Fonterra says no NZ plant closures - unless competition increases

Fonterra seeks changes to dairy industry legislation beyond review proposals.

Fonterra would consider closing dairy processing plants if more competition developed in New Zealand, says chief executive Miles Hurrell.

Responding to a question about possible factory closures from Parliament's primary production select committee, Hurrell said no closures were currently planned.

"We would have to consider plant closures if there was more competition".

Fonterra, New Zealand's biggest company, has 30 manufacturing sites around the country, some of which are ageing.

The Te Rapa site in Hamilton for example has just marked its 51st year. It is currently renewing its resource consents for water take from the Waikato River, discharge to air, including odours, and discharge of stormwater, cooling water and treated waste water to the Waikato River.

The proposed length of the term for each consent for Te Rapa is 25 years, a reduction from the 35 year term originally sought.

Hurrell told the select committee New Zealand milk production had flattened while competition for milk was increasing. Fonterra now had 10 competitors, many wholly or partly owned by overseas companies, operating 15 manufacturing sites around the country.

From 2002 to 2019, independent processors' milk collections had increased by about 830 per cent, Fonterra's by just 37 per cent.

In 2014, spurred by advance notice of significant coming growth in milk supply from central North Island conversions, Fonterra had invested up to $380m in plant to cater for the new milk.

Many of the conversions had not eventuated with the result that the newbuild Lichfield plant in south Waikato now ran at 30 per cent of its capacity.

Fonterra chairman John Monaghan told the select committee the farmer-owned co-operative had "contingency plans" for closures.

The select committee was hearing submissions on the Government's proposed changes to the legislation governing Fonterra and the dairy industry, the Dairy Industry Restructuring Act (DIRA).

Hurrell said Fonterra's last significant factory closure was its Dennington site in southwest Victoria, with the loss of nearly 100 jobs. The recent decision followed a review of the Australian business and a declining milk pool across the Tasman.

Fonterra last month announced a 2019 year net loss of $605 million and asset writedowns of $826m. These included the Australian business.

Fonterra's submission calls for changes to DIRA to go further than proposed by the Bill.

Among them, the company seeks the end of open entry by farmers to the co-operative and wants the right to decline all applications to supply. The proposed legislation change only enables Fonterra to decline membership to farmers not likely to comply with its terms of supply.

"We need greater control over where we invest our farmers' capital to ensure that we can return the greatest value to them," its submission said.

Fonterra chief executive Miles Hurrell. Photo / File

If the select committee does not accept that change, Fonterra wants to be able to decline supply applications in regions where its market share has dropped below 75 per cent such as in Canterbury.

Fonterra believed the Bill's proposal for the Government to nominate an appointee to the regulated milk price panel was unnecessary as the Commerce Commission provided adequate oversight of its work.

But the company called for greater transparency of how all dairy processors determined their milk price.

"All milk processors should be required to publish the average price they pay farmers, the key parameters of their milk price and examples showing the payout farmers would receive for different parameters."

Asia-Pacific food and beverage company Goodman Fielder, Fonterra's biggest competitor at the New Zealand supermarket chiller, told the select committee it believes DIRA's requirement for Fonterra to sell it up to 250m litres of milk a year at a regulated price should be lifted to 350 million litres.

Managing director Bernard Duignan said the requested increase reflected the big rise in New Zealand's population since 2001 when DIRA was enacted.

The DIRA obligation to supply Goodman Fielder with milk year round was made to ensure Fonterra had a strong competitor in the domestic retail products market.

Duignan questioned the DIRA Bill's provision for Goodman Fielder to have to pay a 10c/kg milksolids premium in addition to the farmgate cost of the milk it received from Fonterra.

Either Fonterra's New Zealand brands business also paid that premium for the milk its parent company supplied it, or there should be no premium charged at all, he said.

"While we recognise that the addition of the premium may better reflect the actual cost of supplying year-round milk to Goodman Fielder, the premium does not apply to Fonterra Brands or any other independent processor," the Goodman Fielder submission said.

If a premium must remain, it should also be applied to Fonterra Brands and all independent processor buying regulated milk.

In its submission Fonterra said it did not object to selling Goodman Fielder the extra 100 million litres requested. But it wanted the legislation amended to ensure the milk was used only in the domestic market.

Fonterra also wants a premium fee of 12c/kg milksolids rather than 10c, and wants it applied to all other processors buying its milk at a regulated price.