Fonterra says being compelled to accept all milk from new farms will be a "critical" part of the Government's review of legislation governing New Zealand's $18 billion dairy industry.

Agriculture Minister Damien O'Connor has announced terms of reference for the review of the Dairy Industry Restructuring Act (DIRA), introduced 17 years ago and little changed while the industry itself has altered significantly.

DIRA was passed in 2001 to deregulate the export dairy industry and regulate Fonterra, created that year from an industry merger which gave it 96 per cent of milk production at the time.

Today, with emerging processing competition, it collects 82 per cent, though figures due out next month are expected to show a decline.


Fonterra, a farmer-owned cooperative with listed units, has long pushed back against the DIRA requirement that it take all milk offered to it, which has resulted in the company having to spend hundreds of millions on new stainless steel processing capability as annual milk production climbed in recent years.

Fonterra argues this capital requirement erodes its strategy to move from processing commodities to value-add products, and is helping its internationally-backed competitors.

Fonterra said in a statement the review was "well overdue" though parts of DIRA, particularly the milk price regime, were still important.

The industry had become "highly competitive" particularly with the relatively large number of new entrants in the past five years.

"These international new entrants are often backed by deep capital and global businesses. They do not need an extra leg-up via milk from New Zealand farmers. Given this new competitive environment, the issue of open entry – which means having to accept all milk from new suppliers – is a critical part of the review," it said.

"Open entry limits our farmer-shareholders and the industry's ability to maximise value for New Zealand. It distorts investment decisions and leaves Fonterra's farmers underwriting risk for competitors who cherry-pick their suppliers."

Listed Synlait said it supported the Government's comprehensive scope of the DIRA review and was pleased it would look beyond the current regulatory framework to address some of the fundamental issues facing the industry's future.

"We will be providing input and look forward to contributing our unique perspective as a successful value-add nutrition company in the industry. Our hope is that any legislative changes will be focussed on supporting a sustainable and high-value industry in New Zealand," Synlait said.

Federated Farmers dairy chairman Chris Lewis said there were no surprises in the review terms but detail was scarce. The federation would comment when more work had been done by the reviewers, the Ministry for Primary Industries, supported by the ministries for business, innovation and employment, environment, Treasury and foreign affairs and trade.

Duncan Coull, chairman of the Fonterra Shareholders' Council, which represents the interests of farmers, urged O'Connor to consider farmer views and farmers to engage in the review.

In a paper to cabinet, O'Connor said the main purpose of the review was to consider the effectiveness of the DIRA regulatory regime and its impact on the industry across a range of matters, including incentives and/or disincentives it creates for the industry to move to higher value production and processing and more sustainable environmental practices on and off farm.

O'Connor said he expected the main concerns raised would be:
• DIRA's open entry and exit provisions and their impact on the industry's environmental outcomes and Fonterra's ability to invest in value-add processing
• DIRA's requirement for Fonterra to sell milk to its competitors and its impact on the future structure of the industry
• Fonterra's milk price-setting processes and their impact on land use and land values, and incentives for the processing sector to invest in innovation
• Fonterra's cooperative structure and its impact on Fonterra's ability to raise capital to invest in innovation and value-creation
• The changing dynamics in the wholesale supply of domestic consumer dairy products and their impact on the long-term interests of consumers

He wants the review finished by next February, the month farmers sign up to supply Fonterra for the next season.