Union forecasts layoffs on under-used Fonterra sites if capital rejig blocked

Fonterra's processing site at Te Rapa. Hamilton. Photo / David Kerr

Several large Fonterra dairy processing sites are under-utilised, raising the risk of provincial job losses through plant closures, the Dairy Workers Union says.

In a submission to Parliament's primary production select committee supporting Fonterra's case for changes to dairy industry legislation to allow a capital restructure, the union said despite national milk production declining, it knew of several large Fonterra manufacturing assets being under-used.

It said independent processors were building new plants near these assets.

"The DWU is concerned that without the changes proposed by the bill (Dairy Industry Restructuring Act amendment), Fonterra runs the very real risk of under-utilisation of existing assets and the prospect of localised or regional job losses through partial or full plant closures," the submission said.

The select committee is now considering the Government bill.

Fonterra's submission was yet to be published by late last night, the only one which appeared to not be publicly available ahead of oral presentations starting today.

The union said it represented 8500 dairy industry workers, around 6000 of whom worked for Fonterra, which collected just under 80 per cent of the country's raw milk production, and is its biggest business.

Fonterra was created from an industry mega-merger 21 years ago under the Dairy Industry Restructuring Act (Dira). The act allowed it to circumvent Commerce Commission approval for the merger.

But Fonterra must get Parliament's green light when changes such as a new capital structure require tweaks to the Dira legislation.

There have been several amendments to Dira since 2001.

Fonterra required the latest amendments to introduce a capital restructure making it cheaper and easier for new and expanding dairy farmers to buy its supply shares.

The aim was to keep factories full in a milk supply market being squeezed by environmental restrictions, costs and regulations and changes in land use.

"The DWU submits that without these proposed Dira changes, existing well-paid and highly skilled Fonterra dairy processing jobs may well be lost from a provincial or regional area, only for a new dairy employer to become established only several kilometres away, offering substantially lower wages and reduced industry conditions to those offered to current workers," the union submission said.

"The DWU is also concerned that without the proposed changes ... we may well see the closure of many current Fonterra shifts/departments, or even entire worksites."

It said these Fonterra plants were often the major source of direct and indirect income for many provincial and rural communities.

Fonterra, a farmer-owned cooperative and the world's sixth biggest dairy company by revenue, had 30 manufacturing sites across the country.

It processed more than 16 billion litres of milk a year and exported 95 per cent of local production to 130 countries.

A submission by Federated Farmers was broadly supportive of the bill enabling Fonterra's proposed capital restructure, approved last year by its 8000 cooperative farmer-owners.

The farmer advocate said a survey of members on a previous submission to the Ministry for Primary Industries' discussion paper on the bill canvassed farmers supplying "the full range" of New Zealand processors and sharemilkers.

Increased competition forecast

The results indicated milk suppliers to processors of all commercial stripes were generally in favour of the bill's measures, believing it would increase competition between raw milk processors, and in turn benefit farmers with higher milk prices.

"This group also think that reducing the capital needed to supply Fonterra and easing the ability to move between processors will have similar effect - again increasing competition for milk supply," the submission said.

The survey also found disaffected farmers who held Fonterra shares but no longer supplied it, either due to retirement or because they now supplied other companies.

At the time the survey was conducted, Fonterra shares had approximately halved in value over a 15-month period.

"Shareholders who were expecting to sell shares have as a result lost considerable amounts of capital and often spoke of feeling 'betrayed' by Fonterra's actions," the submission said.

Since Fonterra announced capital restructure proposals last year, its cooperative share price had fallen 42 per cent, wiping $3 billion off its market capitalisation.

That was attributed to the restructure's intention to revert to a largely farmer-only trading market.

The proposal delinked the market for Fonterra farmer shares from the misnamed Fonterra Shareholders' Fund, set up under a 2012 capital restructure to offer outside investors units in farmer-owned shares.

The units were dividend-carrying but non-voting. Only supplying farmers could own Fonterra shares.

Critics of the restructuring proposal and Government support for Dira changes to enable it claim the fund, and current Dira regulations, provide for farmers to easily exit the big cooperative at a fair market price underpinned by the fund.

They have told the select committee the restructure significantly undermined the remaining "open exit" provisions of Dira.