DIRA proposal irks Fonterra

MAF today (Tuesday) announced a number of proposed controversial changes to the Dairy Industry Restructuring Act (DIRA) and Raw Milk Regulations.

MAF says the present act sets the maximum quantity of milk available to other companies at 5% but the regulations limit the total volume to 600 million litres which is about 4% of Fonterra's total milk supply. It plans to retain the 5% but removed the limit.

Fonterra Shareholders' Council Chair Simon Couper says there's no guarantee the extra milk will ever reach the New Zealand domestic market or that the profits remain in New Zealand.

"The Government's legislation proposes that New Zealand subsidise increasingly foreign-owned competitors while doing little or nothing to ensure milk is available to those processors who need it most or who assist the domestic market."

Based on 2011-12 projections, less than half of the 570m litres supplied to other processors this season will make it to the New Zealand domestic market with about 300m litres (53%) forecast to go to independent processors who primarily export product overseas.

Of those 300m litres, two-thirds is claimed by processors with some level of foreign ownership.

"When one sector of an industry has to subsidise another it creates inefficiencies and false economies," says Couper.

"This proposed legislation would further fragment the New Zealand dairy industry and weaken New Zealand's export returns, strengthening our overseas competitors at the expense of the New Zealand economy and the average New Zealander."

Fonterra chairman Henry van der Heyden says the proposed changes will have New Zealanders subsidising increasingly foreign-owned dairy processors who send their products and profits offshore.

Van der Heyden says the proposal would impose nearly $200 million of additional costs over the next three years alone and work against our efforts to reduce the price of milk in New Zealand.

Other proposed changes to Raw Milk Regulations include a a three-season limit for independent processors who source raw milk directly from farmers and a range of maximum quantity limits for independent processors accessing milk in different months to reflect the seasonal nature of milk production.

Other controversial proposals in the review include the Commerce Commission carrying out annual monitoring of the milk price. Fonterra's current milk price governance arrangements would also be embedded in legislation and the company to be required to publicly disclose information about its milk price setting.

The draft bill also includes changes that enable Fonterra to move to its proposed Trading Among Farmers (TAF) system, should it choose to. Should Fonterra not proceed with TAF, or if it is unsuccessful, the review recommends that Fonterra be required to price its shares at 'fair value'.

Submissions close on February 24, 2012.