The warning came from the dairy industry’s number two processor, Open Country Dairy, as part of the Commerce Commission’s Dairy Industry Restructuring Act (DIRA) review submission process.
“We are keen to ensure that farmers in their time of need are not being taken advantage of,” Open Country chief executive Steve Koekemoer said.
“We are concerned that the interest-free loans (and any requirements to pay interest on exit) may limit open exit.
“We are also concerned that financing these interest-free loans will involve significant costs and these need to be incorporated in the milk price calculation.
“We further understand that some bankers are encouraging their clients to take out the loan even though they consider there to be a risk that their clients will be locked in to Fonterra as a result,” Koekemoer said.
Fellow independent processor Synlait was first to raise concerns over the Fonterra loan scheme with the commission in mid-August.
Fonterra quickly responded with reassurances farmers who took up the two-year, interest-free loan would not be locked in for the duration of the loan.
Its support scheme did not contravene the DIRA because participation was voluntary, the loan could be repaid at any time and it did not restrict farmers from entering or exiting “in any other respect”.
It did not consider the requirement to repay the loan on exit would materially affect the decision to cease supply.
“Firstly, this will not impact upon the key drivers of that decision,” Fonterra general counsel Andrew Cordner said.
“Secondly, we expect that repayment will be able to be made out of the proceeds of the required sale of Fonterra shares held by that farmer or out of the payments made for their milk which are paid following the end of the season.”
Cordner also replied to matters raised by other submitters by emphasising Fonterra did not want to change the milk price regime, Trading Among Farmers, free exit for farmers and the supply of raw milk to Goodman Fielder and smaller independent processors.
He also hit back at allegations of “tactical pricing” of milk being anti-competitive, which he said occurred in a limited way some time back as an offer to some farmers who were considering leaving.
The tactic didn’t meet the approval of shareholders, was not continued and was found by the commission at the time not to be anti-competitive.
Fonterra tackled the issue of open re-entry to the co-operative, raised by several independent processors, as a necessary requirement under DIRA for the reassurance of farmers who left.
It drew a distinction between a right of refusal (which it is seeking) in “marginal cases” and the re-entry of farms in “competitive areas” where independent processors operated.
Fonterra wanted changes to the open entry and exit provisions of DIRA in limited circumstances.
It wanted a right of refusal when there were capacity constraints or farms were particularly difficult to reach or supplied minimal quantities of milk.
But as long as incremental revenue from milk exceeded incremental costs, Fonterra still had a strong commercial and co-operative incentive to accept new suppliers.
That applied more so when farms seeking to re-enter were in core collection areas where competition was keen.
Open Country was not convinced, saying open entry and exit were essential to contestability and the commission could strengthen Fonterra’s existing right to reject new conversions rather than undermine open entry and exit.
It cited Fonterra’s treatment of the New Zealand Dairy supply farms, under investigation by the commission, as an indication of likely behaviour without DIRA.
All farmers had to agree to supply Fonterra, were locked in for six years and had to buy at least 1000 shares
Open Country also said all submitters except Fonterra contended there was not yet workable competition in the farmgate and factory gate markets.
“Independent processors have had mixed success and recent investment is still untested,” Koekemoer said.
“As a result, the commission’s review must be mindful that the current levels of competition (following the recent peaks in milk prices) are by no means entrenched and may erode over the commodity price cycle.”
Fonterra strongly defended its “sharing-up” opportunities over periods of three, five and 10 years.
It said there was no evidence they had produced difficulties for the independents.
But it did concede extended time sharing-up options were partly introduced to meet competition from independents.
Finally, Fonterra withdrew its request to remove the 20% rule, which allows farmers to divert up to 20% of their milk away from Fonterra without approval or penalty, on the grounds of redundancy.
It acknowledged some smaller cheese companies like Grinning Gecko, Karikaas, Mercer Cheese and Over the Moon Dairy were taking advantage of the rule without Fonterra’s awareness.
The 20% rule was not a priority for change and Fonterra no longer sought its removal.
