Hon Damien
O’Connor
Minister for Agriculture

December 19, 2017
                 MEDIA STATEMENT

Proposals for vital dairy industry act

Minister of Agriculture Damien O’Connor today announced plans to introduce a new Bill to prevent the efficiency and contestability provisions of the Dairy Industry Restructuring Act 2001 (the DIRA) from expiring in the South Island.

“This Bill will be introduced to provide certainty for the dairy industry about the regulatory regime after 2018,” says Mr O’Connor.

“The Government also intends to undertake a comprehensive review of the DIRA as a matter of priority and will consult fully with the dairy sector on further policy decisions in 2018.

“This will allow a more strategic focus to be taken to issues facing the dairy industry, including, for example, environmental issues, land use and how to achieve the best outcomes for farmers, consumers and the New Zealand economy.”

The DIRA was passed in 2001 to manage Fonterra’s dominant position in dairy markets, until sufficient competition emerged.

The DIRA therefore contains automatic expiry provisions that were triggered in 2015, in response to Fonterra’s reduced market share in the South Island.

Key efficiency and contestability provisions in the DIRA will expire in the South Island on  May 31, 2018, if the DIRA is not amended beforehand.

A report from the Commerce Commission, published in 2016, found that competition was not yet sufficient to warrant the removal of the DIRA provisions.

The Government considers that the Commerce Commission’s findings remain valid and the DIRA provisions should be retained, pending further review.

Question and answers

What is the Government going to do?

The Government intends to introduce a short Bill to amend the Dairy Industry Restructuring Act 2001 (the DIRA) to prevent key provisions in the DIRA from ceasing to have effect in the South Island in 2018.

A Bill was already before Parliament – why not just pass that?

The previous Government introduced the Dairy Industry Restructuring Amendment Bill in 2017, but this Bill did not proceed to a Select Committee prior to the election.
That Bill dealt with the expiry of the DIRA provisions and several other matters.

The Government wants to take a strategic view of the dairy industry, given its place in the New Zealand economy.  Passing the 2017 Bill could pre-empt future decisions.

The Bill that the Government now intends to introduce, therefore, deals with the issue of expiry.  This will mean that other DIRA provisions will continue to apply throughout the whole of New Zealand, allowing time for the Government to undertake a comprehensive review of the DIRA before any other legislative changes are made.

Why didn’t you just let the DIRA expire?

When the DIRA was passed in 2001, Fonterra had a dominant position in dairy markets. The main purpose of the DIRA was to manage that dominance, until sufficient competition emerged to make regulation unnecessary. The DIRA, therefore, contained expiry provisions that were triggered when Fonterra’s market share fell below a specified threshold in either North or South Island, or both.  The expiry process also required a review of the state of competition in dairy markets to be undertaken by the Commerce Commission.

The Commerce Commission reviewed the state of competition in the New Zealand dairy industry in 2015, when Fonterra’s market share in the South Island met the statutory threshold. The Commerce Commission found that there was not sufficient competition to let parts of the DIRA expire in the South Island. The Government considers that market conditions have not changed significantly since the Commerce Commission’s review, and that expiry should therefore be prevented at this time.

Keeping the DIRA in place now will give the dairy industry certainty about the regulatory environment and enables the Government to undertake a more comprehensive review of issues in the dairy sector, and the DIRA.  This review will be undertaken in consultation with the industry.

What does this mean for Fonterra and Fonterra farmers?

Preventing expiry of the DIRA in the South Island will mean the current regulatory regime continues in place.  The key provisions that are being maintained are:

·         Open entry and exit: Fonterra must accept any application to become a shareholding farmer in Fonterra, and accept supply of milk from that shareholder.  Shareholding farmers can also readily exit from Fonterra and supply another dairy processor, should they wish to do so.  Open entry and exit are the most significant of the DIRA provisions, as they allow new processors entering the industry to obtain milk supply, protect those farmers who do not have alternative processors to supply and incentivise Fonterra to price milk efficiently.

·         Milk price monitoring regime: the DIRA requires the Commerce Commission to review Fonterra’s farm gate milk price calculation at the end of each dairy season. Under the milk price monitoring regime in DIRA.  The Commission is also required to review Fonterra’s Farmgate Milk Price Manual. The Manual sets out Fonterra’s methodology for calculating its base milk price (i.e. the price paid to farmers for their milk) for the season. The milk price monitoring regime is intended to promote confidence and transparency in Fonterra’s base milk price setting processes.

·         The 20 percent rule: the DIRA allows Fonterra farmers to sell up to 20 percent of their milk production to another processor each season.

Won’t this impose unnecessary costs on Fonterra?

The Commerce Commission considered that the open entry and exit provisions have not contributed materially to the milk volume uncertainty that Fonterra manages.  Any (marginal) cost arising from the DIRA is offset by the benefits of open entry and exit, in terms of enabling increased competition, and providing flexibility to farmers to decide which processor they wish to supply.

Open entry and exit does not prevent Fonterra from investing in value-added products. The DIRA does not pre-suppose any particular business model or product mix.

When will the DIRA expire?

The Government will undertake a comprehensive review of the DIRA, in the context of wider strategic issues facing the dairy sector.  Decisions on the shape of the future regulatory environment and the duration of the key DIRA provisions will be addressed through the forthcoming review.

What happens next?

A Bill is being drafted to prevent expiry, which the Government intends to pass as soon as possible, and well in advance of May 2018.  The review will be initiated in 2018, once terms of reference have been agreed by Cabinet.  There will be opportunity for stakeholders to provide input during the review process.

The former Government proposed to make changes regarding new dairy conversions – what has happened to this provision?

The 2017 Bill, as introduced, included a provision to allow Fonterra discretion as to whether to accept an application to become a Fonterra shareholder/supplier from a new dairy conversion.  This measure was proposed by the Commerce Commission as a means of mitigating any (small) risk of asset stranding that Fonterra might incur as a result of open entry and exit.

The Government has decided that this issue can be further addressed, if necessary, in the review. The intention is simply to prevent expiry at this time, and then take a holistic approach to all other dairy-related issues. There is little merit in taking a piecemeal approach to parts of the 2017 Bill, as opposed to a comprehensive review of all interrelated issues.

Wouldn’t the new conversions measures have been helpful in managing the environmental impacts of dairying? Why hasn’t the Government done anything to address the environmental or other costs of dairying?

The measures in the 2017 Bill regarding new conversions were not intended to, and could not, address environmental impacts.  The measure was proposed by the Commerce Commission as a means of managing possible asset stranding that Fonterra might experience.  The measure would not prevent dairy conversions from taking place – it would simply give Fonterra discretion to refuse an application from a new conversion to become a shareholder/supplier.  Fonterra could still have accepted supply from new conversions if it wished to do so.  Further, it remained open to any other processor to accept supply from a new conversion.

The DIRA’s purpose is to support efficiency and contestability in the dairy industry. The Resource Management Act is the proper statute for regulating environmental matters and that Act includes detailed processes and extensive powers to manage environmental impacts of dairying, along with other activities. Putting environmental controls in the DIRA would risk creating confusion or duplication between the two statutes, between Ministers’ powers and those of local and regional authorities.  The Government will be looking further at environmental and other issues in the forthcoming review of the DIRA. Careful consideration will need to be given to the alignment and inter-relationship of different statutes, to ensure that the required outcomes are achieved, and unintended consequences and costs avoided.

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