Fran O'Sullivan: Butterfingers over EU ban

Officials advising Phil Goff on the controversial European butter ban are relying too much on the mushroom theory: keep them in the dark and feed them manure.

The welter of rulings that preceded the European Commission's unexpected retrospective halt to New Zealand's European butter imports from July 12 show that the dispute is not concentrated solely on German trader Franz Egenberger's opposition to the "costly" requirement that import licences for NZ butter be issued "only in the United Kingdom", as Goff's initial press release implied.

That particular technical issue is a political red herring.

What the Beehive spin-meisters should have pointed out on Friday, after New Zealand was blindsided by the unexpected EC suspension, was that the pivotal European Court of Justice preliminary ruling on which the EC based its action also focuses on an arguably more important issue: the legislated monopoly position Fonterra enjoys in respect of European dairy quota.

This is the real battleground, as both sides know.

Fonterra's dairy competitors argue that it is able to exploit monopoly rents through exclusive control over all aspects of New Zealand's preferential European dairy quota. With the pressure mounting on their own economic circumstances through the gradual withdrawal of EU subsidies, they want a look in.

At issue is not just Fonterra's sole rights to EU dairy quota through to December 31, 2007 (which will be subject to internal review within New Zealand at that point) but more crucially the fact that the dairy giant is also the sole entity able to acquire an import monitoring arrangement certificate from New Zealand authorities in the first place, which in turn enables it to be licensed by the British authority as the sole importer into the EU.

Conversely, New Zealand argues the preferential dairy access is guaranteed by agreements negotiated when Britain entered the European market and reaffirmed in an expanded form during the Uruguay Round.

That is the heart of the dispute.

But issuing press releases which skirt the issues will not make them go away.

The German company filed a case against the European Commission alleging anti-competitive practices after it was refused an import licence by Germany's Federal Agency for Agriculture and Food in October 2003 to import into the community 100,000kg of New Zealand butter at a preferential tariff.

A previous request to Fonterra Logistics to buy preferential New Zealand butter, which had not yet passed through the community's customs procedures, had also been turned down on the ground that Fonterra Group only sold such butter at the pre-customs stage to Fonterra Logistics.

A December ruling makes pungent reading.

Advocate-General Leendert Geelhoed highlighted provisions in New Zealand's Dairy Restructuring Act 2001 which were geared to "maximise the economic benefits to New Zealand arising from tariff quotas maintained by foreign governments controlling access to their domestic markets".

Geelhoed's criticism was strongly worded.

While conceding that the economic analysis had yet to be done, he had concerns that Fonterra's monopoly over New Zealand butter import licences could lead to community consumers paying more for the product.

"This means not only that all other potential importers are excluded completely from importing the product, but also that Fonterra Logistics has a major advantage on the downstream resale markets for NZ butter as other resellers must pass on their raised costs resulting from Fonterra Logistics' high resale price.

"In sum, the damaging (direct and indirect) consequences for community consumers of this absolute monopoly are potentially grave."

There is more of the same. In essence the Advocate-General put the root cause of the unfair discrimination down to the New Zealand legislation which basically gave Fonterra both export and import rights over the EU dairy quota.

The Court of Justice, the next rung on the legislative ladder, ruled the EU's regulations relating to the sole UK authority were invalid - so, too, the regulations that "permitted discrimination" in the issue of import licences for New Zealand butter at reduced duty.

The Government and Fonterra could probably see that coming.

What they did not see coming was the commission's heavy-handed reaction.

Goff finally conceded the issue was not just about NZ being the injured party in a late-night phone call to me after he had registered his protest with European Agriculture Commissioner Mariann Fischer Boel.

Minister Goff's latest press release was again surprisingly anodyne.

But pressed on the underlying issue, he conceded the key issue was not just whether it was the UK or any other EU member nation that awarded the dairy licences, but whether it was the EU or New Zealand that basically controlled the import monitoring arrangements. He also conceded Fonterra's supply monopoly was an issue which would be reviewed.

So far so good.

But officialdom does not want anyone else to say the same.

Keith Woodford, professor of farm management and agribusiness at Lincoln, pointed out that to reach a new agreement, there was a strong likelihood that Fonterra would have to sell butter to European importers as well as to its own subsidiary.

Woodford's directness upset the Ministry of Agriculture and Forestry principal adviser who sent the lecturer an email imploring him to think about the "national-interest consequences" of his comments.

The MAF official argued that while freedom of speech was important, it was not "helpful that NZ's competitors should be alerted" to possible outcomes.

This is naive garbage. Instead of trying to silence academic truth-tellers, officials should be focused on another worrying issue - contagion.

How can they stop the dairy dispute spilling over to affect New Zealand's sheep-meat exports?

The MAF website has long conceded that if importing countries took control over quota allocation through a Brussels-based administrative system, "NZ would stand to lose very substantial quota rents".

That is one point of contention that will have to be taken into account as New Zealand and the EU negotiate new dairy arrangements.

It must be a given that New Zealand should have some determination over these issues - not simply EU officials acting in a panic. After all, the EU's own protective arrangements have jacked up dairy prices well above the world price for a very long time.

Attacking Fonterra's so-called super profits is not the answer to a fully competitive EU dairy market.

But the EU has its back to the wall.

Cast as the villainous fall guy for the failure of WTO trade talks to make headway, the commission may well feel it does not owe free-trading New Zealand any favours.

The assurance by Mariann Fischer Boel that the forthcoming New Zealand-EU negotiations will be "transparent, open-handed and in good faith" has to be accepted at face value.

What does not is trying to cast the row the opposite way in New Zealand. Our ministers and officials are better than that.