Dairy Industry Restructuring (Raw Milk Pricing Methods) Bill

Hon SIMON POWER (Acting Leader of the House) Link to this

Following agreement in the Business Committee, I seek leave for all the provisions of the Dairy Industry Restructuring (Raw Milk Pricing Methods) Bill to be taken as one question.

Hon DAMIEN O’CONNOR (Labour) Link to this

I guess that this gives us the opportunity to go through the nitty-gritty detail of the legislation, which we have all agreed we support. Once again, I have to raise what I guess is the urgency of the situation. As the Acting Leader of the House probably knows, and as the Committee definitely knows, unless we get this legislation passed by midnight, the dairy industry will be in trouble. It is not quite sure how it will then supply milk, or what system it will use to supply milk—up to 600 million litres of milk. Actually, I do not think that too many people out there will understand how much 600 million litres of milk is. It is a hell of a lot of milk, and producers want to know what they are to do with it.

Hon DAMIEN O’CONNOR Link to this

No, I have no vested interest; I am not a shareholder in any way. I have brothers who are, and a father, but I am not in any way a contact. Westland also said, however, that if we are intent on continuing with this structure, then it will apply for milk, which seems a little bizarre, given that that company actually objects to the whole set-up, anyway. But it said that it was in its commercial interests—and it has an obligation to its shareholders to maximise returns—to ring up Fonterra and ask for tankers of milk to be supplied in Hokitika. Of course, it will pay for transport, but it is still worthwhile for it to do that, because being able to square one’s supply curve—that is, fill in the gaps and get consistent supply into one’s factories—is invaluable in any large processing structure.

There is a value in that that had not been assessed by Fonterra or those purchasing. I thank the Westland Cooperative Dairy Co. for its honesty, because it did help the select committee and, I guess, reinforced the view that we need to move towards an auction system where the market will identify the true value, and we will not be attempting, by regulation, to set a fair price on a commodity—milk—the price of which fluctuates on a regular basis in the international market place. In fact, it fluctuates quite a bit domestically on the basis of those international prices. So I hope that Westland does not have to continue to access milk from Fonterra, because it will be a transfer of wealth from Fonterra to Westland shareholders. Maybe that is quite a good thing, actually, but, anyway, I have to thank them for their submission.

There were a number of other submissions, one from Federated Farmers, which, I have to say, was fairly consistent. They still believe that the market will deliver everything without regulations. I think it is a little naive of them, but they do understand that there was a dilemma and their farmer shareholders were searching for and seeking a resolution to this. I have to tell them they are getting it a year later than they should have because of the National Government’s procrastination, and that is unfortunate. It is not because the select committee sat on its hands. We moved immediately. We heard submissions. We processed this as quickly as we could, and I think we have done a pretty good job with it.

I will refer to just one other submission, which was from Open Country Cheese, a large and growing company in this country. It has concerns. It has enjoyed the benefits of accessing milk. I think it is prepared to accept that an auction system will be the fairest way for it to move forward. But it has views too around the capital restructuring of Fonterra—the next step that we will see in this House—and how it thinks that it may lock farmers into Fonterra. That is not the intention of this House, and was not in 2001 when we passed the legislation. Farmers need to be able to come and go. Land use needs to be able to change, although in my humble opinion there is a loss of value to this country of continued land use change and a waste of capital. But I think we will look at that in hindsight—[Interruption] Of course, if that Minister, Steven Joyce, gets his way, Fonterra will be listed on the stock market, his friend Mark Weldon will be enjoying a slice of the action when the shares are bought and sold, and he will be patting himself on the back saying what a wonderful thing he has done for New Zealand agriculture. In the end, as the stock market has done before, time and time again, those shares will disappear offshore, but Mr Steven Joyce has no fears about that. It does not worry him who owns New Zealand, as long as there is someone around making a slice on the transactions as those shares come in and out. That is the warning that I have.

The detail that the select committee has worked through on this legislation has been done because the chair and the committee members are firmly of the view that we are doing this to improve the situation for the dairy industry, in the belief that it will remain in New Zealand hands. If we were—and I think we have checked and double-checked—making a mistake by bringing in an auction system that will better facilitate the capital restructuring and will allow shares to be traded on the stock market, then I would not vote for this piece of legislation. But I think that in the staged way that we are approaching this, this is a good piece of legislation.

The technical details in this bill—which I have not dwelt on too much, I have to say, even though this is the Committee stage—I think are all sound. We have amended, through clause 4, section 115, which deals with the issue of auctions and what may be required. The Minister of Agriculture will have the right to set a reserve. There are some concerns about that. The chief executive of the Ministry of Agriculture and Forestry—and I see some officials in the Chamber who I am sure will be listening carefully—is required to maintain the auction system. The chief executive is required to maintain a sound, fair, and honest auction system. That does not always occur when there are a couple of big players and some small players. That is why the concerns that some of the smaller players had have been addressed, and there will be a certain amount of milk available for smaller players—I think it is up to 40 million litres. So if one wants to start a little cheese factory then one will be able to bid at the auction and one will not have to compete with Open Country Cheese, Westland Dairy, as they might bid into it, Synlait, or the Russian-owned companies, as who knows what foreigners may come into this country, the Chinese, or anyone else. Opportunities for small, innovative, entrepreneurial New Zealanders have been protected with the set-up that we have and the changes we have made.

New section 119A has been inserted to allow regulations to be made under the Act. We need some protections to ensure that there is decent consultation. We have dealt with those technical issues as best we can in the bill. Maybe one of the Government members or the chair of the Primary Production Committee can get up and give us an assurance on that. I feel comfortable with it. We have to make sure that the regulations that this bill allows do apply and that we can have a fair and honest auction system. Thank you.

Dr ASHRAF CHOUDHARY (Labour) Link to this

I rise to highlight two points in particular. One is about what Fonterra wants out of this, and one is about the concerns expressed by other players in the dairy industry about how the Minister of Agriculture and the officials will handle those situations. Fonterra believes that the auction system must be limited to no more than 600 million litres of milk. That is its the bottom line. Also, it wants the reserve price to be at least 10c per kilogram of milksolids and to set the seasonal value of the milk. It wants that to be included in this arrangement. But some of the other players, the processors like Green Valley, and other industry players like Cadbury’s, for example, have concerns that the auction system will not be fair and equitable. Also, they wanted to ensure that there is consultation prior to the auction system being put in place. I think that is where the concern is. They believe that the new system, particularly the auction system, will not be fair and equitable to them, and they want to have consultation in setting up that system.

So I would appreciate it if the Minister, as a stand-in Minister, or the chair of the select committee, would take a call and perhaps give some assurance to the small players, the processors who are likely to buy this extra milk, that the auction system will be fair for them. As I understand it, there will be at least 300 auctions per week. So there will be a lot of auctions of milk, and if the milk is not auctioned it will be subtracted from the total milk available. So, clearly, we need to have a system in place that is fair, otherwise we will be back in this House asking for changes to be made. Small players in the industry have some concern about this issue. Clearly, there is a concern that Fonterra will not be fair to processors and will want to charge 10c for a kilogram of milksolids at a seasonal value. Some of them are suggesting that this is an unnecessary extra cost they have to pay. I would be very keen for Shane Ardern or the Minister in the chair to be able to give an assurance to processors that they will have a fair go, if you like, once this auction is put in place by 1 June of this year. We want to make sure that all players in the “white gold” industry in New Zealand, which is well regarded overseas, have equitable access to available milk, and that they feel they are part of the restructuring of the industry.

As my colleague Damien O’Connor has said, other bills are coming through regarding the capital restructuring of the industry. We must make sure that this bill, and particularly the auction system, is fair to all parties. At the moment we have an online auction of milk sold overseas, which I understand is working very well. In the local situation, we need to have an auction system that is fair to all players.

Hon Dr NICK SMITH (Acting Minister of Agriculture) Link to this

I will take only a brief call on the Dairy Industry Restructuring (Raw Milk Pricing Methods) Bill. I know that members will be nervous that I am the Acting Minister of Agriculture, particularly colleagues of mine like Shane Ardern who are far more knowledgable than me on such issues. There is a healthy tension between me and the Minister of Agriculture.

There are two points that I want to answer. Firstly, a very reasonable point has been made by Ashraf Choudhary on the auctioning system, the number of small players, and what reassurance they can be given that the auctioning system will be fair to those businesses. I reassure him that the law requires a process of consultation by the Ministry of Agriculture and Forestry. If the Minister of Agriculture wants to use the regulating powers that the bill provides, that process of consultation will provide some reassurance for those players that it will be fair.

Secondly, I will also make a brief comment about an amendment to clause 2 that has been tabled in my name. I confess that it is an area of the bill that I do understand properly, and that is the date of commencement—that is something I can cope with. The issue is that the Governor-General will not be available to sign this bill tomorrow. The commencement date currently in the bill reported back from the Primary Production Committee is 1 April. The amendment simply changes the date of commencement from 1 April to the date of Royal assent, which is likely to be the beginning of next week. It is a pragmatic little response. My big contribution to agricultural legislation will be getting the date of commencement right on the bill.

BRENDON BURNS (Labour—Christchurch Central) Link to this

I follow in sequence from the Minister in the chair, the Acting Minister of Agriculture, in acknowledging that I am no expert on the dairy industry, either. However, we are partners in crime in respect of the Dairy Industry Restructuring (Raw Milk Pricing Methods) Bill as we go through the Committee stage.

I will comment a little further on the current beneficiaries of the raw milk pricing system. A number of those are present in the market place, one of which is the Synlait dairy factory in Dunsandel. I understand that currently it has a shareholding owned by Mitsui of Japan, of 22.5 percent. I have talked about its plans to quintuple production, so obviously it will be seeking to expand greatly. The details of this bill will be important in terms of Fonterra being able to ensure that in the future its supply to that dairy plant in Dunsandel is done so on an equitable basis.

New Zealand Dairies will be a dairy company known to many members in relationship to the Studholme family, who started it, but its total shareholding now belongs to a Russian company called Nutritek. That plant is at Waimate, near the Waitaki River, and the growth in the dairy industry has fed into that plant.

Open Country Cheese is a Waikato-based dairy company. Amongst its shareholders is a former Deputy Prime Minister, one Wyatt Creech, who is known to the Minister in the chair at the moment. Olam International, a company from Singapore, is a major shareholder there.

We also have the Cadbury’s factory in Dunedin, a proud institution on the Dunedin landscape. Britain is the major shareholder, or, I think, wholly owns that Cadbury’s factory. There are two others. Tātua has already benefited from the raw milk supply from Fonterra, which is the subject of this bill, and I think there are predictions that Westland Cooperative Dairy will in the next season also become a recipient of milk from Fonterra.

One of the issues that the Primary Production Committee had to consider was the balance. It considered whether Fonterra was too dominant and whether it was getting the benefits it deserved from the current system, and I guess there was a sense that Fonterra is not the bully over the little guys in this respect. Those smaller players are growing in strength and size, and obviously we want a system that balances those interests. Some of those players can hardly be described as small. When we consider that Open Country Cheese collected about 850 million litres of milk last year, it is not exactly a small player.

In relation to the issues of the auction, and that option is provided for in future, the basis is that although the Fonterra farm-gate milk price reduces the underpricing associated with the current wholesale milk price—and the addition of a 10 percent premium provides an allowance for the seasonal pricing to smooth it out, if you like—the fact remains that the current regulated milk remains underpriced. The full value of the seasonal price has been calculated at around 15c per kilogram of milksolids, rather than at 10c per kilogram, and the 10c premium does not attempt to capture the benefits for the independent processors. They are able to limit the risk to their factories through having a diversified milk supply, and they have the enormous convenience provided by effectively being able to dial up a Fonterra tanker. That provides them with enormous financial strength, effectively at the expense of the balance sheet of Fonterra.

The reason to use the farm-gate price is that it ensures independent processors do not purchase raw milk from Fonterra under the regulations at a lower price than the average price that Fonterra pays its farmers for raw milk over the whole period of the season. Therefore, employing the farm-gate price to regulated milk establishes a price equivalent of about 4 percent of the raw milk that Fonterra has to divest under the current regulations, with Fonterra keeping the price of the remaining 96 percent. We have heard the figure from Shane Ardern that although it takes 96 percent of the milk, it provides from that only 84 percent of the exports, so that again really enshrines the nature of competition that Fonterra is facing. The price adjustment of 10c a kilogram of milksolids reflects the additional costs to Fonterra in providing what is called a square supply curve, which is one that goes right the way across a season. The additional price above the farm-gate milk price is required to ensure a fair and efficient price, because that farm-gate milk price reflects the average price paid by Fonterra for a farmer’s annual milk supply profile.

I reinforce the point that Fonterra is our largest and our only truly large-playing New Zealand private company. Its success is our success. When Fonterra’s milk price drops, the economy dips with it. When the milk fat price rises, the economy rises with it. Farmers gear up on that milk fat price—sometimes, one would have to acknowledge, in a rather profligate fashion.

We know that some of the banks at the moment are doing some restructuring in the dairy industry due to the expansion that a number of farmers engaged upon because they began to believe that prices nudging towards $8 a kilogram would be sustained. That is a foolhardy proposition. Anybody with any experience in the industry would know that prices can range from between $3 and $4 a kilogram, and the top end price of, I think, $7.80 a kilogram, which was achieved in the season before last.

Dairy farmers in the Fonterra structure are given a lot of confidence in the future of the industry. It has been around a long time under various guises. It has had enormous growth. Through this bill we want to ensure that the success of Fonterra, which has been a large part of the success of the New Zealand economy, continues. We want to see that those who have taken their positions in the market as a result of the dairy industry restructuring of nearly a decade ago are not given golden windows of opportunity and are not having windows shut. I am confident that this bill, as it was passed through the select committee process, will deliver the sort of balance that we want to see in the New Zealand dairy industry.