Govt handcuffs Fonterra to maintain milkflows to rivals

Agriculture Minister David Carter. Photo / Christine Cornege

The Government is to reneg on sunset clauses in enabling legislation which created Fonterra and force the giant dairy to extend the provision of "statutory" milk to rival competitors.

The Dairy Industry Restructuring Act 2001 (DIRA) was set up with triggers, which industry observers expected to be reached next year, absolving Fonterra farmers of the requirement to provide up to 50 million litres of raw milk to virtually any rival processor that asks.

Fonterra has complained loudly that providing cheap milk to rivals is a burden, particularly when many of those rivals are backed by extensive overseas investment, and in some cases are competing for Fonterra's export markets.

Agriculture Minister David Carter said today that Fonterra was placed in a "privileged position" as the dominant market player when it was created out of the Dairy Board and the nation's two biggest dairy cooperatives, Taranaki-based Kiwi and Waikato-based NZ Dairy Group.

"This required rules to ensure a competitive and innovative dairy industry," he said today.

The Act contained 'sunset clauses', due to be triggered when independent processors collected at least 65 million kilograms of milksolids from dairy farmers in the South Island - with one independent processor collecting at least 25 million kilograms outside the West Coast - and at least 12.5 per cent of milksolids produced in the North Island.

These were expected to kick in by the end of the current season, May 31 , 2011 in the South Island, and possibly by May 2012 in the North Island - causing the pro-competition provisions to expire.

However, the Government was not confident there would be sufficient competition in the dairy industry to protect the long-term interests of farmers and consumers, Carter said.

It has set new triggers at a Fonterra market share of 80 per cent in the North Island, and in the South Island, excluding the area West Coast.

When one of those triggers is reached it will not automatically axe Fonterra's responsibilities: instead, the Agriculture Minister will be required to commission a report on the state of competition in the dairy industry.

"This is not about reducing Fonterra's market share," said Carter. "It is about delivering fair and open competition and innovation to the New Zealand dairy sector."

Concerns had also been raised over the eligibility criteria for access by independent processors to the regulated raw milk - such as whether companies with their own farmer suppliers should continue to take milk from Fonterra - and the Government will consider them in a review of the criteria.

Carter said the changes to the sunset clauses, set a decade ago, would provide certainty while Fonterra proposed substantive changes to its capital structure, including a proposal to allow its shares to be traded among its farmers, rather than redeemed by the cooperative.

A detailed proposal was expected from Fonterra in the near future to allow time for the share trading to be put in place by late next year.

- NZPA