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)