Fonterra challenges milk price 'gaming' perceptions as it seeks capital restructure green light

Fonterra tells select committee it respects the national interest in the raw milk price. Photo / File

Dairy market dominator Fonterra says it objects to any inference it is "gaming" the country's milk pricing setting system in a defensive submission to the parliamentary select committee hearing its case for a capital restructure.

The farmer-owned cooperative, which collects around 78 per cent of New Zealand's raw milk production, needs changes to the Dairy Industry Restructuring Act 2001 (Dira) to proceed with its capital rejig.

Its submission to the primary production select committee today said many of the proposed Government amendments to the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill "seem to address perceptions around the transparency and independence of the milk price regime".

"We respect the national interest in our milk price, considering that in the last financial year, Fonterra's milk payments (to farmers) represented $13.7 billion delivered to the New Zealand economy.

"And, as you will hear from our competitors, Fonterra's milk price sets the benchmark for the industry. So all New Zealand dairy farmers, whether they supply Fonterra or not, benefit from the fair, transparent, and independently overseen price we pay for our farmers' milk.

"However for the record, we object to any inference the co-op or the individuals involved in the process are somehow gaming the system. In fact Fonterra has been advocating for greater transparency of milk prices across the industry in all of our Dira submissions.

"We continue to propose that Dira be amended to require all processors to publish prices paid for farmers' milk. Improved transparency of milk prices paid by other processors will address the current imbalance of information available to farmers and support contestability in milk supply.

"It's interesting our competitors are resisting that suggestion, while questioning the integrity of our milk price calculation - which already includes significant oversight from a majority independent (milk price) panel including a ministerial nominee and Commerce Commission oversight."

Fonterra said since 2012, the commission had raised just two concerns related to the inputs, assumptions and processes used to calculate the base milk price which Fonterra had not promptly addressed to the competition watchdog's satisfaction.

The submission said while Fonterra supported many elements of the bill, it had concerns about some of the Government's proposed measures, "including significant measures that were not consulted on prior to the introduction of the bill".

Fonterra is New Zealand's biggest business, collecting nearly 80 per cent of the country's raw milk. Photo / Michael Craig

It said the bill would amend Dira to remove legal risk associated with the company's proposal to cap the size of the stockmarket-listed Fonterra unit fund, as part of the capital restructure.

In addition to removing this risk, the bill had introduced additional measures to mitigate perceived risks from the capital restructure, the submission said.

Fonterra said the capital restructure, overwhelmingly approved in a vote by its 8000 shareholders last year, was "critical" to its future.

The capital restructure would help it maintain a sustainable milk supply in shrinking milk production, by making it easier for new and young farmers to join and for existing farmers to stay in the cooperative. Unlike most of its smaller competitors, Fonterra requires farmers to buy shares in order to be able to supply. The restructure will make this cheaper by reducing the minimum shareholding requirement.

"The new flexible shareholding capital structure will help to level the playing field with our foreign-backed competitors in an environment where we expect total New Zealand milk volumes to decline or be flat at best, due to environmental pressures new regulations and alternative land uses."

(The country's second biggest dairy processor Open Country is not foreign-backed. It is 100 per cent owned by Motueka's Talleys family.)

The submission said Fonterra leaders had spent the best part of two years consulting its farmers on the proposed change.

"One of the most meaningful pieces of feedback we received was concern for farmers that were planning on retiring from farming or leaving for a competitor and the impact that the restricted market discount on shares traded in a farmer-only market would have on their plans.

"In response we made a key change to the transition plan to allow these farmers up to 15 seasons initially and reducing to 10 seasons to sell their shares."

Fonterra said this move supported farmers' ability to freely exit the co-op during the transition period to a new capital structure and beyond.

The impact of the proposal to restrict farmer share trading and its alleged impact on their ability to freely exit the company is one of the most criticised parts of the restructure proposal - along with claims from competitors it enhances Fonterra's milk price setting strength. Fonterra's share price dived after the proposals were announced last year, wiping around $3 billion off its market capitalisation.

But Fonterra's submission said farmers had voted in the new regime by 85 per cent and had "collectively made that decision knowing there would be a significant impact on the value of our Fonterra shares".

Fonterra is challenging several Government measures in the bill, including new third party enforcement provisions allowing any person to bring a direct claim against the company for an injunction or damages for breach of the milk price oversight provisions.

"This is a significant expansion of current enforcement provisions and was not consulted on. These provisions significantly impact Fonterra. We believe it is important any new enforcement tools....do not undermine, contradict or confuse the commission's new directive powers (if our submission to remove the directive powers is not accepted) and that any enforcement tools can only be exercised by the commission, (not by third parties).

"We are deeply concerned that third-party rights of action could also allow other parties to gain access to extensive commercially sensitive information about Fonterra's business via discovery processes - that is inappropriate. We see significant scope for such powers to be mis-used by third parties."

Fonterra also challenges a new individual liability provision in the bill for any person involved in a contravention of the milk price oversight regime and submits this should be removed.

While it doesn't oppose the bill's intention to increase the number of ministerial nominees to the milk price panel to two, it believes the independence is currently assured.

It doesn't believe the Commerce Commission needs to be given powers of direction, arguing it duplicates proposed governance changes to the milk price setting regime and adds significant annual cost for no clear benefit.

The company is also concerned about a bill provision requiring it to publish information provided, or requested, as part of the commission's milk price review processes.

This wasn't consulted on, Fonterra says, and it is "highly concerned" the requirement could result in commercially sensitive Fonterra information being made publicly available and accessible by its national and international competitors.