The Government is serving the commercial priorities of Fonterra over other New Zealand dairy processors, enabling an already dominant force to strengthen its market hold, say four companies teamed up for a last-ditch fight against elements of Fonterra’s capital restructure they consider anti-competitive.
In a submission to Parliament's primary production select committee hearing the case for the country's biggest business to get a law change to enable its capital restructure, the Open Country Dairy, Miraka, Synlait Milk and Westland Milk Products companies said they'd combined to express a common concern the Government is not being neutral.
Fonterra, created from an industry mega-merger under special legislation 21 years ago, needs Parliament to pass amendments to the Dairy Industry Restructuring Act (DIRA) to action its proposed capital structure rejig.
Promoted in 2001 to be "a national champion", Fonterra is seeking to keep its factories full by making it easier for farmers to buy its shares and supply milk, as competition for milk tightens in a declining production market.
DIRA sets the ground rules for competition in the dairy processing sector, a cornerstone of the economy.
The joint submission said DIRA impacts not just Fonterra but other processors which handle 21 per cent of milk and employ thousands of workers in provincial New Zealand.
"Despite this, Fonterra's commercial priorities are the focus of the (DIRA) Amendment Bill," the submission said.
It strengthened Fonterra's competitive position when the big exporter was already dominant in the market.
"At the same time, while the bill makes substantial and important changes to the regulation of the base milk price, the bill leaves Fonterra in a central role, allowing it to influence the regulated price."
The companies said their common concern is "that the Government is serving the commercial priorities of Fonterra without properly balancing that with the commercial priorities of other dairy processors".
The submission said previous Fonterra-driven amendments to DIRA had eroded original provisions in a law designed to rein in the dominant market power of the farmer-owned cooperative.
At the time of the last amendment, in 2020, Fonterra's raw milk market share was around 80 per cent. The submission noted this had not materially changed.
It said in the original DIRA, the main provisions supporting contestability in the raw milk market ensured Fonterra farmers could freely enter and leave the company - called "open entry" and "open exit".
But in the 2020 amendment, the open entry provisions were repealed and now, the Government was amending DIRA to accommodate the restructure which "significantly undermines the remaining open exit provisions" of DIRA.
"This is because members (farmers) can no longer recover their full investment in Fonterra when they exit. This undermining....further strengthens Fonterra's already dominant position in the raw milk market."
Under the current capital structure, a farmer could exit Fonterra at a fair market price underpinned by the stock market-listed Fonterra Shareholders Fund, set up in the last capital restructure in 2012.
The submission said the new capital structure partially delinks the market for Fonterra shares from the fund.
It said this delinking has resulted in a substantial restricted market discount in Fonterra shares, with the share price falling steeply since Fonterra announced the restructure.
Fonterra "freely explained" the purpose of the restructure was to more easily capture and retain milk supply, which it referred to as "flexible shareholding", the submission said.
The Government had acknowledged it understood this was the purpose, but "once again the Government is shoring up the continuing dominant position of Fonterra without adequately balancing that against the rightful concerns of other parties which have invested in dairy processing and must compete with Fonterra in the raw milk market".
MPI's regulatory impact statement (RSI) had concluded that in the case of existing and potential future dairy processors, the risk was "high" that the option adopted by the Government in the bill would result in "increased barriers to expansion and reduced ability to compete for farmers' milk and/or pursue value-add investment strategies", the submission said.
"Furthermore the majority of economic evidence presented to MPI and considered in the RSI rejected the capital structure as anti-competitive. Independent expert economic evidence was received from Frontier Economics, TDB Advisory and Castalia."
The submission argued the Government was contradicting its own commitment in March to the Productivity Commission to assess the anti-innovation and productivity effects of Fonterra and the DIRA regime on the wider dairy sector.
At the same time as the amendment bill largely dismantled what was left of DIRA's open exit and entry provisions, Fonterra was introducing a 67 per cent reduction in minimum shareholding for supplier membership, the effect of which had been "supercharged" by the 42 per cent decline in its share price, the submission said.
This further tilted the field to favour Fonterra's already dominant position in influencing and setting the country's base milk price.
The four companies could not, and did not, object to the way Fonterra set its share standard, but the effect of the 67 per cent change on its already dominant position was "undeniable".
"The capital restructure should have been assessed against its impact on competition before the Government chose to actively support it.
"With the dismantling of the open entry and exit provisions, the regulation of the base milk price remains the only substantive DIRA provision supporting contestability in the raw milk market ... the calculation of the base milk price remains a Fonterra-centric process."
The submission however noted Government provisions in the bill which provided for increased transparency, oversight and some independent management of the processes that determined the base milk price.
It was "crucial" these amendments were not diluted.
The four independent companies said Fonterra had suggested they saw milk "as a cost to be minimised".
"This is not true. Sustainable dairy is an increasingly scarce and valuable resource. The submitters are committed to innovate and to add value to dairy processing so they can meet a competitive price for that scarce resource."
While strongly against elements of the bill, the four seem resigned to it proceeding. If it does, they are calling for the next DIRA review to be brought forward to June 2024 and be presented to Parliament no later than May 2025 instead of 2027, by which time “considerable damage” they say would have been done.
The NZX 50 rose by 0.15% to 12,480.05 as Fonterra performed strongly.