New agriculture minister to review dairy laws on Fonterra

Minister of Agriculture and Trade Todd McClay. Photo / Andrew Warner

New Minister of Agriculture Todd McClay says he thinks the New Zealand dairy industry model is still the right one, nearly 23 years after the formation of dominant player Fonterra.

However, in response to Herald questions, he said a review he plans of the parts of dairy industry legislation specifically regulating Fonterra would provide the new Government with an opportunity “to further consider its overarching vision and objectives” for the sector.

McClay said the legislation, known as DIRA (Dairy Industry Restructuring Act), required him as minister to undertake periodic reviews of whether subparts 5 and 5A of part 2 of the legislation should be retained, repealed or amended.

“Basically, those are the parts of the DIRA that specifically regulate Fonterra. As part of this obligation I will be initiating a review later this year with a report presented to Parliament no later than 1 June 2027,” McClay said.

Subpart 5 of DIRA concerns regulation of dairy markets while subpart 5A covers the base milk price.

“When we undertake the review, it will be an opportunity to consider the future of the DIRA, including the effect of the most recent amendments, the state of competition in the dairy processing sector, as well as do a wider scan of factors affecting the sector,” McClay said.

The terms of the review would require Cabinet approval.

“Stakeholders will expect full and transparent consultation so it would be premature of me to comment too much further.”

New Zealand exports 95 per cent of its dairy production. Dairy exports earned $26 billion in 2023.

In 2001 the DIRA overrode the merger provisions of the Commerce Act 1986 to enable the merger of New Zealand’s two largest dairy co-operatives and the Dairy Board to form Fonterra, New Zealand’s biggest business. As well as containing Fonterra-specific regulation, the DIRA also deregulated the industry, providing for the emergence of processing competitors.

At the time Fonterra, a farmer-owned cooperative, collected 96 per cent of the country’s milk production. Today it has a raw milk market share of around 78 per cent, following the emergence of some smaller competitors.

Asked by the Herald for his view of the current competitive landscape for milk collection, processing and manufacturing, McClay noted the decline in Fonterra’s milk market share and that there were 10 “fairly sizeable” dairy processors operating, including Fonterra.

“Nine of the companies are export-focused and while Fonterra remains the largest dairy processor and the only one with a truly national network of milk collection and processing assets, the other dairy processors provide some competitive pressure on the fringes,” he said.

Fonterra is the world's sixth-biggest dairy company by revenue and New Zealand's biggest business.

New Zealand also had around 60 smaller, highly-specialised dairy companies supplying niche products to the domestic consumer market, he said.

Asked about his view on Fonterra still having around 78 per cent of the raw milk market after 23 years, McClay said as the incumbent processor, Fonterra was the only one with a national network and long-established relationships with farmers, who had the benefit of owning a large, well-established co-operative.

“The business models of processors that have entered the market subsequently have generally involved (a) much smaller and regional presence. I understand that most have a single processing site and associated infrastructure.

”When the DIRA was passed, the intent was to create the business environment in which new processors could enter and compete with Fonterra (and each other) on the merits of their own business and investment decisions and assessment of risk and opportunity.

“It did not presuppose a specific shape and market structure for the future dairy processing sector, nor did it seek to influence the type of business model, product mix, ownership, or scale of operations, either on the part of Fonterra or any other processor.”

A Fonterra spokesperson said the co-operative would “need to consider our approach” if the minister decided to call a review as part of the DIRA 2021 amendment requirement for a minister to require a report on subpart 5 and 5A every four to six years.

Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.