Fonterra warning: Open Country, Miraka fear farmers locked in under new law

Fonterra's head office in Auckland. Photo / Michael Craig

New Zealand milk market giant Fonterra is about to get a legislative pass to throw its weight around even more, small dairy companies say.

Miraka and Open Country Dairy are concerned that amended dairy industry legislation is being rushed through that, in loosening the reins on Fonterra's market power, could lead to milk supply drying up for new dairy processors or those wanting to set up in regions currently only served by Fonterra.

Their chief executives fear that a surprise clause introduced in the Dairy Industry Amendment Bill (No. 3) after lobbying by Fonterra will allow it to deny farmers a previous basic legislative right - to buy back into the big co-operative after exiting for whatever reason.

Their concerns appear merited judging by Fonterra's rejection of a special request by Agriculture Minister Damien O'Connor even before the proposed legislation change gets to last base.

Herald inquiries reveal O'Connor, who backs the removal of Fonterra's obligations to accept supply from all farmers willing to buy shares, has asked Fonterra "to consider amending its constitution to reward the loyalty of its farmers when it comes time to sell their farms, by honouring its existing commitment to collect milk from these properties".

Fonterra has told the Herald the answer is no.

A statement attributed to outgoing chairman John Monaghan said changing its constitution would be a significant process, and unnecessary given Fonterra has recommitted to an agreement made with Federated Farmers in 2017.

That was: "Should the open entry provisions be removed from Dira (Dairy Industry Restructuring Act), Fonterra will continue to accept applications to supply from all farms that are, at the time of the application, supplying Fonterra on a share-backed basis, until the remainder of the pro-competition provisions in Dira fall away".

Fonterra is a farmer-owned co-operative that, 19 years after its formation from an industry merger enabled by special legislation (Dira 2001) and against Commerce Commission advice, still controls around 80 per cent of the country's raw milk supply.

Chief executive of Miraka Richard Wyeth at the company's processing plant north of Taupo. Photo / Alan Gibson

It's New Zealand's biggest company, a global exporter, and the world's fourth largest dairy company with about 9800 farmer-shareholders.

Fonterra has long-chafed against the compulsion to accept all milk, legislated in 2001 to rein in its market power - 96 per cent at the time - to ensure farmers in remote locations still got their milk picked up and could freely come and go from the company.

O'Connor has told the Herald he hopes to get the amendment legislation through Parliament before the election.

Miraka chief executive Richard Wyeth asks what's the rush? Particularly, he says, as the select committee which considered the Bill acknowledged the dairy sector had not had the chance to debate the introduced clause, which he calls "an attack on free re-entry".

Wyeth said the select committee recommended the clause be "further refined taking into account the sector rules", but made no recommendation how that might be done, and included it anyway.

"This is bad legislation," said Wyeth, who has a meeting booked with O'Connor later this month, which Open Country will also attend. Both companies say listed Synlait Milk will be there too, though the Herald could not immediately confirm this.

Wyeth said he understands Fonterra's resistance to having to collect milk from polluters or environmental or animal welfare recidivists.

But the new clause "completely puts aside and ignores Cabinet intentions and decisions in approving the Bill at first reading and contradicts advice from officials", he said.

Smaller dairy companies had strived for years to build their own farmer milk supply, a challenge with farmers nervous about leaving the security of Fonterra - despite the lure of not having to buy shares to supply the newcomers - because they feared the new venture would fail.

"To give Fonterra open slather on who can be allowed back provides the opportunity to lock farmers in," Wyeth said.

Open Country chief executive Steve Koekemoer said not all areas had competition yet and removal of Fonterra's open entry obligations would make it hard for a new company to get milk supply in a region like Northland, where Fonterra has a monopoly.

"Open exit and entry was one of the foundation cornerstones of Dira. It was a way to allow competition to enter so farmers could leave if they wanted and come back if that (new) business failed.

"The way this is being pushed through is not about new entrants, it seems more focused on re-entry by farmers who have left and want to come back. It seems to us a clear intention to build a wall with existing Fonterra farmers. It puts them on notice - 'if you leave we don't have to take you back'.

"I only see a downside for Fonterra farmers."

Fonterra had made entry and exit an emotional issue for its farmers without factual evidence.

"People think it's a loyalty thing - loyal farmers should stay. But that's no reason to change the legislation.

"Farmers are only going to leave if there's a better prospect. Just do your job right and you won't have a problem."

Fonterra is recovering from two disastrous financial years, which according to its watchdog farmer council, destroyed more than $4 billion of farmer wealth.

Damien O'Connor, the Minister of Agriculture. Photo / Supplied

O'Connor, a past critic of Fonterra's financial performance, told the Herald he agreed with the select committee's recommendation to remove the requirement on Fonterra to accept all applications from dairy farmers wanting to become shareholders and supply milk or re-enter after leaving.

"I gave much consideration to how the Bill should reflect the importance of opportunities for farmers to enter the dairy industry, which the committee drew attention to, as well as the importance of continued supply arrangements to the viability of Fonterra farms in the future.

"I intend to progress the Bill with changes that make these critical factors for Fonterra to consider in making decisions about applications."

The Bill provides for a review of Dira every 4-6 years.