Dairy Bill not good enough

by Steffan Browning

The Primary Production Committee’s report on the Dairy Industry Restructuring Bill has just been released.

We worked with Labour on a minority report to express our concerns but I also wrote a minority report on some of the Greens additional concerns.

The first of these is that the Bill misses the opportunity to green up the dairy industry. Fonterra has already dropped 50 per cent of its organic producers from its organic programme, due primarily to “inefficient” milk pickup runs and processing plant operations.

Secondly, the Trading Amongst Farmers scheme will see a weakening of the farmer base of the co-operative, and may better be described as Trading Against Farmers instead.

Read on below for the full minority reports.

New Zealand Labour Party and Green Party minority view

The Labour and Green members of the Primary Production Committee have concerns that have not been addressed through the Committee’s consideration of the bill. The short timelines for submissions and limited ability of the committee to obtain advice on TAF has resulted in a bill that contains risks for the dairy industry and Fonterra.

Independent advice provided to the committee identified risks that have not been properly considered. Advice from officials with limited knowledge of co-operative company principles and objectives left many concerns raised by submitters unanswered.

The Base Milk Price Setting system that the bill legislates for would provide oversight by the Commerce Commission, but both the commission and independent processors identified potential flaws in the policy. The limited time to analyse the changes proposed to the complex system could lead to unintended consequences. The open entry open exit objectives in a transparent and contestable dairy market may be compromised with harm to farmers, independent processors, and Fonterra. The enabling provisions of the bill that allow the trading of shares between farmers are subject to requirements laid out in the bill. Insufficient scrutiny of the potential effect of the Shareholder Share Market size and the fungibility with the open trading on the Shareholder Fund Market have prevented analysis of potential gaming and market influence on the operations of the co-operative company. There is a tension between the differing interests of milk-supplying shareholders and investors who may be more interested in a short-term return rather than the long-term interests of a vertically integrated industry. The legislation contains no legislative limit on the proportion of Fonterra share securities that can be traded in the open market by non-suppliers, which could lead to pressure to demutualise the company. We believe such a protection for the co-operative is needed in law.

In the event of failure or wind-up of share trading, the bill legislates for a “fair value” share in Fonterra. Officials stated the objective is to achieve a full-value discovery. We question this objective, given the co-operative status of Fonterra and the clear desire of farmers to have it remain a co-operative. Many submitters requested the removal of section 77A and, while improvements have been made, we feel the imposition of such a valuation system on a co-operative is untested. This legislation implements fundamental change to Fonterra, a co-operative that is the largest company in the most significant export sector in New Zealand. Any reduction in control or ownership has risks for farmers and the country. We are concerned that an immediate and unavoidable consequence of the establishment of the TAF scheme will be the loss of an unknown and uncapped proportion of the dividend stream generated by Fonterra’s profits, currently retained by New Zealand farmer shareholders, to overseas investors. We believe the select committee has had insufficient time, resources, and analysis to ensure the passage of the bill will deliver the security of ownership and control in Fonterra long-term that farmers are expecting from Parliament.

New Zealand First concurs with the views of the Labour and Green members.

Green Party minority view

The Green Party also felt that the focus of the bill on the efficient operation of dairy markets in New Zealand, missed an opportunity, and fails to allow broader environmental gains, such as the promotion of biological or organic farming models, to be influenced by the bill. Fonterra has already dropped 50 per cent of its organic producers from its organic programme, due primarily to “inefficient” milk pickup runs and processing plant operations. Larger volume independent processors show no sign of picking up what can be seen as more environmentally sustainable production. “Efficient” is primarily a term used for volume-based production and marketing, and does not address long-term economic efficiency, that being sustainable production.

TAF as proposed in the bill has had an evolution from origins that intended open stock exchange listing. The current desire of Fonterra for TAF maintains elements of that, and as such does not fit the co-operative model that has allowed the success of Fonterra. Many submitters pointed out that the purported advantages of TAF for buffering redemption risk can be achieved by other means, such as the retention policy that has already been shown to be successful in accruing significant capital. Fonterra have issued contradictory statements as to the need of the share trading as envisaged in TAF, which is further confused by its complex communications to its member farmers. The Green Party doubt the veracity of some of the Fonterra executive’s statements, and cannot support TAF.

TAF allows investors that are not providers of milk to Fonterra to trade shares that benefit from Fonterra farmer shareholder dividend streams. The Green Party sees this outside “investment” as a weakening of the farmer base of the co-operative, and may better be described as Trading Against Farmers.

Share valuation in the absence of TAF, and the farm gate milk pricing mechanism of the bill, are focused on contestability rather than competition, according to officials. However, no matter the semantics of contestability or competition, the mechanics of the bill seek to open up competition in the dairy industry to the point that there would be significant risk to the dominant single desk co-operative and New Zealand farming families’ economic and intergenerational success. Such success is more likely to drive improvements in environmental and social sustainability than the open market model that this bill appears to predicate.