Hon Dr NICK SMITH (Acting Minister of Agriculture) Link to this
I move, That the Dairy Industry Restructuring (Raw Milk Pricing Methods) Bill be now read a third time. I do so as the Acting Minister of Agriculture on behalf of the Hon David Carter, who is currently hard at work for New Zealand’s interests in the all-important opening market of China. I want to acknowledge his work on this bill as well as the very cooperative, constructive way in which all members of the Primary Production Committee have helped to move this bill through the House.
The bill was tabled in the House in October 2009, it had its first reading on 28 October, after which it was referred to the Primary Production Committee. The select committee reported back the bill to the House on 22 February 2010.The bill has now had its second reading and passed through the Committee stage with only a very minor amendment in respect of the date of its coming into effect.
The dairy industry is an integral part of the New Zealand economy. The industry contributed $11.3 billion, or 27 percent of New Zealand’s total merchandise export value, in the year to March 2009, and the industry continues to grow. As a result of productivity improvements and the expansion of dairy farming over the past few seasons, New Zealand’s milk production is growing at around 3 percent per annum, and there is great potential for further growth over the next 10 to 15 years. On the back of that strong milk growth, we have seen increased investment in the industry through the entry and expansion of dairy processing companies and specialised food processors over the past few seasons. The increasing diversity of business models that have entered the dairy industry provides choice both to New Zealand farmers as well as to domestic and international customers and consumers wanting high-quality New Zealand dairy products.
The Dairy Industry Restructuring Act has provided the regulatory framework in which new companies are able to enter the dairy processing industry and test the efficiency and the profitability of the different business models. The purpose of the pro-competitive measures contained in the Act was to promote the efficient operation of New Zealand dairy markets, to ensure that New Zealand markets for dairy goods and services were contestable. The contestability of milk supply provided incentives for all dairy companies to seek innovative opportunities to drive cost efficiencies, thereby improving the value of New Zealand milk and the returns to New Zealand farmers and the wider New Zealand economy.
Upon the passing of this bill, some of the inefficiencies in the current pricing system can be removed so that the dairy processors will be provided with the right economic incentives to source milk directly from farmers, where practical, rather than under the regulations. By promoting contestability in the market for farmers’ milk, this bill builds on the purpose of the Dairy Industry Restructuring Act to promote the efficient operation of dairy markets in New Zealand. This bill allows for raw milk supplied to independent processors by Fonterra under the Raw Milk Regulations to be allocated through an auction system or through any other method. The bill improves upon the Act by providing for more flexibility in the pricing and allocation of regulated raw milk, both now and in the future. As the industry continues to evolve, the Government needs to have the tools to be able to modernise the regulatory framework in which the industry operates. This bill provides a more modern and flexible regulatory framework for pricing and allocating regulated raw milk.
I want to pass on the Government’s thanks to the officials and to the industry, which has constructively engaged in helping us get to the point of being ready to pass this bill. The bill builds on the objectives of the Dairy Industry Restructuring Act to promote a contestable market for farmers’ milk and ensure that the dairy markets in New Zealand operate efficiently. Yes, it is an important issue for dairy farmers, but, actually, the importance of the dairy industry makes this an important bill for all New Zealanders. I commend this bill to the House.
Hon DAMIEN O’CONNOR (Labour) Link to this
This is a very good bill, if only for the reason that I am sure the Minister for the Environment is a lot wiser about the dairy industry now than he probably was earlier this evening. That is progress.
Hon Rodney HideHon DAMIEN O’CONNOR Link to this
There is someone who certainly needs some education in every area of his portfolio. Perhaps he can learn a bit about Auckland; I am sure he will shortly.
Labour supports the bill. The purpose of the bill, as was stated by the Minister, is to replace the current regulated pricing formula for a formula that is fairer to the parties—to Fonterra, to suppliers, to shareholders, and to independent processors. It sets up ultimately, we think, an auction system. There are possibilities of other systems, but the auction system is one that has been investigated. It has been identified as being the fairest to the parties. Minister Smith’s amendment identified, once again, the fact that this Government has let this bill languish. It has procrastinated, it has not realised the importance of the bill, and this bill is late going through the House. I suggest it is going through a year later than it should have been, but even now it is too late for the Governor-General to sign off, so we had an amendment at the last minute saying that the bill will come into force on the day after the date on which it receives the Royal assent, instead of 1 April. This is just an example of the mismanagement that occurs from time to time. None the less, the Opposition is happy to facilitate the passage of this bill and to agree to it.
We did look at these issues very, very carefully. As Minister Smith said, we are dealing with the most important industry in the country. It is a primary industry that has thrived and grown, in spite of critics out there saying that it should do better, it could do better, and we have to restructure and change the whole thing. I say to the House, to members opposite, to Ministers—in particular, Mr Steven Joyce, who is an enthusiastic seller of State assets in New Zealand—and to anyone who wants to come along, that that is why the Minister assisted with the changing of the Overseas Investment Office rules. We will see whether he stays around long enough for the sale of many, many things, but hopefully not Fonterra.
Farmers should be concerned that although we are improving their returns and rebalancing the system of auction for 5 percent of their milk, the 95 percent that we are not addressing tonight in this House has to be carefully managed. The returns and the value from that milk have to come back to New Zealand farmers, because they are the people who produce 25 percent of the export revenue for this country.
Colin KingHon DAMIEN O’CONNOR Link to this
It is 27 percent—there it is; it has gone up. It must have gone up in the last few days but, anyway, 27 percent is a huge chunk of wealth creation in this country. It is not the investors, it is the farmers who have made the investment in the land, in their stock, in their machines, in their knowledge, and in their commitment as individuals—it is a hard life often—whom we have to ensure we look after, because they have driven this economy right through the 1900s and will drive it in the 21st century as well, if we get it right.
The passage of this bill deals with 5 percent of the milk industry. It allows opportunities for independent processes for companies like Cadbury’s and for the cheese producers, but it also continues to supply opportunities for growing and larger companies like Synlait, like Open Country Cheese, and like Westland Cooperative Dairy. The bill provides opportunities for those companies to access milk, and that is a privilege in any commercial arrangement. In the interim, they pay 10c above market value for raw milk, but ultimately it will go to auction, we think, on the basis that it will offer a fairer deal for all players.
As I have said, we have to get this right. I have some concerns about what will happen next. We will pass this bill, and then there will be another one before the House. We will have people advocating for recapitalisation, the capital restructure of Fonterra, and questions must be asked whether that will assist with the progress that we have made here or whether, in fact, it will detract from the wealth that can be created and retained by New Zealanders. I say, as the Irish farmers say, and as Desiree Reid has discovered, that Fonterra is the jewel in our crown. It is owned by farmers, and the Irish dairy industry is desperately trying to recreate that position.
There will be people in this House and people who have gone and looked at Kerry Group plc, which was once a cooperative owned by farmers, and said what a wonderful measure of success it is for the dairy industry. Well, I have to say that the Irish dairy industry found very quickly that it has left farmers in a desperate situation. They are receiving the lowest payout of any dairy company, and the same could happen in this country. The dairy industry would be ruined if we allowed farmers to be just the takers of the raw milk price, rather than the owners, the shareholders, and, ultimately, the beneficiaries of a totally vertically integrated dairy system. That is the reason why we have a successful dairy industry that is able to produce 27 percent, we are told, of our export earnings. That is based on smart, carefully assessed legislation.
This has been the discipline that has driven success in the dairy industry. It has been good legislation. I trust we are passing good legislation now. We worked through it, under the wise guidance of the chairman of the Primary Production Committee, Shane Ardern, who should be the Minister. I have concerns about his ministerial colleagues and what they will bring to the select committee, if they are brave enough, of course. They might try to divert it to another select committee, but I know that Shane Ardern will fight tooth and nail to ensure that any dairy legislation, in particular any legislation relating to possible capital restructure, will come to the wise—
Hon DAMIEN O’CONNOR Link to this
—all-powerful, and astute Primary Production Committee. If it does not, there is a danger that people, for their own reasons, will want to see capital restructure.
The question I ask, as I did in my second reading speech, is whether John Key is one of those people. Is he still a shareholder and a major investor in the Dairy Investment Fund? This is a private equity investor focused on deregulating the dairy sector so it can invest in this profitable sector. The question I ask, which I know Mr Ardern will ask and will want the answer to, is whether John Key is still a major investor in that fund; if so, will he declare an interest with the passage of this dairy legislation and any other possible dairy legislation that will be considered by this House?
I know we have members, such as Shane Ardern, who are farmers. He has declared an interest up front as a shareholder. But it is the subtle investments through back-door deals, such as the Chinese wanting to come into our dairy industry with $1.5 billion. We have had Russian interests and we had Singaporean interests through Synlait. We have a number of overseas interests in the dairy industry and they are growing, in both their influence and their power. The question is: if Fonterra goes through a capital restructure and if, as many want to see, its shares are put on the stock market, will John Key still be an investor in the Dairy Investment Fund, which will be out there trying to lap up and buy up shares in Fonterra?
Ultimately, the loss of control by farmers will be the demise of the dairy industry. They will end up taking a price for raw milk that will see them just survive, and nothing else. That is the experience internationally, and that is the experience of the Irish. I suggest to anyone who thinks otherwise to read the wise words of Desiree Reid, who has been travelling over there.
Labour supports the passage of this legislation. It addresses issues around 5 percent of the milk supply in this country, and issues around the other 95 percent have to be carefully considered. I trust that we can end up with the same good outcomes.
SHANE ARDERN (National—Taranaki - King Country) Link to this
I rise once again in support of the third reading of the Dairy Industry Restructuring (Raw Milk Pricing Methods) Bill. I thank the members of the Primary Production Committee very much for their fulsome support of myself. But I ask them to please lay off, because I do not think that it is in the best interests of my political career going forward to be so forcefully and roundly supported by the Labour Opposition. But I thank them none the less; they worked very hard in the select committee, where sometimes we had difficult characters before us. We managed to get the bill reported back to the House on time with some reasonable recommendations for the Minister, which have been accepted.
I will recap what the dairy industry in New Zealand in respect of this debate is about. As the Acting Minister of Agriculture said—and I was surprised to hear this myself when he commented; I hope it is correct—the dairy industry now provides 27 percent of our export earnings. It was 25 percent the last time I looked, but it is now 27 percent. I am sure that figure is correct, because the officials would have given it to the Minister.
Fonterra is made up of approximately 10,500 shareholder farmers. They are hard-working mum and dad New Zealanders. They are the hard-working individuals who own the industry through the shares that they hold and the land that they purchased. They risk their capital, and it can be a substantial risk. I know some cases of directors who were about to press the start button on the new factories they had built. Had those plants not operated up to the specification range that they were supposed to operate up to, they would have lost their farms. I am talking particularly about the Waharoa site, now the Fonterra site in Hāwera, South Taranaki. It is a 20-tonne-an-hour powder plant that is world leading—the first in the world. That was how it worked. That was the risk they took, that was the capital they invested, and those were the decisions they made. I have never seen another industry in New Zealand with that type of backbone in terms of that integrated structure—from the producer right through to the market—and investing that type of capital.
As I said earlier, and most people were surprised to hear this, Fonterra now represents 84 percent of all milk exported from New Zealand. Let us understand the difference between export and domestic. We seem to be able to understand that the All Blacks playing against the Springboks is different from when Taranaki plays Waikato. But when it comes to trading internationally, for some reason we cannot understand it. There is a mental block about the domestic market and the international market. Fonterra exports 84 percent of all the milk processed in New Zealand. Fonterra exports 84 percent, not 90 percent, not 100 percent, and not all these other figures that are put about. Fonterra, with 10,500 shareholders, exports 84 percent of all milk that is processed in New Zealand. Fonterra represents a substantial part of the economy in New Zealand. This bill allows up to 600 million litres of Fonterra’s milk to be made available domestically to competitors of that company—that is what it does. The purpose of the bill is to set a fair pricing mechanism. Some legitimate concerns were raised by speakers from the other side about how fair that pricing mechanism is. It is the Fonterra farm-gate price, plus 10c per kilogram of milksolids to recognise the seasonal production curve.
The Prime Minister has just recently opened in Edendale, Southland what is now the biggest powder plant in the world. I think it now processes 27 tonnes an hour. I understand that the specification range of that plant is somewhere between the commodity bottom-end powder, which is skim-milk powder, at about $1,500 to $2,000 a tonne, right up to the very high-end specification, which sometimes can be in excess of about $7,000 per tonne. I stand to be corrected on those figures, but that is what I understand to be the case. The plant will be efficient—and on paper it is the most efficient in the world—only if we can get milk into that plant for a long enough period. The legislation that we are passing tonight allows competitors of that plant, like Kraft General Foods, which is the total shareholder of the former Cadbury’s plant in Dunedin, to be able to collect milk directly from under that new powder plant in Edendale, deliver it to Dunedin, and get that milk at Fonterra farm-gate prices in a Fonterra tanker, plus 10c a kilogram.
The debate is whether that process is fair and equitable, and that debate will continue. There will be another round of discussions, and there is a consultation paper out there. The small processors at the other end of the scale argue that of course they should have access to milk, and if they are innovative and if they are developing markets in New Zealand or internationally that will bring a higher return to New Zealand from that process, then, yes, of course they should. That is the balance we have tried to strike. I acknowledge the members of the Primary Production Committee for the work they did, and I thank them for their support. I commend this bill to the House.
BRENDON BURNS (Labour—Christchurch Central) Link to this
This bill, the Dairy Industry Restructuring (Raw Milk Pricing Methods) Bill, is a natural evolution. It follows on from the Dairy Industry Restructuring Act passed by the previous Labour Government. As the previous speaker, Shane Ardern, indicated in some detail, the bill addresses some of the problems in the domestic market supply, which came through in the industry review initiated by the Labour Government. The bill will, in essence, mean that Fonterra’s farmers will get a fair price for the raw milk that they deliver.
One of the points we want to make is that this bill should have been passed some time ago by this House, because it will help to improve the performance of an industry that is the most important industry to this country in many, many ways. The dairy industry provides 27 percent of export receipts, so for every dollar we spend as a nation, 27c comes from the dairy industry. Therefore, this bill should have had priority status attached to it. When we consider that this House has debated bills to cut the seats on polytechnic councils, for instance, instead of considering this dairy industry restructuring bill, we have to ask where the Government’s priorities were. This bill was on the back-burner, and other lesser bills were given front-status treatment.
This is a refinement bill: an ongoing refinement of the dairy industry regulations and legislation that Labour introduced and continues to support. It is only one of the larger issues that the Government will face, in terms of the dairy industry. At some point the Government will have to bite the bullet and make decisions about the capital restructuring of Fonterra. Last year we saw that the Prime Minister and his good mate, the chief executive officer of NZX, looked at proposals for quite considerable change in the dairy industry capital structure. They were defeated by the dairy industry stakeholders themselves, and that was a welcome move. But that issue will come back, and I think that sooner or later the Government has to give some signals as to what its position will be. It has to think very, very carefully about those issues.
Fonterra is our only multinational company. It is 100 percent owned by farmer shareholders, and is our biggest player in international markets. I think I have heard figures tonight about the amount of the international dairy industry trade. I think 40-plus percent was the figure, coming from this one company with its 10,500 shareholders across New Zealand. Fonterra does a fantastic job. It is indeed our prized jewel. We need to make sure we protect it, not expose it to the vagaries and fluctuations of international capital markets. Fonterra needs to remain in New Zealand hands, in New Zealand ownership, and deliver back to New Zealand every dollar that it gets.
Whatever benefits foreign investment brings, it brings other consequences. Every dollar that has to be repatriated to foreign shareholders is another dollar we have to find, as a nation, in terms of our balance of payments. Every dollar that we repatriate is another push on our New Zealand dollar, keeping it high. Every dollar that we repatriate to foreign shareholders represents another pressure on our interest rates. All of those things end up costing New Zealand—
The member says “What rubbish!”. This is absolutely fundamental. Every dollar that we send overseas we have to find somewhere else, and the member is telling me that that does not impact on our balance of payments. Is he telling me that that does not impact on the level of the New Zealand dollar? Is he telling me that it does not impact on New Zealand interest rates?
I find that extraordinary—no, I do not actually, coming from the leader of the ACT Party. He believes that the market delivers everything. He does not believe in Fonterra. He thinks the market does better.
That is right. That is why he got 2 or 3 percent of the vote.
We need to make sure that Fonterra gets some measure of protection, and I think this bill does that.
Mr DEPUTY SPEAKERThe point about this bill is that it gives a measure of protection to the Fonterra shareholders. There are 10,500 hard-working New Zealanders who every day go out and deliver for New Zealand.
There are some people in this House who believe that the market can do better. They are the kinds of people who have taken the axe to the apple industry. We are seeing that industry doing so terribly well! They would now like to see that expand to the kiwifruit industry, because they can do so much better! That is despite the way that Fonterra has shown that the shareholding structure that it has, the cooperative nature that it has, actually delivers real returns for New Zealand. Twenty-seven percent of our export receipts are delivered by that one company. That is a pretty impressive figure. But it is “socialism at work”, and some people ideologically think that is anathema. They think the market can always do better, even if the evidence strongly shows that that is not the case. I think the debate will happen, and we will see people like Mr Hide take a role in it. He has had success today with the bill to gut Environment Canterbury. I hope he does not get his hands on Fonterra, because that would be to the detriment of every New Zealander, not just the 10,500 people in the industry. When we get 27 percent of our export receipts from one company, what a bunch of fools we would be to allow market ideology to take control of that.
That would be one way of describing it.
What we would see from a public float of Fonterra’s shares is ownership going outside of New Zealand, outside of the hands of New Zealand farmers. That could lead to Fonterra falling into the hands of foreign investors. If it is going to be described as some kind of myth, I tell members to look at the developments of last week, when a Chinese company with a cheque book of around $1.5 billion indicated that it wanted to spend up large in the New Zealand dairy industry. It has seen the gains that this industry has delivered for New Zealand. It would like to take out a share of that. That is the way the world works, but most nations of the world would say that is a short-sighted approach, and that it will not protect New Zealand jobs, it will not protect New Zealand investments, and it will not protect our returns but will simply open the floodgates to a whole repatriation of money that should be staying in New Zealand.
The door has opened somewhat. The Minister of Finance, in one of his first acts last year as the new Minister, ordered a review of the overseas investment legislation. The Overseas Investment Office’s ability to operate in the interests of protecting New Zealand’s sensitive land and resources was streamlined for reasons of speed and efficiency. We are now more open to further buying up of New Zealand’s land, and the Overseas Investment Office, which is our only protection against that, does not have the tools necessary to make sure that it does a proper job to try to protect New Zealand interests.
We have seen some people take a very strong position on issues like the sale of Auckland International Airport. Some of us happen to believe that there are things that are worth holding in New Zealand hands—like strategic assets. I have to say I list the New Zealand dairy industry as one of those. It would be foolhardy to do otherwise. Already that sort of investment is strongly under way. We have a wholly owned Russian company in Waimate. We have a company with a 22.5 percent Japanese stake in Synlait in the Dunsandel area of Canterbury, and we will see more attempts, I am sure, to buy more of our dairy industry. I say let us keep Fonterra in New Zealand hands.
We want to get it right as a nation in terms of fundamental industries like Fonterra, and we have to get it right in terms of fundamental issues like water. Fonterra, I acknowledge, has been one of the architects of the Dairying and Clean Streams Accord. It is not delivering as it might and should, but I applaud what I hear from the Fonterra leadership. They want to work to get the balance right, and I have to say that Fonterra’s farmers are probably doing better than some.
We are already under some assault in terms of our “100% Pure New Zealand” image. The Economist was the most recent international critic of that branding. We have to get it right. When we see potential for big, new, rapid growth in my region of Canterbury, we have to say that that is short-sighted. If we do not get the balance right, we will be at risk, because the international market place is watching and judging us already. Although that might be unfair because other nations probably have worse water quality than us, other nations have not branded themselves as “100% Pure”, as this nation has. It is not a bad brand to have, but living up to it is now incumbent upon us as a nation.
Similarly, issues of animal welfare are important in the international market place, and our reputation will be judged on that issue as well. We have a bill on animal welfare issues before the select committee at the moment. It is mostly focused, I think, on domestic animals, but obviously it is also focused on many millions of stock animals. Animal welfare has to be delivered to stock animals as well as to pets.
This bill is a start. It is giving the right signals in terms of the new milk-pricing regime. I support it and commend it to the House.
JOHN BOSCAWEN (ACT) Link to this
It is a privilege to rise and take a call on the Dairy Industry Restructuring (Raw Milk Pricing Methods) Bill, and I do so at 6 minutes to midnight. I wonder how many people are listening to this debate, and how many New Zealanders are following a debate on the pricing of raw milk at 6 minutes to midnight. So it would be very easy to give up the opportunity to take this call and to shorten this debate.
The reason that I am taking this call is that, as we have heard this evening, the dairy industry is a very, very important part of New Zealand’s economy. We earn a huge amount of foreign currency from the dairy industry—some 27 percent. The Acting Minister of Agriculture, the Hon Dr Nick Smith, led off this debate. He explained that the dairy industry accounts for some 27 percent of New Zealand’s exports and that this bill would allow some several hundred million litres of milk to be opened up to other processors to produce. He talked about opening up contestable markets and how that would allow other people to come into the industry to purchase milk. They would pay a 10c-per-litre premium to secure supply.
I then listened with interest as Mr Damien O’Connor talked about the great work that Shane Ardern had done. Mr O’Connor said he knew that Shane Ardern would fight tooth and nail to protect farmers’ interests. So although this is a third reading debate it has generated into a more general discussion on the dairy industry.
The previous speaker, Brendon Burns, took the opportunity to raise issues not just to do with the pricing of milk but to do with other concerns that confront the dairy industry. For example, Mr Burns talked about the capital restructure of the dairy industry, the potential restructure of Fonterra, and the need to raise new capital. He talked about the potential foreign investments in the dairy industry, and he referred to the recent Chinese proposal to invest in farms. He went on to talk about animal welfare.
I would like to talk about another aspect of the dairy industry, and that is the price of inputs. I would like to bring the debate back to the concept that people who want to purchase milk, other than Fonterra, will have the opportunity to do so at a premium charge of 10c a litre. That figure of 10c a litre is quite interesting, because from 1 July this year the emissions trading scheme comes into place and that is forecast to add 7c a litre to the cost of processing milk. Just as other companies that want to compete in this market will pay a premium, so too will dairy farmers in New Zealand pay a premium for their electricity.
I found it very interesting that the Prime Minister, John Key, would go along to a meeting of the Federated Farmers executive last November to try to assure farmers that they need not be concerned about the surcharges they will pay for their electricity under the emissions trading scheme tax. He told those farmers not to worry, as their dairy stock would not come into the emissions trading scheme until 2015. He said there would be a 5-year period before Mr Shane Ardern would have to fight tooth and nail to protect their interests.
What Mr Key did not tell the Federated Farmers executive was that the cost he was referring to, the cost of the animals, made up only one quarter of the total costs. So only one quarter of what dairy farmers will pay for the emissions trading scheme tax relates to animals. The other three-quarters that the dairy industry will face, the huge proportion of the input costs, will come from electricity, petrol, and the cost of the emissions of those Fonterra plants that we have heard about this evening.
I am told that Fonterra is forecasting that that $25 a tonne will cost it some additional $80 million to process milk. Fonterra is being offered an interim price, a half-price, of $12.50, and that will reduce its costs to $40 million. So starting on 1 July we have an input tax, an additional cost of processing milk for Fonterra alone—and we heard that that is only 84 percent of the market—of $40 million. That is $40 million to come off the price of milk.
I thought that might have been an interjection. I have before me figures from Meat and Wool New Zealand. It forecasts that the additional cost input that dairy farmers will face is some $10,000 for the average dairy herd. Of that $10,000, only $2,500, or a quarter, relates to animal emissions of methane. Of that figure, $7,000 is for electricity, petrol, and Fonterra’s emission costs. Half of that starts on 1 July. We will be the first country to tax our farmers, the first country to charge our farmers extra for their petrol. That does not happen in Europe.