Federated Farmers: Is dairy competitive enough

Fonterra chairman John Wilson at Fieldays in June. The Commerce Commission is reviewing the dairy sector to establish whether enough competition exists to support an unregulated industry.

Dairy farmers will know but, for those unaware, the Dairy Industry Restructuring Act (the DIRA) is the piece of competition legislation that allows Fonterra to set up shop.

The Commerce Commission is reviewing the dairy industry, as required by the DIRA, to see if there is enough competition to support an unregulated industry. In our recent submission on this, Federated Farmers put forward a model of the DIRA that could stand forever, protecting both the farmgate market (where farmers sell milk to processors) and the factory gate market, where processors buy and sell milk to each other.

While this will sound peculiar to dairy farmers, who look on the DIRA as a tool that threatens to fragment the industry, it's worth considering.

The DIRA currently allows Fonterra to exist and the rules are quite different from other business arrangements. It allows TAF (Trading Among Farmers), and if the DIRA were to be repealed, more onerous conditions could be placed on this scheme.

Of special interest to farmers, the DIRA:

* Contains open entry and exit provisions for farmers entering and exiting the co-op, which come into play if TAF ends.

* Makes Fonterra pick up all farmers' milk, no matter where the farm is.

* Allows Fonterra to refuse to pick up milk from farmers who do not meet certain conditions.

* Allows for no discrimination between farmer suppliers.

* Forces a transparent milk pricing model.

At the factory gate market the DIRA requires Fonterra to sellmilk to new processors, which has the potential to add competition at the farm gate.

It is also instrumental in free trade agreements as it reassures other countries that Fonterra cannot become a monopoly.

Federated Farmers suggests that a DIRA for all time would contain altered raw milk regulations by:

* Limiting the number of yearsindependent processors can buy this milk to three, for all processors regardless of whether they have some, all or no own-supply.

* Promoting farmgate competition in areas where there is none by denying access to regulated raw milk in areas where there is sufficient competition.

We also call for continued provision for TAF. The open entry and exit provisions for farmers would need altering too, allowing Fonterra to set the share price should TAF not remain.

Currently Fonterra is required to set it at the 'fair' value.

We'd also like to give Fonterra the ability, when considering new dairy conversions, to choose to either pick up or reject milk or place added costs on to those farmers.

Federated Farmers knows that New Zealand needs a strong player on the big stage in order to lead the dairy industry globally. The world looks to Fonterra to set standards and prices.

We also know that the dairy industry would be more resilient, have sufficient competition and still allow Fonterra to remain a leading player in the New Zealand dairy industry, by having legislation.

And I wouldn't have to revisit this every few years! The Federation's full submission can be found on our website and also the Commerce Commission's, where you can read all submissions received on the topic.