Agriculture Minister Damien O'Connor has warned Fonterra's owners not to expect the Government to sort their company's problems for them through any industry legislation changes that may be coming.

In a clear message that Fonterra's 10,000 or so farmer-shareholders are on their own if they want to change New Zealand's biggest company, O'Connor has reminded them that Parliamentary oversight of Fonterra's constitution is a thing of the past.

In an interview with the Herald about the progress of the Government's major review of DIRA, the 2001 legislation governing the fast-changing $14 billion New Zealand dairy industry, O'Connor said Fonterra shareholders "have to be aware that Parliamentary oversight is no longer a requirement of this review".

"They need to consider constitutional issues very carefully alongside any changes to DIRA."


When DIRA, the Dairy Industry Restructuring Act, was passed 17 years ago enabling the formation of Fonterra from an industry mega-merger, the select committee which heard the case for creating a near-monopoly national business champion required the committee's intentions to be reflected in Fonterra's constitution. DIRA also deregulated New Zealand's dairy export industry.

Fonterra's cooperative constitution had since been amended (by shareholders) and Parliament had no part in it now, O'Connor said.

Fonterra, which still has 81 per cent of New Zealand's raw milk market after starting in 2001 with 96 per cent, is under fire for its weak financial performance, heavy overseas investment losses, shareholder value destruction of more than $1.5bn, and its alleged failure to deliver a higher-earning, value-added product business which was a cornerstone promise of its creation. Back in 2001 its dairying leader architects projected its annual revenue would be $30bn in 10 years.

Last month Fonterra posted a historic annual loss of $196 million on revenue of $20bn.

O'Connor said he was closely monitoring Ministry for Primary Industries progress on the DIRA review. A discussion paper would be issued "in the next month or so".

MPI had consulted most industry stakeholders and the discussion paper would invite more detailed feedback, he said.

O'Connor reminded Fonterra's 10,000 or so farmer-shareholders that Parliamentary oversight of Fonterra's constitution is a thing of the past. Photo / Bloomberg
O'Connor reminded Fonterra's 10,000 or so farmer-shareholders that Parliamentary oversight of Fonterra's constitution is a thing of the past. Photo / Bloomberg

The main issues identified so far were Fonterra's legislative obligation to allow "open entry and open exit" for farmers, to supply milk at the regulated price to competitors and how the country's raw milk price was set, O'Connor said. (Fonterra sets the milk price.)

Fonterra has long-argued that "open entry" obliging it to take all milk offered to it has been unfair and a cost burden. It has declined to answer Herald questions about those costs.


Some industry observers predict the DIRA review will see the open entry requirement jettisoned.

O'Connor: "It would be very arrogant of anyone to make any assumptions about what might come from this review including open entry and exit."

"The summary is DIRA has done a reasonably good job and has allowed the dairy industry to grow. The question is whether Fonterra would have taken a different direction with different legislation? I think in summary there was nothing to confirm that," O'Connor said.

"I think many of the recent issues in relation to Fonterra and its performance don't connect directly to DIRA but are more related to the governance and management of the company itself."

O'Connor said some submissions to the DIRA review had suggested Fonterra be split up but "this is not a key focus for the DIRA review".

"That discussion is for Fonterra shareholders and the constitution of the company."


Asked if Fonterra still holding 81 per cent of the raw milk market after 17 years was a failure of the Labour-passed DIRA, O'Connor said growth of alternative dairy companies had been limited by their willingness to invest in core infrastructure.

"Given the fact that most (of these) companies have been pretty much filled up very quickly, it indicates there are issues in Fonterra that need to be addressed and there are cooperative shareholders that need to have faith in their own company."

O'Connor has been a Parliamentary voice for agribusiness for 25 years - on both sides of the House.

Asked if he had ever seen dairying's public image worse in all that time he said: "Fonterra and dairying are a significant industry in the economy and everyone should be proud, but the company and the industry have done a lot of silly things over the years and at times lost sight of the fact that they need to retain a social licence".

Those silly things included: "The changes to the (Fonterra's) constitution, the way they select their directors, the way they addressed issues in environmental management, the way they've engaged with other industries and the public hasn't at times been smart".

"And I guess the behaviour of a big player doesn't always go down well with the public."


Dairying's image problem "must" be fixed, O'Connor said.

"It will still be a cornerstone of the economy for a long, long time. We need people to understand it better but also the industry needs to understand the concerns of the wider public."