Change rules on raw milk supply, collection – Fonterra

Fonterra ends up being a fallback option for all would-be suppliers, it says in an executive summary of submissions to the Commerce Commission. 

“They effectively have a free option to take risks with another processor, with the costs of this being carried by Fonterra and its farmer shareholders,” the cooperative’s submission says.

“It means Fonterra must live with additional uncertainty about the volume and location of future milk. Fonterra needs to build capacity for milk that may or may not arrive, and which may or may not stay with Fonterra long-term. This works against Fonterra being able to make the highest returning and most efficient investments in manufacturing capacity,” it says.

Fonterra is a cooperative, and is committed to processing all the milk produced by its farmer shareholders.  “But to help Fonterra and the industry invest and operate efficiently, Fonterra should have more discretion as to whether, and on what terms, it accepts milk from new suppliers.”

While the requirement to accept all milk was intended to incentivise Fonterra to price its shares and farmers’ milk efficiently and sustainably, today an efficient milk price and share price are achieved by the milk price regime, TAF and the presence of many well established competitors.

The Commerce Commission has invited views on the state of competition in New Zealand dairy markets and possible changes to the Dairy Industry Restructuring Act (DIRA).

In its submission Fonterra also says it should no longer be required to make milk available to large processors, except Goodman Fielder. Supplying Goodman Fielder remains important for public confidence in downstream wholesale and retail markets. 

Fonterra also recognises there is still a case for smaller, niche dairy processors having access to Fonterra milk, even though it is confident satisfactory commercial arrangements could be agreed without the raw milk regulations. 

“However, Fonterra firmly believes that it should no longer be obliged to make milk available to larger processors (other than Goodman Fielder), including those looking to establish a foothold in the NZ market,” it says. “Fonterra is now operating in a competitive environment in which competing processors have shown they have the scale and ability to secure their own milk supply (from farms or other processors). 

“There are significant costs to Fonterra and its farmer shareholders as well as a real risk of creating inefficient and excess manufacturing capacity in the industry by continuing to provide this additional, regulatory support for large processors.”

In 2001 Fonterra’s share of the farmgate milk market was 96% with the remainder held by Westland and Tatua. Today there are numerous large dairy processors in NZ including Westland, Tatua, Open Country Dairy, Synlait, Miraka and Gardians (owned by Danone). Yashili and Purelands Dairies will start operating soon and others such as He Run, are in the planning stages.

“The profile of these competitors has also changed. There is now a mixture of traditional NZ cooperatives, privately owned businesses, as well as large global companies vertically integrated into the NZ milk pool,” the submission says. Also since 2001 both Trading Among Farmers (TAF) and the milk price regime (including Commerce Commission oversight) have contributed additional market transparency and efficiency.

Fonterra still favours the milk price regime which it says continues to support market efficiency and notes it is only three years since the milk price manual was built into legislation.

Primary Industries Minister Nathan Guy says the Government will need to consider next year whether to promote changes to legislation to extend the duration of the pro-competition provisions. 

The final Commerce Commission report is due on February 29, 2016 to the Ministers of Primary Industries and Commerce and Consumer Affairs. 

Co-op faces increasing competition

Independent dairy processors collected 22% of all milksolids in the South Island in the 2014-15 season.

As this is above 20%, it triggers the expiry of pro-competition DIRA provisions – the requirement for Fonterra to supply independent processors with raw milk -- in the South Island no later than May 31, 2018.

However a Fonterra spokesman told Dairy News the trigger could possibly be pre-empted by any changes to the Dairy Industry Restructuring Act (DIRA), depending on what the Government decides.

Any changes to legislation could take two years but would likely still come before the trigger date.

Primary Industries Minister Nathan Guy says under DIRA the minister is required to certify when the threshold is reached.  The trigger will come into force on May 31, 2018, unless there is legislative change before then, he confirms.

“While Fonterra continues to collect more milk every season, it is encouraging to see new processors enter the market and create competitive pressure,” says Guy.   

“Independent processors also collected 9% of all milksolids in the North Island. This indicates there is increasing competition in the NZ dairy industry.”

 Guy says while the percentage of milksolids collected by independent processors is one indicator of competition, it is not definitive. 

“For this reason the Commerce Commission has been tasked with providing a report on the state of competition in the NZ dairy industry.”