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Home / The Country

Fonterra tipped to score a win in the DIRA review

By Andrea Fox
Herald business writer·NZ Herald·
14 May, 2018 05:00 PM3 mins to read

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Fonterra wants rid of its statutory obligation to take all new milk. Photo / Grant Bradley

Fonterra wants rid of its statutory obligation to take all new milk. Photo / Grant Bradley

Just five years ago, a scenario where Fonterra got to choose its farmer-suppliers would have sent a chill up some spines.

The dairy heavyweight was reckoned to have too much market muscle already, without being free to pick and choose its farmers.

The legislated obligation for it to take all milk offered to it was seen as righteous, as it was given near-monopoly domestic market power by the state back in 2001.

The regulation was one of several imposed on Fonterra to rein in its domestic market clout and encourage processing and exporting competition.

But with that competition now emerging at pace and national milk growth flatlining,
Fonterra's ardent wish to jettison the 17-year-old obligation now looks a good bet to find officials' support in February.

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That's when Agriculture Minister Damien O'Connor wants ready a review of the Dairy Industry Restructuring Act (DIRA) and the state of the sector. It's the month those intending to supply Fonterra for the following year need to sign up by.

Fonterra says the obligation — called "open entry" by DIRA — distorts its capital investment options and has slowed the pace of its strategy to produce more value-added goods.

It's had to throw up hectares of costly new stainless steel for commodity production to handle a highly perishable product as production soared in recent years.

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It also claims its deep-pocketed, often internationally-backed competitors are getting an advantage.

The voices that have long dismissed this as self-serving nonsense are becoming fainter.

As Federated Farmers dairy chairman Chris Lewis says, private companies get to choose their suppliers so it's not fair that Fonterra can't — unless they're heinous farmers or environmental vandals. Lewis supplies Fonterra's biggest competitor, Open Country Dairy.

"Fonterra came in as a monopoly so it needed a few extra rules," said Lewis. "But it's time it was fair to everyone. Fonterra's going to have to compete for milk. They're already getting competitive.

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"Their staff have been here to ask me to come back to Fonterra."

Lewis and Federated farmers vice-president Andrew Hoggard, a Fonterra supplier, say the previous risk in Fonterra being allowed to duck the obligation was to isolated farmers whose milk is deemed uneconomic to pick up.

But a detente mid-last year between the federation and Fonterra proposed a staged removal of open entry requirements. In short, Fonterra agreed to keep the tanker coming to existing supply farms, even if that farm was sold, either within a family, or to a new farmer.

O'Connor himself has said the open-entry rule will get close attention in the review. But economist and dairy industry specialist Peter Fraser says Fonterra's desire to end open entry is "very dangerous in a world of static milk growth".

A former Ministry of Agriculture principal advisor on dairy industry issues, he says the rule needs to stay that "farmers choose Fonterra not Fonterra chooses farmers".

"The issue here is 'open re-entry' or if a farmer leaves they can come back, because if they can't come back they won't leave in the first place.

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"Also remember that farmers need to buy shares to match their supply growth, so additional milk volume provides its own processing capital.

"The argument about capital and value-add is rubbish.

"The reason they don't value-add is they don't have the money and the reasons for this is their capital structure is flawed and they don't retain sufficient earnings."
Fonterra in recent years has become a hybrid.

It is a farmer-owned co-operative with publicly-available, dividend-carrying, non-voting listed units.

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