Exemption for Fonterra in the south would come when its competitors for milk supply total 20% –they now account for 14% nationally.
The so-called sunset clauses of DIRA would come into effect when Fonterra fell to 80% of milk supply and, among other things, remove the open entry and exit obligation and the requirement for it to sell raw milk to start-up processors.
Federated Farmers and several Fonterra competitors haves submitted to the review of the DIRA legislation by the Commerce Commission.
There was little competition at the farmgate on milk price and farmers left Fonterra for other reasons, including freeing up share capital and dissatisfaction with the co-operative, the federation said.
To increase competition at the farmgate it wanted access to raw milk purchasing from Fonterra by independent processors limited to three years – those bigger companies with their own supply farms were now in their last season of that access.
It also suggested the 20% rule under which a large dairy farm could divert up to that proportion of its milk output to another processor would become more attractive when larger processors were prevented from accessing Fonterra’s raw milk.
Federated Farmers wanted the rule dropped or adjusted to some smaller proportion to satisfy specialist cheese makers, for example, or tied to the amount of milk taken in October.
As the processor of last resort, Fonterra was obliged to pick up milk from remote and perhaps environmentally marginal areas.
The federation wanted Fonterra to be given the right of refusal, to put it on a more even playing field with its competitors.
Federated Farmers said its suggested changes to the DIRA, taken as a whole, would form a workable DIRA for the long-term future.
It said the commission should consider the role of the DIRA in trade reform negotiations.
“We are aware that many trading partners consider NZ as a one dairy company country and look on the DIRA as being the only thing saving the NZ dairy industry from being a monopoly.”
Fonterra Brands’ largest domestic competitor, Goodman Fielder, said continued legislation was required because Fonterra dominated the farmgate and factory gate markets.
Goodman Fielder would rely on its 250 million litres a year access to Fonterra’s raw milk supply because it was unlikely an alternative of sufficient year-round supply would develop before the agreement expired in 2021.
It disclosed some on-off supply arrangements with Westland, that in 2014 provided 8% of Goodman Fielder’s NZ milk, but that source was not reliable.
Without continued legislation, Goodman Fielder feared being unable to satisfactorily renegotiate the Fonterra supply agreement post-2021 or acquire or contract with enough farms for its needs.
It would need farms near its processing facilities in Palmerston North and Christchurch and it could not compete with Fonterra’s economies of scale.
Wholesale and retail markets were highly competitive and margins were under constant pressure from supermarkets and service station chains, Goodman Fielder NZ general manager Iain Abercrombie said.
Open Country Dairy said that while competition between dairy processors was evolving, the industry had not reached the point where it could discipline Fonterra’s market power without the open entry and exit regime.
Fonterra was clearly still setting the market prices for milk and the track record of independent processors was mixed.
“We are aware that many trading partners consider NZ as a one dairy company country and look on the DIRA as being the only thing saving the NZ dairy industry from being a monopoly.”
Federated Farmers
Other processors could not yet set a market milk price without reference to Fonterra’s prices.
“It would likely take at least two processors with material market shares (about 10%) and significant spare processing capacity to consider the state of competition sufficient to remove DIRA,” chief executive Steve Koekemoer said.
Westland Milk products also said the open entry and exit provision must remain.
Fonterra had sometimes acted contrary to the purpose and principles of DIRA, such as long-term supply agreements, the formation of MyMilk and departures from the Milk Price Manual.
Although Westland had established a Canterbury supply base (now equal to 20% of total supply) over the past five years only 25% of those farms had come from Fonterra.
Farmers seeking to supply Westland had come up against harsh exit provisions from Fonterra, such as five to 10 years notice required.
Westland said that was contrary to the purpose and principles of the DIRA.
Fonterra could extend that behaviour if the DIRA was removed and it could cherry-pick the areas of greatest competition for farmgate supply.
Tatua Co-operative Dairy Company complained the commission’s review of DIRA was limited in scope by the terms of reference from Primary Industries Minister Nathan Guy.
The review was framed to consider whether efficient dairy markets would be harmed by deregulation, not how the markets could be improved.
“That approach . . . at best offers simply to defer deregulation.”
The premise seemed to be that the regulations were not intended to last indefinitely.
A clear bias evident towards deregulation could be corrected by including options to enhance the regulation, entertaining the possibility that milk markets might remain regulated for the foreseeable future, Tatua submitted.
Trading Among Farmers and the global shifts in supply and demand, sometimes influenced by food safety scares, showed the need for continuing regulation of the market.
Miraka said there was insufficient competition at the farmgate, a market would be unlikely to emerge upon deregulation and that Fonterra would be able and incentivised to use market power over its competitors.
It wanted the sunset level for DIRA lowered to 75% milk market share by Fonterra.
Miraka also had sympathy with the Tatua argument, saying that one possible outcome of the review was that there was insufficient competition in the dairy industry and that the industry should be deregulated.
The commission wants cross-submissions by the end of the month before publishing a draft report in early November and a final report due for Guy in February.
