Tuesday, 08 May 2012 11:07

Fonterra under fire over DIRA

Written by 

FONTERRA HAS come under fire from its competitors at the primary production select committee hearing into the Dairy Industry Restructuring Amendment Bill (DIRA Bill).

The select committee last week heard submissions from all the major players and some individuals about the DIRA Bill now before Parliament and scheduled to be passed into law later this year. The bill is designed to provide an oversight on how Fonterra sets it farmgate milk price and includes changes to allow TAF (trading among farmers). 

In a joint submission, the Independent Dairy Producers Group (IDPG), Synlait, Open Country and Miraka accused Fonterra of being “anti-competitive” because of the way it sets the farmgate price for milk.  

A spokesperson for IDPG, Dr John Penno, told the select committee Fonterra set the price artificially high by cross-subsidising this from its profits to the tune of $600 million. This tactic, says Penno, resulted in Fonterra’s profit being substantially lower than a group of international peers and also artificially lowered Fonterra’s share price.

Penno quoted from an analysis by Deloitte of Fonterra’s pricing systems. He says in 2006 Fonterra changed the basis on which it set the milk price from ‘actuals’ to ‘notional efficient producer’ (NFP).  

He says the ‘actual’ was what Fonterra could pay for raw milk at the farmgate while achieving a ‘sensible’ return on capital. 

Penno claims the NFP, which is based on what an imaginary or ‘super-competitor’ could pay, has seen the farmgate milk price jump to upwards of 50 cents/kgMS. This is more than Fonterra’s own commodities business or a typical independent processor can afford to pay for milk and still make a return on capital, and is therefore ‘anti competitive’, Penno says.

The IDPG says the DIRA Bill effectively enshrines the ‘super-competitor’ concept and will permanently lock in an artificial farmgate milk price.

 “Fonterra’s artificially high farmgate milk price is having a dramatic negative effect on the dairy industry. As well as stifling competition it is sending farmers distorted pricing signals about milk. This will lead to overpriced dairy farm land, accelerated rates of dairy conversion and over-production on existing farms,” says Penno. 

The IDPG wants changes to the legislation to stop Fonterra doing what it is doing now. “Unless the legislation is changed it will prevent TAF from bringing about normal market pressures that would normally solve these sorts of things. So there are some quite specific things written into the act that allow them to do some of the things they do which is distorting the milk price,” says Penno.

The raw milk market in New Zealand is not a competitive market, he says. “We have a very dominant player put there by legislation. What we are asking for is a milk price that approximates what would happen in a competitive environment rather than a dominant player setting that in an unfettered way.”

Kingi Smiler, of Miraka, told the committee the IDPG wants a level playing field and not legislation that supports a monopoly in the market. The IDPG has collective export revenues of $1.3 billion dollars. – Fonterra’s response, P5

More like this

Chinese strategy

OPINION: Fonterra may have sold its dairy farms in China but the appetite for collaboration with the country remains strong.

LCAs tackle false narratives

The quest to measure, report and make sense of the energy that goes into food production has come a long way in the past 25 years.

$3b windfall?

Fonterra's proposed sale of its global consumer business could fetch over $3 billion but not all proceeds will end up in the pockets of farmer shareholders.

Featured

Better animal genetic gain system

A governance group has been formed, following extensive sector consultation, to implement the recommendations from the Industry Working Group's (IWG) final report and is said to be forming a 'road map' for improving New Zealand's animal genetic gain system.

SIDE 2025's new schedule, venue

Annual farmer gathering, the South Island Dairy Event (SIDE), is set to make history as it heads to Timaru for the first time.

Taranaki piggery goes solar

Installing 400 solar panels at their Taranaki piggery and cropping operation will have significant environmental, financial and animal welfare benefits for the Stanley family.

Editorial: Keep FTAs coming

OPINION: The dairy industry will  be a major beneficiary of a new free trade deal between NZ and the Gulf Co-operation Council (GCC).

National

Organic sector backtracks on GE

Organics Aotearoa New Zealand (OANZ) says the Government’s new gene editing and genetic modification reforms could leave New Zealand as…

$3b windfall?

Fonterra's proposed sale of its global consumer business could fetch over $3 billion but not all proceeds will end up…

Machinery & Products

Milk Sustainability Centre launched

The recently announced Milk Sustainability Centre – a collaboration between global giant John Deere and milking and feed specialists De…

Data connection made easier

New Holland and Case IH are introducing new advancements in their precision technology stack to make farming easier and more…

» Latest Print Issues Online

Milking It

Chinese strategy

OPINION: Fonterra may have sold its dairy farms in China but the appetite for collaboration with the country remains strong.

Not fair

OPINION: The Listener's latest piece on winter grazing among Southland dairy farmers leaves much to be desired.

» Connect with Dairy News

» eNewsletter

Subscribe to our weekly newsletter