo. I was told long before the election by a well placed Fonterra source, that Labour would be far fairer in handling the review than National would. John Key wants to see Fonterra listed but he and his cohorts may be picking a fight that will leave them licking their wounds in the dust, if they accept these recommendations. All is not well down on the Fonterra farms tonight.
Our new CEO gives me no confidence in handling this sort of issue - he has been too 'touchy, feeley'.  Andrew may have had his distractors, but he was a hard negotiator - just ask some of our competitors.
 

Hands up all the dairy farmers who voted National. Haha suckers. Sounds like by fair means or foul National are going to use Fonterra to encourage overseas companies to set up here, obviously they believe Fonterra is not doing a good enough job and they know how to fix it.
Wrong CO they have their heads somewhere other than a trough.

Round up some MP's from the last Labour government and ask them was this the outcome they wanted when Fonterrible was set up ?
 
..... Ms Clark ran roughshod over the Commerce Commission's advice , as she felt a monoply player to process all of NZ's milk was best .... and Fonterrible matched her vision of a SOE , as the ideal business model ......
 
Given a fourth term , Michael Cullen may have even nationalized the firm , to add to the government's hodge-podge portfolio of businesses ......

CO I sincerely hope you are right about the co-operative ethos saving the day for Fonterra, as a co-operative, but I certainly don't get that impression from directors et.al are keen to preserve co-operative principles and ethos. As far as votes go, we're constantly told that we had our chance November before last, and tough if they've reconfigured the proposal (don't understand how can have a co-op or any business can have 100% control but not ownership???), or suppliers have changed their mind.
CO is bang on about politicians having their grubby snots in the dairy industry trough, and they are certainly not rooting about for what's best for national interest, it's puro animal farm numero uno. The ironic almost comic point, is they are all National Party or right ring ideologues, the ones farmers vote for to protect their interests. These politicians set Fonterra up to fail when it was formed, by requiring the blatently paradoxical 'fair value share', and it's a shame we didn't form one co-op with ridiculous provisos, but retained two, which could have worked together.
Not sure about Theo myself, do you know what role he played in upholding Campinas co-operative integrity?

Well, maybe this would have been avoided if NZ hadn't had to pay the same price as importer countries for its own milk? I still don't get the arguments of people trying to justify why this is the case.
 
I mean, look at every other country producing one thing or another  - their people don't pay oversea prices (eg cheeses & wines in France, petrol in the OPEC etc). No wonder Kiwis got angry at the exhorbitant price of dairy. Every visitor we've had from Europe has even commented on it and asked us why.
 
So now the result is Fonterra having to do some urgent PR as damage control re-public opinion on rising dairy prices (with the free milk in school programme) & this. I'm thinking that selling what little % of the total milk production is sold on the domestic market cheaper may have been a better strategy after all (both financially and in terms of the average joe's opinion of Fonterra).

….and again NZeconomic industry mix distorted.
Not only the Real Estate industry in New Zealand is proportionally to others far too dominant. Agriculture causes the same problem.
 
http://www2.careers.govt.nz/jobs-database/whats-happening-in-the-job-market/major-industries-in-new-zealand/
 
Here a comparison: Singapore
http://www.singstat.gov.sg/pubn/reference/mdsdec11/excel/topic6.xls#'T6.1-T6.2'!A1
 
There is no wonder why prices are high in New Zealand. Our economy isn’t balanced, but one sided not diverse enough. As a consequence dominant industry sectors cause high prices – e.g. agriculture products and real estate become increasingly unaffordable for Kiwis.
 
http://en.wikipedia.org/wiki/Monopolistic_competition
In a monopolistically competitive market, firms can behave like monopolies in the short run, including by using market power to generate profit. In the long run, however, other firms enter the market and the benefits of differentiation decrease with competition; the market becomes more like a perfectly competitive one where firms cannot gain economic profit. In practice, however, if consumer rationality/innovativeness is low and heuristics are preferred, monopolistic competition can fall into natural monopoly, even in the complete absence of government intervention.
 
 

Hi Elley. These recommendations will not make a jot of difference to the price of dairy products in NZ.  It is the supermarkets who set the prices you pay, not Fonterra. Where I live it is often cheaper to buy your milk at the local service station than in the supermarkets - and I buy our milk.
Europeans do pay extra for dairy etc via the Common Agriculture Policy subsidies that are paid to European farmers.  The average French farmer receives 20,000Euros a year in subsidy funds. For the French consumer though, they only think about the price the pay at the till, not the true price including subsidies. :-) If you want me as a business, to supply my product to you at cheaper than sustainably viable prices, then you must be prepared to subsidise me - as happens in most parts f the world.
As a farmer, I do not have a free choice as to who I supply - all the competitors can and do, at times, refuse to accept milk. Only Fonterra is forced to accept supply from whoever wants to supply it.
Read the fine print of these recommendations.  It is not about cheaper domestic milk, it is all about destroying the cooperative nature of the dairy industry and forcing Fonterra to become a listed company. Young farmers will be big losers as it will destroy the sharemilking pathway for young farmers. If National accept these recommendations it will be setting itself up for a fight, the likes of which it hasn't seen before.
Fresh milk has increased 24.1% in the last 5 years and  wages has increased 23.96%. Not a lot of difference there.  Cheese has gone up a lot but bread, fruit and vegetables have all gone up more than fresh milk.
http://www.stuff.co.nz/dominion-post/news/6312407/Big-jump-in-food-price...

Hi CO, thanks for those details but  I am not comparing the dairy industry in NZ vs France or elsewhere (farmers in France can't make a living so the subsidised system is clearly not working, and dairy farming is completely different in the way it's done and the size of a dairy farm which is around 10-30 cows).
 
What I don't get is why NZers have to pay the same price as importing countries for something the country produces in abundance (milk).
 
We know quite a few dairy farmers, both people who are converting from sheep/beef to dairy, dairy farmers who've been in dairy for a long time and immigrant dairy farmers and they are all in it for the huge profits they can (and do) make. That's fair enough too, except for my question above re why farmers sell milk for the same price in NZ as they do overseas; A domestic rate would seem appropriate as the costs of selling domestically is less (shipping, oversea distribution, import/export taxes etc). As mentioned above, other countries that produce a particular good don't pay anywhere near the same price for it domestically as the people in the countries they export to. I guess the world is all about money, money, money in the end (and power I suppose) but it just doesn't seem quite right to me.

Hi Elley. Do you charge the same rate to NZ clients as you do your overseas clients? Perhaps you don't. 
You are also paying export prices for fish and meat, if you buy them, so why should dairy farmers subsidise consumers but not the fishing and meat industries?
In order to process our milk we have to invest in bricks and mortar and stainless steel and all down the chain there are borrowings to varying degrees.  Whether those bricks and mortar are making liquid milk or powder is irrelevant - there is a basic cost. NZ is the only country in the world that exports 95% of its dairy produce. And therein lies the problem for most of our primary industries - NZ is a very small market. Fonterra is bound by DIRA to supply the domestic market with milk - it has no choice.  So given that compulsion, why should I charge you less and make less profit, when I could possibly turn the raw milk in to export product and make more $ but am not allowed to. I am not so sure that there is more cost in exporting than in providing liquid milk to the domestic market. Exports are usually in bulk and don't require refrigeration and have a much longer shelf life.  I paid $7NZ in Rarotonga for a litre of Anchor Trim milk - considerably more than what I pay at home.
Milk price is related to powder prices.  The problem for consumers at the moment is that powder prices have remained relatively higher than has been expected. The milk price freeze that Fonterra put in place last year cost it in to seven figures in lost revenue - not that I expect consumers to be appreciative of that!
I buy Dairy Dale milk from the service station - usually quite a bit cheaper than Anchor at the supermarkets. Yet it is a Fonterra brand - without all the fancy packaging and marketing. Most Supermarkets won't stock it because it would be direct competition to the home brands.
Fonterra doesn't set the retail price - the supermarkets do.
If your debt levels are manageable there is money to be made in dairying - but that is the same as most businesses. I've been dairy farming for over 30years - it is the lifestyle and challenges of it that keeps us farming.  Anyone who goes in to it purely to chase the money will be doomed to eventual failure. You have to like what you do to be long term successful and sustainable.
I am hearing in recent days a call from Fonterra farmers for Fonterra to pull out of the domestic market all together - not that we can. The real problem for NZ would be who would pick up the slack at the prices consumers are currently paying - no one, as there is more money to be made by exporting it.
Fonterra is dropping the wholsesale milk price at the end of this month.  Let's see how much the supermarkets drop the price.
 

Don't get me started on the supermarket monopole in NZ, it's terrible, and a well-known fact that the suppliers (eg apple growers etc) get peanuts in comparison with what the customers are charged. I buy my [30l/week of] milk (and almost everything else) from the local SuperValue where it is cheaper than in the large stores. That said we'll probably soon start getting it straight from a local dairy farmer, and then from our very own dairy cow if hubby has his way.
 
To answer your question, we don't charge everybody the same rate no. Although it is more about what the customer can afford and as a result, oversea customers (or local branches of foreign-owned companies) usually pay more. It is a very different business though. We sell a service rather than a product and with software, there's no processing or packaging, shelf-life, or shipping issues. Unlike Fonterra, we don't exactly have a monopole for software development in NZ either so it's a completely different ball game :)
 
Re-"NZ is a very small market" - yep, to some extent it does make sense but this line is used, and I feel over-used, to justify pretty much everything. I will have a look to find out how much of French wine is exported and how much is sold domestically. One thing I know is that if it was sold in French supermarkets at the price that it is sold in the UK for example, there'd be another revolution before you had time to realise it ;)

The original DIR was a stuff up that was probably forced on the Export Dairy Industry who, at that time knew they had to get out of the NZ Dairy Board Structure for marketing reasons. It was seen and perceived by Overseas Governments and Overseas customers as a NZ Government subsidised Dairy operation. Even the Farmer suppliers of the previously  established Dairy Companies such as the NZ Co-op Dairy Co--Kiwi Co-op Dairy---Si Dairy Co-op etc took a lot of discussion to be persuaded to join into one large company. Two opted out of Fonterra, Westland Co-op Dairy Co and Tatua C-op Dairy Co Ltd, as is their right to do so and both have paddled their own companies quite successfully.  But neither company is involved in Liquid Milk Sales. (Town/City Milk). 
What the Government also tinkered with was the Town Milk Industry--which had separate Dairy Farmer supplier owners---who also owned the Town Milk Processing Stations. These  companies were forced into corporate ownership. (eg Canterbury Dairy Farmers became owned by Goodman Fielder). The Farmers were bought out of their shares by Goodman-Fielder, and all of these farmers had to change to supply Fonterra.  Fonterra was then via the DIR empowered to supply any NZ Dairy based company with milk up to a limit (eg Goodman Fielder plus the Exporting companies such as: Synlait--Open Country Cheese--Tatua--Westland--Talleys). Because the milk was cheaper than their own suppliers and could give them extra volume for start-up, they all hooked in where possible.  Also there are other minor NZ Milk users --such as Tip Top Ice Cream---Cadbury's --etc, -which were also required to be supplied by Fonterra.
When the Town Milk was placed in Corporate hands (eg Goodman Fielder) they just took over the other Town Milk companies and closed them down. Eleven companies in total in the South Island, were closed down. Simliar story in the North Island. Site and equipment all sold off.
But the biggest Nigger in the Woodpile however for Domestic Liquid Milk--is Foodstuffs and Progressive---who set the retail price in the domination of the domestic/NZ consumer food business, and they refuse to reveal their margins.
We do have a few independent companies, such as Klondyke Milk (part of the Emerald Group ) who is successfully selling liquid milk through Dairies at a price of $2-99 for 2 litres of Homogenised Milk, which is less than most supermarkets.  
I think the way forward is to allow the DIR Law to continue ----but modify it so that Fonterra only has to supply to companies that are manufacturing for New Zealand domestic consumption only.   

Reply To  Mist42nz.
All I have said is publicly available information, of what actually happened.
NZ Consumer Milk and Cheese and Yogurt--Etc is one thing but Export Products are another.  Not one Fonterra Site is set up for Town Milk Bottling--except for the Anchor Plant at Takanini, Auckland, which Fonterra owns partly because they wanted to retain the Anchor as a Brand name of NZ origin.
The Manufacture of Export of Dairy Products, is the major country concern. Take the case of Synlait at Dunsandle, Canterbury. They have been operating for only a short time and did not have the capital to build a new  $100 million Milk Powder Plant for baby food powder. So they take in Bright Dairy (China) as a 51% Owner, who provides the $100million in exchange for shares in Synlait.   They are now making Baby food powder---with Bright Dairy doing the sales and marketing in China.  But effectively they can take 51% of the Total Profits made by Synlait and also take a profit on the sales of the Baby Food Powder as well. ( Synlait also has a No 1 Dryer which can make Skim Powder or Whole Milk Powder and a Anhydrous Milk Fat Plant (butter Oil) ).
According to John Penno --Chairman of Synlait --- the sale price of Baby Food Powder --in China--will be equivalent to NZ$80 per  1 Kg  Tin --  or  $80,000  per  tonne (less costs).  When Whole Milk Powder sells Internationally for  ( last weeks price)   NZ$4570  per tonne or  $4-57 per Kg there is a big difference to the $80 per Kg of Baby Food Powder, so plenty of room for lots of profit for Bright Dairy.
Conclusion--- A big chunk of money going Off Shore to China--in both Baby Food Powder Profit and Synlaits company profit.
This New Zealand could well do without this--and Fonterra should not have to prop Synlait up by compulsorily having to provide them extra milk under the DIR.
The Domestic Milk sales is just a sideline issue--- it is Fonterras Big EXPORTS that produce the Foreign Currency for the Imports  we have to buy to operate the country.