Given the importance to our economy, it is critical the dairy industry remains dynamic, innovative and efficient.
A key element of this is that Fonterra gets its farmgate milk price right. If this price is right, it will drive the right investment and production decisions and ensure the market is contestable – that potential competitors have an opportunity to compete with Fonterra and keep it on its toes.
This is the intent behind the Dairy Industry Restructuring Act (DIRA) and why I am progressing legislative amendments aimed at increasing confidence in and transparency of Fonterra’s farm gate milk pricing.
It’s important to remember that without the DIRA Fonterra would not exist. The DIRA is fundamental to ensuring that in spite of Fonterra having a dominant market position, the industry continues to be efficient, competitive and innovative. This is in everyone’s interest.
The current DIRA Bill will ensure Fonterra’s current milk price governance arrangements remain in place, and that it continues to publicly disclose information on its milk price setting. It also introduces an annual milk price monitoring regime to be undertaken by the Commerce Commission. I can see no reason why anyone would argue with this.
The bill also enables Fonterra to proceed with TAF (trading among farmers). Most dairy farmers know that the ability for farmers to freely enter and exit Fonterra, at a price that reasonably reflects the value of their capital contributions, is a core plank of the DIRA. The Government’s main concern with TAF is therefore that it preserves this ability to freely enter and exit.
Ultimately TAF is a decision for Fonterra’s shareholders but I believe TAF could offer Fonterra and its capital structure stability and agility to respond to opportunities when they arise.
China should grow up to 30% in the next decade and Fonterra’s strategy is to participate in this through development of its own production in China. Fonterra believes in order to continue to capitalise on growth opportunities in China and elsewhere, it needs the permanent capital TAF would deliver.
Fonterra’s share price is important: an artificially low share price could subsidise entry to the co-op and discourage exit from it. If Fonterra proceeds with TAF, I am confident the market will determine a fair value for Fonterra’s shares. However if it doesn’t proceed then it’s important Fonterra’s share price still reflects fair value in the future.
A fair value share price will ensure farmers’ decisions on whether or not to supply Fonterra are based on Fonterra’s milk price and performance, not distorted incentives about the value of farmers’ capital contributions. That’s why the bill proposes Fonterra must price shares according to full fair value if TAF doesn’t proceed.
In ten years Fonterra has become New Zealand’s largest company, and a company New Zealanders can be justifiably proud of. However, in ten years the dairy industry has changed substantially and a review is timely.
The Government’s responsibility is to give Fonterra the tools it needs to tackle the challenges of the next decade and beyond. It is for Fonterra and its shareholders to seize the opportunity.
• David Carter is the Minister for Primary Industries
