Many now believe the market is mature enough, and competition robust enough, for open entry requirements to be amended, writes Federated Farmers Dairy Industry chairman Chris Lewis.

Of all the issues dairy farmers needed to consider under the review of the Dairy Industry Restructuring Act (DIRA), the key topic for most was the provision for 'open entry'.

In essence, this is the stipulation that dominant player Fonterra cannot refuse to pick up milk from any farmer, so long as that farmer meets Fonterra's standard terms of supply and is within the co-operative's current geographic footprint.

Submissions to the Ministry for Primary Industries on the DIRA review closed earlier this month.

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Federated Farmers supported amending the legislation to allow Fonterra to have discretion over accepting 'new' suppliers, with a couple of riders attached.

Read more from Federated Farmers here.

I'll explain why we took that view – but first, a bit of background.

The DIRA was passed in 2001 to enable formation of the farmer co-operative Fonterra, and to ensure that farmers had competition for their milk at the farm gate by allowing new milk processors to be formed, and to make sure that domestic consumers of milk, butter and cheese had choice at the local shop.

The DIRA is competition policy and if it were to be totally repealed, the dairy industry would be exposed to the broader and less certain competition provisions of the Commerce Act 1986.

Feds believes that, on the whole, the DIRA has worked well.

It enabled the formation of New Zealand's largest company, now owned by 10,000 farmers and their families, employing 22,000 people here and overseas.

Fonterra's annual revenue exceeds $20 billion; it exports to 140 countries, contributing 25 per cent of New Zealand's total goods exports.

Fonterra shareholders can, generally, choose to leave the co-operative and supply an independent processor (IP), or come back in as a supplier, on an annual basis.

Federated Farmers Dairy Industry Chairperson, Chris Lewis. Photo / Supplied
Federated Farmers Dairy Industry Chairperson, Chris Lewis. Photo / Supplied

This 'freedom' has encouraged Fonterra to offer different terms and conditions in areas where there is real competition, such as My Milk (Southland, and the South Island's east coast) and higher than average milk price payments to some suppliers.

Other DIRA provisions facilitate IP start-ups and guarantee supply of raw milk from Fonterra if they collect less than 30 million litres from their own suppliers.

And because farmers have the safety net of being able to return to Fonterra if an IP terminates a supply contact at the end of its term, the IP doesn't have the moral dilemma of worrying the farmer would be left with stranded assets.

With the open entry requirements, and the relative ease for dairy farmers to enter and exit supply to Fonterra, the co-operative had an incentive to perform well so that farmers would want to supply it, and would still try to keep the milk price within that 'Goldilocks' spot that meant it was not flooded with uneconomical milk.

Many farmers and commentators now believe the market is mature enough, and competition among a host of processing companies robust enough, for open entry requirements to be amended.

This attitude was backed by a clear majority of more than 300 members who responded late last year to a Federated Farmers survey on the topic.

After weighing the pros and cons, Federated Farmers has proposed that the DIRA be amended to allow Fonterra to have discretion over accepting suppliers, but guaranteed right to supply is protected for those Fonterra-supplying farm properties which change hands during sale/purchase and family succession, so long as supply from that farm to Fonterra is continuous, share-backed and the new supplier meets the normal terms and conditions of supply.

However, after a lead-in period, farmers that leave Fonterra will lose their legislated right to return to Fonterra in the future.

While we believe there is very little land left to be converted to dairying, we also say that Fonterra should be given the ability to refuse to accept milk supply from land which has been newly converted to dairying from a defined date (our suggestion is that date be from the season after the DIRA has been amended).

Because this could affect those farmers who have changed land-use away from dairying when they no longer want to milk cows themselves while hoping that someone in the family might want to milk cows later on, we also provided a definition.

Our idea of a new conversion is one where greater than 50 per cent of the land area is new to dairy and therefore, if accepted by the government, subject to Fonterra's discretion.

This definition would allow those 'new' farmers to clean up the lanes, re-commission the farm dairy, bring back the cows and welcome the Fonterra tankers back to the vat.

Feds also thinks that amending the open entry rules would also drive IPs to perform.

They would not attract suppliers to switch from Fonterra unless their offer was attractive, and they would no longer be able to terminate supply contracts at the end of their term in certain knowledge Fonterra would have to pick that farmer up.