Hoggard: "We need to talk about DIRA"
Fonterra farmers need to get their heads together in the next couple of years to talk about how life will look without the Dairy Industry Restructuring Act (DIRA), says Federated Farmers dairy chairman Andrew Hoggard.
The Government has promised the next review of the industry legislation in the 2020-2021 dairy season will be much wider than just competition policy and farmers need to have a discussion ahead of that, he said. DIRA, enacted to regulate the activity of dominant industry player Fonterra, will have been in place 20 years by then.
Hoggard, a Fonterra supplying-shareholder, was commenting on changes to DIRA announced by the Government recently. These followed a Commerce Commission review and report to the Government this year which found that competition for Fonterra was not yet sufficient to warrant industry deregulation.
The only major change that could materially affect farmers was that Fonterra could from the 2018-2019 season choose whether to accept milk from new dairy conversions, Hoggard said. DIRA currently requires Fonterra to accept all farmer applications to supply milk.
But there were few conversions these days and this change was probably a decade late, Hoggard said. "It might have been a good idea to put in 10 years ago when we (the Fonterra farmer co-operative) struggled to find enough stainless steel to cope with conversion supply. But it's better late than never."
This change does not go as far as Fonterra leaders lobbied for during the review.
"I know Fonterra was pretty disappointed that it didn't get to make that decision over all new supply offered to it. But not a lot of farmers are aware that 'new supply' would also include a new generation taking over the family farm and farms sold to someone else. Fonterra may have a legitimate beef about having to accept milk from returning suppliers who left to supply another company and come back, but before we say let's scrap that (DIRA) clause, we need to talk.
"Let's pretend DIRA is gone and decide how we as a co-op should respond."
Fonterra Shareholders Council chairman Duncan Coull could not be contacted for comment.
Hoggard said he was in an inter-generational change situation himself, buying out his parents. "Suddenly I would become a new supplier if that clause was to go and Fonterra could choose whether or not to pick up my milk."
This was no different than the situation pre-DIRA, but today there were more farmers in the industry who had worked under a DIRA regime than before it.
Removing Fonterra's obligation to accept all new supply offered could also affect farm value in a sale situation, Hoggard said.
"Say it's a farm on the edge (of a collection area) and Fonterra says no. The value that farm was seen to have wouldn't be there, and the farm will sell for less. Again, that's like it used to be before DIRA but we need to have a discussion over the next couple of years. We need to understand the potential ramifications before we make a change."
The prospect of more differential pricing for milk was another area Fonterra farmers as a co-operative needed to decide how to respond to.
"At some point the legislation is going to pass away. We need to talk about that, and do we need it anyway? At the moment it's all about is there enough competition? Of course any economist would look at the situation today where one company has 78 per cent market share and say 'no'. But let's think about New Zealand taking on the world, taking a New Zealand Inc. approach.
"I'm pretty comfortable with the level of competition. We don't have to force Fonterra to be smaller."
Hoggard said farmer understanding of DIRA had never been good. "A lot of us thought it was about competition on the supermarket shelves. I hope before this review we can have a good discussion and change that."
Primary Industries Minister Nathan Guy said about 100 submissions came in on proposals to amend DIRA after the commission's review report. "These were split between those who wanted further deregulation of Fonterra and those who said Fonterra was still in a dominant position." When DIRA was enacted, Fonterra had 96 per cent of the New Zealand raw milk market.
The changes Guy announced were:
- prevent the contestibility provisions of DIRA from expiring in the South Island and require a review of industry competition in 2020-2021
- enable ongoing monitoring of dairy markets
- allow Fonterra discretion to accept applications from new conversions from 2018-2019
- alter who is eligible for regulated milk from Fonterra and terms of availability. Fonterra no longer required to sell regulated milk to large, export processors from the start of the 2019-2020 season and all processors buying regulated milk to have reduced flexibility in forecasting volume of milk they intend to buy from the 2018-2019 season.
In anticipation of a well-signalled regulated milk supply clampdown, Fonterra's biggest processing rivals some time ago found alternative milk supply. The change that limits flexibility around their milk volume forward ordering is in response to Fonterra's complaint that its own milk requirement planning was impacted by rivals' demands, especially at times of the year when supply was short.