Friday, March 29, 2024

Fonterra re-entry route to close

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Fonterra will be able to refuse re-entry of milk supply farms to the co-operative but not for four years.
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The end of the legislative right of open entry for farmers has been welcomed as a breakthrough but its enactment date is June 1, 2023.

Fonterra said the new clause in the Dairy Industry Restructuring Act will apply to applications to supply received after June 2023 and therefore effectively for the 2024-25 season.

The long phase-in for what chairman John Mongahan called the most significant change in the regulatory framework was introduced in the final stages of the Dairy Industry Restructuring Amendment Bill (No 3).

The Bill passed into law on Friday July 24 and was hailed by Agriculture Minister Damien O’Connor as fit-for-purpose legislation in the changing economic and social environment.

The Primary Production Select Committee recommended removing the obligation on Fonterra to accept all applications to become milk-supplying shareholders, which he agreed with.

The committee said the right of open entry to existing farmers should be removed on June 1, 2022.

O’Connor extended the abolition date for a further year because a longer notice period to all affected parties was necessary.

“All effective dates were moved back 12 months to take account of the delay in passing the bill because of covid-19 disruption to Parliamentary processes. 

“This was to allow time for affected parties to plan ahead and manage contracts and investment decisions.”

National agriculture spokesman David Bennett said his party’s select committee members came up with the closed entry clause.

“That wasn’t in the original bill and Fonterra wasn’t seeking it but we pushed it through a constant battle with officials.

“Because the committee is a four-four split the DIRA Bill wasn’t going to proceed without bipartisan agreement.

“The minister seemed to change his view in favour after the loss of farmer ownership of Westland Co-operative.

“Getting that closed re-entry clause through was the biggest win that I have seen in Opposition.”

Clause 20b says Fonterra needs to have regard to the effect of its decision on the ongoing viability of the farm if the farm supplied Fonterra in the previous season and the land use opportunities available to the applicant.

In 2019 the original draft retained open entry and exit but provided exceptions if more than 50% of a farm was a new conversion or if there were grounds to consider the applicant was not likely to comply with Fonterra’s terms of supply. Those exceptions have been dropped in the final wording.

Competing dairy processors lobbied for a retention of open entry because the prospect of a refusal in the future might deter a farmer from leaving Fonterra in the first place.

Fonterra has argued open entry imposes a requirement for surplus processing capacity and stops it refusing supply from environmentally unsound conversions.

Bennett said the views of all submitters were heard but in practice the alternative processors seemed to have no issues attracting suppliers.

Monaghan said Fonterra’s undertaking to continue to accept applications from all farms supplying the co-op will be included in the constitution at this year’s annual meeting if farmers vote in favour.

“This means that even if ownership of a farm changes we will accept supply as long as it is continuous and the new owner meets our normal terms and conditions of supply.”

Fonterra can introduce differential pricing for milk through its terms of supply on matters such as animal welfare, food safety, health and safety, employment conditions, the environment, climate change and sustainability, subject to existing non-discrimination provisions in section 106.

From 2024 Fonterra will not be required to supply milk to other processors who have 30 million litres of their own supply.

Other smaller changes include an asset beta valuation figure consistent with other like processors, a member of the milk price panel being appointed by the minister and an increase in the Goodman Fielder milk volume from 250m to 350m litres annually plus 10c/kg MS extra charge.

Open Country chairman Laurie Margrain said the big DIRA change to open entry is extraordinarily anti-competitive, as his company and other independent processors have consistently argued.

Fonterra will be able to wave a big stick at its farmers, saying “if you leave, don’t think you will be allowed to come back”.

“Why would farmers want to give up their future options?” he asked.

“The closed re-entry is a blunt instrument hidden behind the guise that Fonterra shouldn’t have to pick up all the milk.

“We agree there shouldn’t be an automatic right to pick-up. We are not arguing that for all types of dairying on all classes of land.

“But you won’t get competition in parts of the country where there still is no competition.”

In response to Bennett’s point about a waiting list to supply independents Margrain said many people in the independents have worked extremely hard to establish their milk supplies.

“How successful would we have been if Fonterra had been able to wield the big stick?

“For the health of the dairy industry we must allow farmers freedom to come and go from the processors of their choice.”

Margrain said there is a lot of water to go under the bridge before the closed re-entry clause takes effect.

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