Fonterra's proposal for a capital restructure needs Parliament's tick. Photo / Michael Craig
Fonterra's proposal for a capital restructure needs Parliament's tick. Photo / Michael Craig
A Government bill amending dairy industry legislation to provide for a Fonterra capital restructure has been introduced to Parliament - and agriculture minister Damien O'Connor wants its journey into law to be quick.
"It's important the amendment bill proceeds quickly to give certainty to Fonterra, farmers and the wider dairysector," O'Connor said.
The first reading of the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment (Dira) Bill will be later this month. O'Connor expected it to be heard by the primary production select committee this year.
He may be keen for a speedy process, but as with any tweaks to the Dairy Industry Restructuring Act (Dira) - particularly those perceived to be loosening the reins on the dominant industry processor and exporter - the select committee is unlikely to be short of arguments to hear from other industry players.
A Castalia report commissioned by Fonterra's nearest competitor, Open Country Dairy, has already sharply criticised the capital restructure, concluding it will cause Fonterra's farmers a short-term loss of $4 billion, strengthen the company's market dominance and push up dairy prices at the supermarket chiller.
Other, small (in comparison to Fonterra) export processors are also likely to follow up at select committee on concerns they submitted to the Ministry for Primary Industries in an earlier consultation on the bill.
However O'Connor said the bill would provide "greater economic security for New Zealanders" by supporting Fonterra's capital rejig, which he believed would reduce long-term risks to New Zealand's $22.1 billion dairy sector.
The bill promotes several mitigation measures intended by O'Connor to allay industry concerns about the flow-on empowering effects of Fonterra's restructure proposal. The restructure was backed by its farmers in a vote last year.
With New Zealand milk production flatlining and expected to fall, the capital restructure aims to ensure Fonterra's factories remain full of milk by making it easier and cheaper for those wanting to join the co-operative to buy shares in order to be able to supply milk. Fonterra collects just under 80 per cent of the country's raw milk. When it was created under the special enabling Dira legislation 21 years ago, it controlled 96 per cent.
The new structure will replace Fonterra's Trading Among Farmers (Taf) capital structure, in place since 2012. According to an earlier Government discussion paper, the proposal marks a "substantial" shift away from existing Taf arrangements.
One aspect of Fonterra's proposal is to partially delink its listed unit fund permanently. This could have exposed Fonterra to legal action under Dira, so it wanted the legislation amended to remove that risk. The fund offers outside investors non-voting, dividend-carrying units in Fonterra shares. The independently-operated fund wanted Fonterra to buy back all the units but Fonterra rejected that idea in favour of capping the fund. The price of units and Fonterra farmer-only shares have fallen since the proposal was unveiled.
Damien O'Connor, Minister of Agriculture and Trade. Photo / File
O'Connor said the bill struck the right balance between supporting Fonterra's shareholder mandate while taking the opportunity to improve transparency in the dairy sector.
"Long-term sustainability, fair pricing in the domestic market and value creation in New Zealand's dairy industry, is part of the balance we are aiming for. The past two decades have seen new entrants bring competitive innovation to the industry and we want to see that continue."
O'Connor said the industry's continued success was vital to the country's ongoing economic recovery "and protecting New Zealanders from the sharp edges of a global economic downturn".
He said the bill's key risk mitigation measures would:
• Improve the transparency and robustness of Fonterra's base milk price-setting arrangements by increasing the number of ministerial nominees to Fonterra's Milk Price Panel from one to two.
• Require the chair of Fonterra's Milk Price Panel to be fully independent of Fonterra, and appointed only with the approval of the minister.
• Give the Commerce Commission the power to issue binding directions to Fonterra on matters arising from its reviews of Fonterra's Milk Price Manual and base milk price calculation.
• Support liquidity and transparency in the trade of Fonterra shares in its restricted farmer-only market by, for example, requiring Fonterra to engage a designated market maker(s) and make independent financial markets analysis of its performance accessible to farmers and unit holders.
• Support Fonterra's ability to access internal capital for investment in innovation, by requiring Fonterra to maintain and publish a dividend and retentions policy.
Fonterra was created from an industry mega-merger in 2001 on the promise it would be "a national champion".
It is the country's biggest business, and the world's sixth largest dairy company by revenue.
