Dairy exporter Fonterra is New Zealand's biggest business. Photo / Michael Craig
The Government is taking an anti-investment and anti-competitive position in amending dairy industry legislation to support Fonterra's capital restructure, say rival dairy companies.
In a joint submission to a Ministry for Primary Industries consultation paper on the Government's proposed amendments to the Dairy Industry Restructuring Act (DIRA) to accommodate the restructure, Synlait Milk, Miraka and Westland companies say they "strongly object to the anti-investment and anti-competitive position the Government will take by proceeding with the amendment(s)".
The trio say independent processors have made substantial investment on the basis Fonterra's "disruptive power" was held in check by DIRA statutory provisions. These included "free exit" provisions making it easy for farmers to leave Fonterra. The Government in effect now intended to remove the substance of the remaining "free exit" provisions "at Fonterra's behest".
Their submission claims the Government DIRA amendment proposal "is intended to allow Fonterra to proceed with the restructure in its preferred manner and in a way which removes the risk of legal challenge".
"The Government does not appear to propose to compensate those parties that will lose the right of legal challenge and will (and already have) suffer economic loss from the proposed restructure."
They also take issue with MPI not formally seeking submissions on "the Cabinet decision to support Fonterra's capital restructure through DIRA amendments".
The trio's submission, and others, including a strongly critical take by the country's second-largest dairy processor Open Country, have yet to be published by MPI, which says it is analysing them. A submission by Federated Farmers broadly supports the Government's proposed response.
The Herald invited Fonterra chair Peter McBride to respond to recent wider criticism of the proposal and its alleged potential negative impacts. He declined, saying Fonterra would wait until the submissions were published to comment.
Fonterra, a farmer-owned co-operative, is New Zealand's biggest business and the world's sixth-largest dairy company by revenue.
It was created from an industry mega-merger in 2001 under the specially-written DIRA legislation, which allowed it to skirt Commerce Commission approval. This is why it needs Government approval for the restructure.
Today the company still collects around 80 per cent of all New Zealand raw milk. It also still sets the benchmark national price for raw milk, though argues it has independent monitors, including the Commerce Commission, looking over its shoulder as it does so.
With national milk production expected to fall, Fonterra says it needs the capital restructure to attract milk supply and remain viable.
Among other measures, the proposed restructure makes it cheaper for farmers to buy supply access to Fonterra and caps a listed fund which enables outside investors to buy non-voting, dividend-carrying units in Fonterra shares.
This Fonterra Shareholders Fund (FSF) exposed Fonterra to private capital market scrutiny, and provided some constraint to the company inflating the milk price, say industry critics. Fonterra farmers have voted 85 per cent in support of the restructure.
Since the restructure proposal was announced in May last year, Fonterra's share price has fallen by more than 39 per cent and its market capitalisation by nearly $4 billion. Last month the company announced a $50m on-market share buyback saying the shares were under-valued.
Synlait, Westland and Miraka say MPI has failed to consider independent processors in considering whether the proposed amendments would reduce confidence in New Zealand capital markets.
They say in concluding the risk was low, MPI had only focused on the likely impact on FSF investors.
The trio claims DIRA changes sought by Fonterra include unravelling protections put in place at its last capital restructure in 2012, and the Government is supporting that.
"This time by capping the FSF and removing the fungibility of Fonterra shares with units in the FSF, Fonterra will frustrate the 'free exit' protections in the DIRA. Fonterra members will no longer be able to exit Fonterra and receive fair market value for their shares.
"At Fonterra's behest, the Government is now taking actions which will have the effect of undermining and effectively removing the last remaining 'key regulatory tool for managing Fonterra's dominance risk' - ie the 'free exit' provision. This is being done without resort to a (DIRA) section 147 review of competition despite the magnitude of the changes and likely impact on competition."
Open Country Dairy in a lengthy submission says the restructure "will damage competition and innovation in the New Zealand dairy sector, harm productivity and leave Fonterra vulnerable".
It urges the Government to reject the restructure and not to proceed with the DIRA amendments.
"The Government committed in April 2022 to review DIRA more fundamentally, in response to the Productivity Commission's concerns about 2020 changes to DIRA. Not even one month later it is now considering even greater relief and favouritism for Fonterra."
Among other recommendations, Open Country calls for a new milk price-setting regime.
"The restructure presents a serious threat to competition and to maintaining a level playing field for milk processors. It is highly unusual for a regulatory tool that sets prices for a whole market, like the milk price manual (setting methodology), to be held by the dominant firm in that market.
"Especially, when the regulated price is paid to that firm's shareholders and is their primary source of income.
"This tool needs to be taken away from Fonterra. There are market indicators now available for all inputs into a base milk price calculation to ensure transparency. Discretionary input from Fonterra is no longer needed."
Open Country claimed the restructure gave Fonterra "a much stronger incentive and greater capability to inflate the base milk price ... A milk price-setting regime that is fully separate from Fonterra will provide a more robust and fair milk price".
"There is no longer any strong justification for Fonterra, the dominant processor in the market, to have the authority to set the benchmark price and determine the calculation methodology (manual) and decide on the inputs."
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