Why Fonterra doesn't agree with some Govt moves on its capital rejig plans

Fonterra's proposed capital reform has smaller dairy processors worried. Photo / File

Dairy industry heavyweight Fonterra has pushed back against some of the Government's proposed tradeoffs for allowing the company to implement a major capital restructure.

The Ministry for Primary Industries (MPI), which has oversight of the farmer-owned co-operative under the Dairy Industry Restructuring Act (DIRA), has published submissions to the Government's response to the capital reform plan, which largely okays it but with some proposals to keep a leash on Fonterra's market power.

MPI told the Herald Cabinet has delegated the decision-making over the capital restructure proposal to Minister of Agriculture Damien O'Connor. He's now seen the submissions to his earlier response so they can be published.

Fonterra, created in 2001 from an industry mega-merger under the specially-written DIRA legislation which avoided the necessity of getting Commerce Commission approval, still collects just under 80 per cent of the country's raw milk. Promoted to be a national export champion, it is New Zealand's biggest business and the world's sixth largest dairy company by revenue.

DIRA will have to be amended to incorporate the capital reform. Industry arguments for and against Fonterra's plan will get another airing before a select committee.

Fonterra says its capital restructure proposal is critical to help it maintain supply in a national raw milk market predicted to shrink, by making it easier and less capital intensive for farmers to join the cooperative, and for it to remain farmer-owned and controlled for generations to come. But much smaller processing competitors claim the reforms will strengthen Fonterra's market dominance, erode market competition and innovation, and risk pushing up household dairy prices.

Opponents claim Fonterra is already able to manipulate the country's base milk price calculation - a historic industry assertion Fonterra "strongly rejects" - and that the capital reform will add to that commercial issue for competitors.

To address this and other concerns, O'Connor has made several influence-limiting proposals. They include increasing the number of ministerial appointments to the national milk price panel from one to two, and requiring the panel chair to be "suitably independent" of Fonterra and can only be appointed by the Fonterra board with ministerial approval.

Fonterra has responded that the current level of governance for the base milk price setting regime is "robust" and works well, supporting "an efficient and transparent milk price".

"This is evidenced by the growth in sustained competition for raw milk in the last 10-15 years and by the fact that independent processors are competing effectively and new independent processors are taking active steps to enter."

It notes the calculation of the base milk price is not carried out by Fonterra, but by the independent milk price group with the oversight of the panel. The base milk price is calculated, it says, with reference to the Milk Price Manual which is prepared under DIRA regulation and principles in Fonterra's constitution.

Fonterra says it doesn't oppose increasing ministerial panel nominees to two, but it believes the panel's independence is already assured. It has concerns about the minister's proposal to prescribe a maximum of seven panel members, "in the context of the proposal to make the chair an additional independent member".

The requirement to increase ministerial panel nominees to two and the prescription of maximum and minimum panel member numbers would require Fonterra to amend its constitution and the Fonterra Shareholders' Market (FSM) listing rules. The constitution amendment would require a special vote by shareholders, the support of 50 per cent of Fonterra farmer councillors. Changes to the listing rules would need both NZX and FMA approval.

"It is therefore important that the legislation effectively overrides or is deemed to amend anything in Fonterra's Constitution or the FSM Rules to the contrary."

Agriculture minister Damien O'Connor. Photo / Mark Mitchell

Fonterra says any of the five independent panel members should be eligible to be chair and that DIRA's definition of "independent" is already sufficient. It believes the chair must have strong corporate and governance experience.

On the minister's proposal that Fonterra be required to contract out the day-to-day administration of the base milk price calculation to an external party and replace that party every 4-6 years, Fonterra calls for sufficient flexibility to continue contracting this function to several external parties.

It doesn't agree with the minister's additional measure to reduce Fonterra's discretion in setting the base milk price by giving the Commerce Commission the power to make its price review findings binding on Fonterra's inputs, assumptions and processes in the country's base milk price manual and the calculation. The commission already reviews the manual's methodology and the base price calculation annually.

Fonterra says this measure would be duplicative of other proposals and add significant additional costs for no clear benefit. It proposes that "consideration of additional measures as significant as this should be deferred to the next DIRA review".

MPI consultation on the Government's response started in April and closed on June 3.

MPI said 17 written submissions were received from 19 submitters. One oral submission was received.