Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill

Members, the House is in committee on the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill. We first come to the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill. Members, we now come to Part 1.

Thank you, Madam Chair. I seek leave for all parts to be taken as one debate.

Is there any objection? Approved. Members, what we’ve got here is we’re taking it as one part. As long as you’re succinct and you stay within the clauses of the bill, we look forward to you taking calls. The question is that Parts 1 and 2, the Schedule, and clauses 1 to 3 stand part.

Thank you, Madam Chair, and thank you, Minister, for coming down to the House this evening. I just have a few questions that I think we all need some clarity on, sir. As you would appreciate, the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill is probably going to go through the House tonight fairly unhindered, and I think the industry needs surety—operational surety—going forward.

Minister, if I may, I seek clarity on the sharing-down process. I know that Fonterra has announced $300 million last year for the sharing-down process, and a further $51 million as far as I’m aware. There were concerns around liquidity and those exiting the industry sharing out, essentially, and what it meant for farmer owner-operators leaving the industry in terms of, as you would well appreciate, the contractual obligations that they had with the banks, and they are moving to other land-use changes—well, other functions on farm, potentially going to other industries. What did sharing down mean? How quickly would this $300 million and the subsequent $51 million be made available, to your understanding of the legislation as written, so farmers that were actually choosing to leave the industry, or certainly Fonterra, could have surety of operation?

Can you please explain to the House tonight—and I’m playing devil’s advocate here, because, fundamentally, we can see that supporting this bill is ultimately where this will go—what the entry provisions are. Historically, the Dairy Industry Restructuring Act 2001 had an open-entry reality; now that is being somewhat constrained. Fonterra, as is the free market, has historical obligations that no longer exist, and I would be most interested in what the changes of the entry provisions are.

Finally, Minister, if you’d be obliging, can you give some clarity for the likes of Miraka, Open Country Dairy, Westland dairy, and other producers about what the role will be for the Commerce Commission in terms of the base milk price setting and the governance structure therein. And there’s a good place to start. Thank you, sir.

Thank you, Madam Chair. A couple of questions for the Minister just in relation to, under Part 1, the commissioning of analysis and research. I’m just interested in that, along with the Commerce Commission directors and the risk of adding extra bureaucracy into the process unnecessarily. This is something that we’re seeing far too often in legislation coming before the House at the moment, which is extra bureaucracy and there are questions around the additional value of that.

In particular, with regard to those research reports, my concern is that now that we have added in these additional offences for the members of the milk price panel, there is a risk that we could see additional cost being incurred through that reporting process, effectively, from their perspective, to ensure that they are overcompensating for the risk of being liable for any offence by reporting over and above what they might otherwise have done, and, therefore, incurring additional cost through the manner and mechanism of that reporting. That really goes beyond what is necessary in that regard. So is the Minister confident that the reporting requirements and the offences alongside that with those obligations on the members of the milk price panel are fit for purpose and are not going to result in additional bureaucracy and compliance through that part?

Indeed, then, coming on to the other aspect of that risk around compliance under Part 2 around the directors of the Commerce Commission—and this is one that we did debate a wee bit through select committee as well. It was getting that balance between the milk price panel being able to determine what the milk price should be—and, of course, with the Commerce Commission now being given this new power to direct a change on that milk price panel if they find some particular omission or error, or are dissatisfied, and whether or not that’s an appropriate balance, again, or whether we’re going to then see further reporting or bureaucracy, ultimately, coming into the mix from the milk price panel to try and get around that.

Then, of course, there is the risk of the Commerce Commission coming to the milk price panel for clarification, because they may not necessarily have the same depth of experience or resourcing within the Commerce Commission to fully understand all matters pertaining to the setting of that milk price at any given time, and, therefore, going back and forward. I mean, is this adding more cost, and are we confident that we’re going to see significant benefit that will not ultimately end up with more bureaucracy coming through in this legislation?

Thank you very much. I was going to take the time to run through, I guess, the rationale for the bill, and perhaps I’ll take a few minutes to do that. Look, we are passing this bill through urgency. It’s really important that it does pass. The shareholding suppliers of Fonterra had a vote on this. It was a very open process and they voted to support this through. It makes a number of changes that the members speaking refer to: the ability to share down, to have one-third of the shares in a company that has for the most part, and going way back in history—that says for every kilogram of milk solids, you should hold one share; that has been changed.

There were amendments made under what was called TAF—Trading Among Farmers—as an attempt to change the capital structure to remove what they called redemption risk if a whole lot of farmers left. In my view, it was a faulty structure in the first place and we’re now being asked to come in and straighten that out. I think it’s reasonable that we do that with the endorsement of the shareholders.

It’s not a terribly controversial bill, but it’s one that is important. It’s important that we get it right. And it is ultimately the tension between a competitive dairy market situation that keeps pressure on the single biggest player, which is Fonterra, that doesn’t allow monopolistic or monopsonistic behaviour, that gives farmers a fair go, and ensures that the company operates in an efficient way into the future. And so we as a Government have supported them. We’ve worked with Fonterra and we’ve made some adjustments, not ones that Fonterra wished for but ones that we thought were really important to ensure the tension within the sector, to drive the efficiency that we need.

In terms of the people leaving Fonterra, and/or people who might be sharing down and they have shares that might be worth $5 or $6—I’m not sure what they are at the moment, actually—and then there’s a fear that if they’re forced to sell down or they are leaving the industry, there might be an excessive number of shares come into the market at once and slump the market price. The fact that the share price has gone down in anticipation of some of this is a bit unfortunate. None the less, the vast majority of the asset value is not in the shares but in the value of the farm. Those farms rely on the efficient operation of Fonterra and they need to get this capital structure right to be able to operate efficiently into the future.

So while there might be some short-term pain—I acknowledge that and I’ve had emails from people—the long-term gain here is worth the changes that we’re making. But the $300 million that Fonterra has allocated to buy back shares to ensure that people can have somewhere to sell their shares is really important. But also the provisions around the requirement to have a market-maker, to have someone who’s going to be in the market to buy and sell shares so that farmers aren’t trapped, are really, really important. So those provisions are in here, along with a few other issues.

Can I just come back to the one of ensuring that some fairness is there for the core measure of the dairy industry, the milk price or the raw milk price, which is the price paid to farmers for raw milk prior to any value-add that might occur in Fonterra or in some other company. There’s been some claims and accusations that because the vast majority of those on what they call the milk price panel are appointees of Fonterra or connected to it, they had been managing in their own interest, not in the interest of the wider dairy industry; so we’ve decided to have an independent chair.

The chair’s actually appointed by Fonterra, but on the recommendation of the Minister and one further independent, and it’s just to ensure that those people won’t be answering to the Minister; they’ll be answering to Fonterra and to the process of the milk price setting, ultimately overseen by the Commerce Commission. And we’ve made some changes to ensure that if some of the requirements in setting that milk price are ignored by Fonterra, which had been the claims, then the Commerce Commission—there are some technical terms that I daren’t repeat because I’ll get into trouble from the Minister of Commerce here, about alpha and beta and all these kind of valuation things that go beyond me; they’re algorithms that are used in this system. If the milk price panel chose to ignore one of those core components, then it would distort the outcome of their exercise.

There have been claims there and so we’ve said that the Commerce Commission can enforce them to use all of those core components. It’s not that the Commerce Commission will tell them what they should pay to farmers. They will make the recommendation following the process. Ultimately, Fonterra still has the ability to set its own milk price, but the raw milk price will be one made through—and will be transparent so that other companies that are using it as a benchmark will know what that is and it will be more accurate, arguably, than some claim it has been in the past. So that’s the Commerce Commission questions, I guess, that the member was asking for. You know, they will have an ability not to force the final price, but to ensure that the process has been adhered to by the milk price panel.

The other one is the entry provisions. People will still be able to apply to Fonterra, and Fonterra will pick up their milk if they are within the normal collection zone. There is an ability for them to say no if someone is in an unreasonable position and it will require a whole lot more cost to pick that milk up. I think that’s something that the farmers of Fonterra have been asking for—that they don’t want to be forced to pick up milk when other companies could say no as a normal part of their supply arrangements. I’m not wanting to shut that down.

I hope that that answers a few of the questions that we have there. Ultimately, we hope that the milk price panel and the way it works will be more transparent, that people will have more confidence in it, and that that will ensure that people who might want to come into the dairy industry will have a fair benchmark by which to judge themselves and their farmer suppliers will have the same benchmark. So I’ll sit down and answer any further questions if people have them. Thank you.

Thank you, Madam Chair, and thank you, Minister, for those clarifications. I was really interested in your comments around transparency, and I wonder if you could dig a bit deeper on that about exactly what that might look like. Is that around what the process would be? Is it around other kinds of configurations? Because I agree, if you’ve got that transparency that it does, it takes some of the heat out of the fire, so to speak. So if you could dig a bit deeper into that, I’d appreciate it.

Thank you, Madam Chair. Look, the Commerce Commission ultimately will provide oversight, if we’re talking about the milk price setting process. And I think that’s been at the core of a lot of the debates in these changes. And the Commerce Commission will have the ability to direct Fonterra—or the milk price panel—to use certain provisions, and it will have to notify Fonterra that they have made that direction. But, ultimately, the milk price panel is independent and will be more independent because of the way that we’re structuring it now to reach a final conclusion. But if Fonterra are withholding information, then the milk price panel, you know—or the Commerce Commission—can instruct them to provide that and ensure that the milk price panel has all of the information available to them.

So it will be more open and transparent. There have been accusations in the past—and, as you know, “he said, she said” kind of claims made there. Look, I’m sure there will be imperfections, but it’s a lot better than it was. We’re trying to move on from the debate, and there will still be independents who think that they’re forced to pay too much for milk. Ultimately, we have an industry that is quite unique—with Fonterra, it does maximise the return to farmers for what they get in the market through a process that is fairly open and transparent for those farmers. Elsewhere in the world, where you have publicly listed companies, or you have set-ups that are not cooperatives, there’s no guarantee that that value will come back to the farmer.

As a country that will not subsidise or intervene on those prices, it’s really important that when we’re encouraging and supporting farmers to do the right thing, to do the best thing, that that can transfer ultimately through into value in the marketplace, and that value transfers back to them. We have a privilege with the dairy industry that we’ve had because of our ancestors and the way they’ve set that up. It’s important that we don’t blow it for ideology—it might be economic ideology that might have said, you know, competition will deliver everything. We’ve got to have the right balance between competitive pressure and ensuring that the structure can return to farmers and they can remain viable, sustainable, and support our economy as they have.

Thank you, Madam Chair. Just quickly, Minister, and to demystify the mystical for some of the detractors of the bill who have spoken about the environment degradation increasing because of this new dairy industry restructuring Act piece of legislation. Do you want to speak to that? Because I’m sure there are certain detractors of the bill that have raised concerns about increased environmental pressures, and I’m trying to reconcile that personally myself, knowing that the overall New Zealand milk pool has contracted. Coupled to that, and quite separate from it, there have been claims about the potentiality of predatory pricing from Fonterra—notwithstanding it is still about 79 percent or 80 percent of the overall milk pool in the country—and can you give clarity again, for the sake of those that perhaps don’t necessarily support the legislation, about what the role of the Commerce Commission would mean for those that are concerned about that in terms of public transparency? And you’ve spoken again about the independence of the milk price panel—give some pause to that if you could, very quickly.

Thank you, Madam Chair. Very briefly, I have traversed some of these issues before, but without getting into the technical details that make my head hurt as well. I guess the oversight by the Commerce Commission with additional powers ultimately is what we must trust in to ensure that the milk price panel—and some say we should rewrite that. I don’t buy into it. I think it’s worked very, very well. And those who come in objectively and assess it say we have a unique system, unique in the world—nowhere else do they do that. I think we have to trust that. It will be open to challenge, I guess, over time, but I think this has made the tweaks that have made it better; it hasn’t rewritten it.

Can I come back to environmental degradation? The view is that because it will cost farmers less to become a supplier of Fonterra, the money that they might have used in buying shares might then be used to buy more cows, so we might have more milk production and more environmental degradation. Look, a long bow would be the kindest way I could put that. I think it’s paranoia and I think that it will provide some flexibility for farmers who would otherwise put that capital into shares of Fonterra—and there’s a philosophical debate around whether that’s right or wrong—but that money will be used for improving farm practices. As people know, that might mean investment in environmental mitigation on farm to allow them to continue. But the idea that this will drive further environmental degradation is absolutely false. It is wrong. What we’re doing here is providing flexibility for farmers to get on and address the challenges of the future.

Thank you, Madam Chair, and thank you, Minister, for those clarifications. Just building on the question that was just asked, I was wondering if you could track for us different exit pathways. I’m interested in two of them, actually. One of them is for a farmer who’s retiring, they want to get out of the game and live the good life with the mokopuna. What does that look like for them? The second pathway is for people that want to exit for different land use, they want to do something more sustainable, they want to be able to move and do that. What are the supports that are in place to enable both of those things to happen?

Look, Madam Chair, thank you very much. I think the reference to the $350 million, or thereabouts, that Fonterra has allocated to buy back the shares, and the valuation, is set through the market and the unit prices and the share prices, and without going into what has been a devaluation there based on, I guess, assessments of where this might end up, that’s unfortunate. But the reality is that those farmers who want to get out will be able to get out. There’s a market-maker requirement here that says there has to be a market, so it’s no good, the farmer exiting. They can retain their shares for a certain period—as many might want to—but the issue here is that there will be someone who will buy their shares and they can move on to other land use and use that capital for investment there.

Just on the subject of environmental degradation—I have to ask the question; I’m in the Greens—how do you see this bill playing out in terms of commitments to the emissions reduction plan? I can ask that again; it was just around the question of environmental degradation, which has been brought up. How do you see this working in terms of the objectives of the emissions reduction plan—the ERP?

Thank you, Madam Chair. Look, to say they’re not linked would be naive. Of course, every part of the farming system and capital investment in farm operations is linked to environmental outcomes, and I think we’re moving to a more sustainable space. As I say, the flexibility that this new structure will provide will allow farmers who might be facing an upgrade in the effluent system the ability to maybe sell shares and then to fund that. That might not be what they want to do, but there’ll be some flexibility here.

The bottom line around environmental management—look, the farmers have had those messages for a long time, they’re getting on and doing some amazing stuff in the space, and there are some new requirements around water standards and there will be around emissions. So they’ll be making those adjustments to meet the requirements not laid down or set out in this piece of legislation, in other pieces of legislation, and this flexibility here will help.

I move, That the question be now put.

Just very quickly, Minister O’Connor, if you’d be obliging, just for the sake of a very short pause. The $350 million in the sharing-down reality: in what sort of realistic time frames could farmers expect, leaving Fonterra, to have those shares and the liquidity of sharing down realised? Just for the sake of pause.

Look, I think that will be very quick. I don’t think there’ll necessarily be a delay. They are able to retain their shares for—just saying I’ve been reminded—10 years, and many might want to do that, depending on whether they need to cap it or not. But my understanding is there should be no delay in being able to do that. They should be able to sell their shares into the market. Whether it’s Fonterra buying them back or into a deal managed by the market maker, that’s something I can’t judge at this point, but there should be no delay in that situation.

I move, That the question be now put.

Madam Speaker, the committee has considered the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill and reports it without amendment. I move, That the report be adopted.

Report adopted.

ASSISTANT SPEAKER (Barbara Kuriger): The Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill is set down for third reading immediately.

Third Reading