As I put this newsletter together I am mindful of the hardship the rural community is under now. I have spent all my life in and around farms and nothing makes me feel more at home than out in the rural community. There is nothing in the entire world as the New Zealand farming scene. It is, therefore, with tremendous sorrow that I read of the dilemma the East Coast of the South Island is facing now with the earthquakes. I grew up in this area and know it well. I also know many of the farmers. The focus of the media has been on evacuating tourists. The greater concern to me is the people left behind and the farmers who must put their entire lives back together again. While I haven’t been able to contact the farmers personally I know that behind the scenes they will be just getting on with what they must do which is looking after their land and their livestock. Their own well-being and homes will have taken a distant second place. In every sense of the word this is a disaster which many urban folks would have no appreciation for. There will be life after this but it will take many years before their lives are put back together again and the landscape goes back into green pasture.
John Barnes, Managing Director, Fertilizer New Zealand Ltd
Fonterra and its requirement to supply Regulated/Default Milk
When Fonterra was formed out of two big dairy companies the concern of the government of the day (which was National) was that a virtual monopoly was being formed. The government was required to make changes in the law, where needed, to allow the new entity to be formed. It was controversial and many people believed that two big companies plus at least two other smaller companies could operate just as efficiently or better.
The mists of time mean that it is rarely mentioned nowadays but the reason all of this came about was a wish by the government to disband the Dairy Board. This entity up until the formation of Fonterra carried out all overseas marketing of milk products and individual dairy co-operatives contracted to it and this set up was what was then called a single desk seller. The government decided in it’s wisdom to get rid of these entities including the wool board, meat board and several others. This decision meant that international agreements and quota access to many international markets needed to be vested in another entity, and dairy interests including farmers finally settled on the Fonterra model which did not even have a name at that point… That is the very short abbreviated version of history.
In that lengthy government process the farmers and dairy companies were told that the price of a single huge entity being formed which was then 96% of all milk produced in New Zealand was to be the regulated requirement to supply small start-up companies with milk at an agreed price. The total amount of milk involved had an upper limit and the formula for setting that price was set out in regulation. Farmers could send up to 20% of their milk to other processors if that was their wish. Many of these requirements had a sunset clause meaning that they would cease at a certain time in the future.
That day has duly arrived and the sunset clause was to come into force in the South Island. This was opposed by Goodman Fielder and other recipients of regulated milk from Fonterra. This is what has triggered the changes announced by the Minister around the 20th of October this year. Goodman Fielder and others claimed that this would lead to an increase in the price of milk to New Zealand consumers. (A somewhat interesting statement, given that they continually argue that Fonterra charges them too much for the milk under the present formula!!!) Both sides of the argument being the recipients of regulated milk and the farmers, and Fonterra have made submissions and the Minister has considered those and accepted some and rejected others.
So… The changes that the Minister has agreed to and will go to a select committee in 2017 for ratification or alteration are as follows:
- He proposes to prevent the efficiency and contestability provisions of the DIRA from expiring in the South Island and require that the next review of the state of completion in the New Zealand dairy industry commence during the 2020/21 dairy season. (20 years since the DIRA began).
- Enable ongoing monitoring of dairy markets.
- Allow Fonterra discretion to accept applications to become shareholders from new dairy conversions from 2018/19.
- Alter who is eligible for regulated milk from Fonterra, and the terms that it is available on. Fonterra will no longer be required to sell regulated milk to large export-focused processors from the start of the 2018/19 season.
- All processors purchasing regulated milk will have reduced flexibility in forecasting the volume of regulated milk they intend to purchase from Fonterra from the start of the 2018/19 season.
The Commerce Commission has advised the Minister that competition in the market is not yet sufficient to warrant deregulation at this point. Some submitters contest that the level of competition needed to be reached before deregulation is in the vicinity of 30% market share. Fonterra strongly contest this and think even 20% is too high.
The battle continues and it should make for an interesting select committee.