John Monaghan on the need to evolve New Zealand's dairy regulations.
With the New Zealand dairy industry providing more than 25 per cent of the country's exported products, the Government's review of the Dairy Industry Restructuring Act (DIRA) needs to have a strong global trade perspective to ensure the industry can continue to contribute to New Zealand well into the future.
Ninety-five per cent of Fonterra's products are exported, but the value comes back to New Zealand and our regional communities.
I saw a great example of how we do this recently in the incredibly pure version of lactose the team at our Kapuni site in Taranaki makes from our farmers' milk. We supply the lactose to a joint venture partner in Europe and it is used in over 750 billion pharmaceutical tablets that are sold each year — almost 100 tablets for every person in the world. At every step innovation is being applied and value is being added, and that value is returning to New Zealand.
Fonterra was formed because to stay ahead on the international market we need breakthroughs in dairy nutrition and we need scale.
It's difficult in New Zealand to achieve scale. The Government helped to achieve it by allowing the formation of Fonterra. It recognised the value it could bring New Zealand.
But it also recognised that certain safeguards were needed. And that's where DIRA came in.
In many respects DIRA still makes sense today. But, like a lot of things, it needs to change because today's world looks very different to when the legislation was passed 17 years ago.
The main purpose of DIRA was to promote competition and to give farmers and Kiwis choices. This has been achieved. Today New Zealand farmers can choose from roughly 10 independent processors (only five of which are New Zealand-owned). In the retail market, Kiwis have significantly more choice of dairy products in our supermarkets than in 2001.
Sustainable food production is now an everyday topic. People want to know their milk comes from farmers who care for the environment and their animals. This is also what drives me and my fellow farmers to get up early in the morning. Though there is still more for us to do on the sustainability front we're proud to support New Zealand by producing high-quality natural products. Like other farmers, I take real pride in making sure my farm and the environment in which it operates will be handed over to the next generation in better condition than when I took it over.
DIRA needs modernising if New Zealand wants to shore up the longer-term contribution of the dairy industry to the country and if we want to give New Zealand-owned dairy companies a fair go on the international stage.
From my discussions with fellow farmers and what I can see, we need to remove Open Entry, evolve Regulated Milk regulations and get clear on how we're going to transition to a deregulated market over time.
Here is why:
1. We need to create an even playing field
We've always welcomed competition. When DIRA was passed it aimed to encourage competition in the milk supply market. This was achieved with Open Entry — which means Fonterra must accept applications to supply milk from new farmers. There's a few very limited exceptions but, in reality, it's near impossible for us to say no. At the same time, new dairy companies can pick and choose which farmers they would like to sign up.
This has seen new companies enter the market and, knowing that if it didn't work out they could always return to Fonterra, farmers had the confidence to move their supply.
But with about 10 dairy companies now operating in New Zealand, competition for Fonterra is here to stay — and that's a good thing.
This means there's no longer a need for Open Entry. In fact, if it is left in place for too long it's going to wipe out the progress that's been made. Because once you have a few processors who've made inefficient investment decisions that only stack up with Open Entry, it has the potential to lead to significant excess manufacturing capacity in the industry. This creates a risk of a downward spiral of low-margin competition that will hold back moves up the value chain and ultimately result in business failures.
There's also obvious environmental and animal welfare challenges at play with Open Entry as Fonterra can't refuse a farmer joining the Co-op based on environmental or animal welfare issues. This just flies in the face of what drives Fonterra farmers.
2. We need to be backing New Zealand businesses (big and small) and not subsidising overseas companies
Another part of DIRA that has reached its "best-before-date" is the Raw Milk Regulations that require us to supply raw milk at a regulated price to other independent dairy companies. It provides a leg up to these processors until they can arrange their own milk supply.
In the New Zealand retail market this makes sense. It's stimulating competition and that has flow-on benefits to all Kiwis — especially as there's now more choice of dairy products in supermarkets.
Where there is an issue with the Raw Milk regulations, though, is when Fonterra farmers have to provide their milk, effectively at cost, to new processors who are typically backed by foreign capital and global businesses, and who export everything they produce. These companies receive our milk, with what some would call a subsidy, they process it and then use it to compete with Fonterra and other New Zealand-owned dairy businesses in export markets.
We all know New Zealand is a small country and we need to be backing our own here and on the international stage.
I've got no issue with providing my raw milk at a regulated price for businesses operating in the domestic market, but when I see my milk going to foreign-owned companies for them to use to compete against my co-op and other New Zealand owned companies, it doesn't sit well.
We need to be giving New Zealand-owned dairy companies a fair go — rather than New Zealand dairy farmers subsidising foreign-owned companies. We want to see as much value as possible captured from New Zealand milk for New Zealanders.
3. We need a clear pathway to deregulation
In any industry, regulatory certainty gives confidence — especially when it comes to investment. DIRA was always intended to ultimately set the dairy industry up to be deregulated.
Over the past 17 years the "sunset" provisions in DIRA have been changed — pushing deregulation further out. The goalposts keep being shifted on farmers and this is generating uncertainty as to whether the intentions of DIRA will be implemented.
In the long-term interests of New Zealand, our dairy industry needs a clear pathway to deregulation so it can prepare itself.
I welcome Damien O'Connor's review of DIRA and the opportunity it gives the Government to identify what the thresholds and triggers to deregulation would be and for the industry to work with the Government to make them happen — for the good of all dairy farmers and New Zealanders.
● John Monaghan is a farmer shareholder and director of Fonterra.