Treasury 'ideologues' slammed

The proposal to extend the Dairy Industry Restructuring Act has made not a few people irate. Richard Woodd reports.

Taranaki dairy industry commentators are warning that government threats to extend anti- monopoly legislation beyond its planned expiry risks undermining Fonterra's position as New Zealand's most successful company and primary exporter.

Shane Ardern, Pihama dairy farmer and National MP for Taranaki-King Country, says the Dairy Industry Restructuring Act (DIRA) is being influenced "by Treasury ideologues who believe every dairy farm should have a choice of three milk buyers at the gate.

"We risk ending up like the meat industry, with a lot of small, inefficient processors who can't foot it internationally, procurement wars at the farm gate, and farmers and New Zealand losing out."

He is calling on Fonterra shareholders "to stand up and say whether they believe in our cooperative or not, because if they don't campaign hard for it, they will lose it and the country will suffer."

The DIRA (2001), which controlled the entry of Fonterra and requires it to supply 5 per cent (600 million litres) of its raw milk to competitors, is scheduled to expire in May next year in the South Island and May 2012 in the North Island.

Ministry of Agriculture and Forestry policy writers are now saying the act and its regulations covering raw milk sales to Fonterra's rivals should be extended because competition for farm milk is insufficient and add that the policy is not causing Fonterra to suffer.

Protests from Fonterra shareholders that the default raw milk price was set too low and that they have been subsidising milk transport costs to their rival processors has seen the Agriculture Minister propose to boost the payment by 10c a kilo of milksolids through a legislative amendment. This will be added to the default price of $5.70kg/ MS.

In 2005, the Commerce Commission ruled that Fonterra overcharged for transporting milk to Open Country Cheese at Waharoa, ordered reimbursement of $211,000 and reduced future charges.

Mr Ardern says the commission "got it wrong".

"They based it on the average cost of tanker collection in the Tatua and Open Country catchments in the Waikato, mostly from farms close to the factory. The success of the Fonterra model is that milk collected in the Awakino Gorge area pays the same cartage cost as milk from next to the Whareroa factory. Open Country's milk could come from anywhere, so the Fonterra average transport cost is fair and reasonable. If Open Country disputes this, why don't they pick it up themselves?

"Fonterra has to collect that milk from a shareholder's farm and deliver it to a competitor's factory by state regulation. It's communistic. Now that the multinational Kraft Foods has bought Cadbury's in Dunedin, it will be entitled to a state- sanctioned 50 million litres of Fonterra milk at a cost subsidised by Fonterra shareholders."

Iain Cossar, MAF's director of sector performance policy (and responsible for reviewing the act), came under direct attack from three people in the audience at a recent Fonterra Shareholders' Council seminar in New Plymouth when he delivered a position paper on the DIRA.

He said there are now four medium-sized and 20 small independent processors buying raw milk; Fonterra is obliged by regulation to supply each up to 50 million litres per year at an agreed default price. Fonterra buys 16 billion litres per year.

MAF's tentative view is that it may be too soon to abandon the regulatory regime because:

There is insufficient competitive pressure in the farm gate market for efficient operation.

The factory gate milk market is likely to be thin and therefore inefficient.

Potential damage to other participants and the efficiency and growth of the industry could be substantial.

The current light-handed regime is not unduly burdensome on Fonterra.

He said MAF's "preliminary conclusion is that there may be a prima facie case for extending the entire DIRA pro-competitive regulatory regime, including the raw milk regulations". He also stated the last MAF review concluded Fonterra was underpaid for its raw milk by $15-20 million a year.

There was a swift and angry reaction.

Harry Bayliss, Oeo farmer and former Fonterra deputy chairman, was one who had points to make.

"I have no issue with Fonterra being required to supply milk to new start-ups, but I do take issue with the pricing mechanisms and the transport cost recovery involved. The net of these mechanisms means that these 11,000 individual farms - shareholders of Fonterra - are subsidising these new and mostly foreign-controlled companies.

"Will we get the money back or do we need to take a class action? And I mean that seriously."

John Washer, Oakura farmer, was another.

"If you're going to extend the DIRA, I'd be very concerned about that. There're enough guys jumping in and some are ex- politicians, starting these little dairy companies. They are extreme fat cats in my view and all they do is get it up and running and then bail out and take the tax-free money out.

"That's what you should be watching. I'm very disappointed at how MAF has treated agriculture in the past year. You haven't been on our side at all."

John Young, former Kiwi Co- op chairman, had this to say: "It's beyond belief that legislators could try to put these hurdles in the way of our most successful company that is still the only one owned entirely by New Zealanders. The competition is now effectively subsidised by Fonterra shareholders."

"I'm not aware transport costs are subsidised," Mr Cossar responded. "I thought they were met in full.

"The 20 per cent rule [allowing any farmer to sell 20 per cent of his milk to independents without Fonterra share redemption] and all other measures in the DIRA are there for the advantage of the milk suppliers, to protect you in the unlikely but possible event that your co-op doesn't treat you how you want to be treated.

"Look around the world at the legal action the owners and suppliers are taking against their co-ops, notably in Europe.

"It's not all sweet and light, but DIRA provides a regulatory legislative minimum that protects you as suppliers and extends that to the domestic consumers as well."

Mr Bayliss has declined to comment further on his class action proposition, but Shareholders Council chairman Blue Read says he doubts that retrospective recompense against a regulation is possible.

"We do have to realise that Fonterra is in a unique situation and that trade-offs were made," he said.

"Some time ago, I would have wanted the DIRA suspended, but now the pricing is to be sorted, it goes a long way to being fairer.

"We will be making submissions about how we think the DIRA should evolve from here. It's being discussed now.

"What really disappoints me is that our competitor companies are not adding value to New Zealand milk in offshore markets. We are simply competing for milk amongst ourselves.

"We've seen this happen with other primary industries: competing with each other for procurement in New Zealand and then competing with each other for markets offshore. And guess who loses?

"I'm putting up a simple argument: if they [the independent milk processors] differentiate from Fonterra in the market, then bring it on, because if they are better than Fonterra or produce something of more value than we do, then that's great, but I don't see evidence of that happening.

"We've put our capital up front. It belongs to the farmers, not investors, and all the profits go back to the farmers. It's the core ethos of the cooperative."

- © Fairfax NZ News