Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill

I present a legislative statement on the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill.

ASSISTANT SPEAKER (Barbara Kuriger): The legislative statement is published under the authority of the House and can be found on the Parliament website.

Hon DAMIEN O’CONNOR: Thank you, Madam Speaker. Indeed, it’s a pleasure to have you in the Chair. I think it’s appropriate, given your position in the dairy industry, and I think that we can, in partnership and cooperatively, move this forward.

I move, That the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill be now read a third time.

The bill was introduced in the House on 13 September this year. It had its first reading on 27 September, after which it was referred to the Primary Production Committee for consideration. The select committee reported on the bill, back to the House, on 10 November, and the bill has now had a second reading and passed through the committee of the whole House.

I would like to take the opportunity to thank all members of Parliament and the submitters to the Primary Production Committee, and the members on the committee in particular, for their wise consideration of this. Thank you. They engaged in this accelerated process in a manner that afforded careful scrutiny and informed consideration of this very important piece of legislation. The fast passage of this amendment bill will provide Fonterra and the wider dairy industry with the certainty they now need to move forward.

The success of Fonterra, a New Zealand - owned cooperative with a membership around 10,000 farmers, is critical not just to our rural communities but to our wider economy. The New Zealand dairy industry, which Fonterra is a key part of, has this year earned more than $20 billion in export receipts. It’s essential that Fonterra has the right settings to perform well.

The Dairy Industry Restructuring Act—or DIRA—was passed in 2001. I have to say it was an honour to be the chair of the committee at that time. It was by a then Labour Government. It allowed the formation of Fonterra, but it also included safeguards to ensure that Fonterra had the incentives to perform well. This was at a time when Fonterra accounted for about 96 percent of the farmers’ raw milk market. The safeguards had, at the time, included certain disciplines around Fonterra’s capital structure.

Last year, Fonterra’s farmer shareholders voted in favour of a new capital structure to replace the current Trading Among Farmers share-trading system. I always thought it was a dog, and indeed it proved to be such. Fonterra’s new capital structure is intended to make it easier for farmers to become and stay shareholders in Fonterra. Fonterra will be better placed to attract and retain milk supply in an environment where milk production is forecast to plateau or decline.

This will ensure Fonterra can make optimum use of its investment in dairy processing, continue to compete strongly in global markets, and remain the mainstay of rural New Zealand. The Government believes it is important for Fonterra to be able to make changes to its capital structure that 85 percent of its farmer shareholders have voted to support and to respond to the changing environment and to be able to proceed with certainty. That’s why we introduced and advanced this bill at pace.

However, while being beneficial to Fonterra in the short to medium term, its new capital structure also carries some long-term risks for farmers, for Fonterra, for the broader dairy sector, and, potentially, for the wider New Zealand economy. One such risk relates to external confidence in the integrity and the robustness of Fonterra’s raw milk pricing practices once it moves to its new capital structure. Fonterra’s intended move to the new capital structure has already resulted in a roughly 40 percent discounted price for Fonterra shares. We acknowledge that. This will mean that in the future any dividend on Fonterra’s shares will appear to provide a much higher return on shareholders’ capital investment. This will provide Fonterra with the opportunity to potentially shift some of its capital returns from dividend to the milk price. As I said at the committee stages, I acknowledge that for some farmers, it has meant a hit on their balance sheets with the reduced value of those shares.

As we all know, though, Fonterra’s milk price determines the price other processors must pay to attract milk supply from farmers. If Fonterra’s milk price were not right—either too high or too low, and that’s been an issue of some contention—it could distort business and investment decisions by farmers and processors, including Fonterra itself, potentially leaving less scope for investment and innovation for the whole industry. Given the importance of the dairy industry to the New Zealand economy, any such distortionary effects could result in the wider economy forgoing opportunities for value creation or innovation.

This is why the bill strengthens existing regulatory safeguards around Fonterra’s internal milk pricing practices. This is not to say that Fonterra has acted in any way contrary to the DIRA regime. It is simply acknowledging that strengthening is required to mitigate for the risk that Fonterra may choose to act opportunistically in the future.

Another key risk that this bill mitigates relates to the increasing divergence of shareholder interests inside the cooperative. Under Fonterra’s new capital structure, all suppliers will have to hold one share for 3—rather than the one share for 1—kilograms of milk solids that they supply to Fonterra but could choose to hold up to four, rather than two, shares for each kilogram of milk solids supplied. So someone who has some cash can buy three more shares for every kilogram of supply. Those who are looking for it, of course, can sell down two for every three that they have.

This may result in competing shareholder priorities relating to Fonterra’s future direction and strategy between farmers with minimum shareholdings—who are often the future of the industry—for supply, and those with larger shareholdings—who might perhaps be on the exit side of the industry—held for investment purposes; for example, larger corporate farming operations and those who are moving out. It is important that we ensure the interest of future farmers and those moving forward are not undermined by those moving out, who will be seeking higher dividends. In the future, there could be significant shareholder pressure on Fonterra’s board to pay both a high milk price and also a high dividend to meet the expectations of both shareholder suppliers and shareholder investors. An outcome of such pressure could be that earnings are paid out without the necessary retentions to fund future innovation or capital needs. In the short term, this may not be significant, but over time this could undermine the stability of Fonterra’s long-term capital structure and the effectiveness of its strategy execution.

A challenge for Fonterra is to achieve the balance between maximising the milk price paid to farmers and holding on to those suppliers—a cornerstone of its constitution, of course—and the retentions for future investment. This is why the bill requires Fonterra to maintain and publish a dividend and retentions policy, something that was not in place when Fonterra was set up, and the industry, one could say, might have lost billions of dollars as a result. That’s spilt milk—to pardon the pun. We’ve got to make sure that those mistakes aren’t made into the future.

We’re not going to direct or regulate Fonterra on how to do that. That is a challenge for Fonterra’s board. The requirement in law to maintain and publish a retentions and dividends policy is, however, a marker of our expectations and a means of making Fonterra’s actions transparent. I’m satisfied that the bill strikes the right balance between enabling Fonterra to pursue its commercial objectives in mitigating the risks to the wider dairy industry. The dairy industry can now move forward and focus on doing what it does best, which is producing the best milk in the world.

I’d like to once again thank the members for their scrutiny, thank all those submitters who brought information and ideas to the select committee that were carefully considered, and thank the officials, I have to say, who have done an outstanding job in a really tricky area of commerce. The Minister of Commerce and Consumer Affairs might do well to pick some of those people up for the Commerce Commission if he wants some outstanding officials. But don’t take them too soon, because I still need them.

Can I say it’s been an honour and a privilege to be part of the dairy industry from my birth, on a dairy farm, and to be able to play a part in what is the single biggest industry in this country. Unfortunately, tourism took a hit. It plays a critical role. We do have some challenges. We’ve got to make sure that we have a sustainable industry, that we get our settings right for not just water quality and local environment but, actually, in a world where there are expectations of lowering emissions, that we apply the same innovation as we’ve applied in the past to continue to produce quality dairy protein while reducing our emissions. I know we can do it, and we will move from volume—which has been a criticism, an unfair one, of Fonterra—not just to value but to values, the values that drive the farmers and the people in this country to produce the very best. In that way, we can be quite proud of the fact that we can be the best farmers for the world, dairy farmers, and across all the other sectors. Therefore, I commend the bill to the House.

The question is that the motion be agreed to.

Thank you, Madam Speaker. As a former dairy farmer as well, it’s a privilege to rise and take a call on the final reading of the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill. And we’ve got to this point now, under urgency, unfortunately—not the best way to be passing legislation in this House, but Government can’t miss the opportunity to push things through without appropriate checks and balances, but hey, here we are.

So, look, we have gone through a reasonable process at select committee. Again, it was very truncated because this needs to be in place for Fonterra, but that shouldn’t be the excuse because, of course, the Government could have delivered it to the House in the first place sooner than they did. But ultimately we are now at this final reading where we have made some changes through that select committee process, which I think, hopefully, will have addressed some of the concerns that were raised at select committee. And I do just want to touch on that because, actually, there were some quite divergent views between what Fonterra wanted with the initial proposal they put forward, and the Government, again, loving the opportunity to put sticky fingers all over everything and appoint more control or more people to have oversight did so beyond what Fonterra had envisaged. But hearing from some of the other submitters in terms of competitors, they thought those additional checks and balances were a minimum and so, therefore, I guess, on the balance of it, you have parties at both extremes, ultimately landing in the middle where no one’s happy—is probably about the right balance, and so, ultimately, I think, on that perspective, it’s not too bad.

I did raise some of the concerns around the risk of additional compliance and bureaucracy and, therefore, cost, through the committee stage that we just heard prior to this as well, because, again, that’s a concern for an industry—for any industry—at the moment when we are facing such high cost pressures across the board. Anything that might add additional cost into that—and this will add more cost into the industry, not a massive amount, but there will be some more cost because the Commerce Commission has to be able to resource their ability to get up to speed on making their determinations around the appropriateness of the price panel’s decisions and the likes; some other changes in here that will add cost. But in the scheme of things, I think we need to be mindful in the first instance that Fonterra came forward with this on the premise—well, off the back of a strong vote of support from their shareholders. I believe it was 85.2 percent support from their shareholders who voted on that, and so that shows, of course, a very strong desire for change.

There was some debate around whether indeed it needed to come through Parliament to make those changes to the Dairy Industry Restructuring Act, or indeed whether they could just carry out those capital changes themselves. We got to this point, and we have made those changes. And I do just want to pick up on a couple of the points the Minister raised as well, because I think that flexibility of shareholding is a good element that adapts to the changing needs within the industry. But I share a concern that he raised as well around what that might shape up like over time, particularly if we see, as we are likely to, those new entrants who are scraping to get into their first farm. They can just buy enough cows, they can just buy the minimum shares and away they go with a block of dirt that has potential. And so that is often the scenario for first-farm buyers. They don’t have a lot of fat in the system, and so they will be buying that minimum shareholding. And so, on that basis, you could see most of the young farmers coming in with that just one-third shareholding rather than the full shareholding they might previously have worked towards. But, as the Minister mentioned, at the other end, exiting shareholders or farmers who have sold, who are looking still for a return on their investment in whatever area they choose to invest, may well choose to stay in Fonterra because that’s something they know and so therefore have more confidence around investing in that space and can retain a much higher shareholding or number of shares. And so, of course, that will be interesting to see how that plays out over time.

We’ve seen a number of changes, and the Minister mentioned trading amongst farmers; that’s over a decade ago, I think 2011, thereabouts, that came in. And we saw some concerns around how that played out as well, whether that was being potentially led by the shareholders fund or by the Fonterra investment fund—so how that played out, where their priorities were. This is a constant challenge with a massive entity like Fonterra, but it is our biggest company and we do need to make sure that we are giving it the tools to do what it needs to do to operate well on behalf of all those suppliers and, indeed, the wider food and fibre sector, and New Zealand more broadly. Because it is a massive contributor to our economy, and at a time like we’re facing now with those cost of living pressures, with a recession now forecast on the horizon as well, we need our food and fibre sector to stand up as strongly as possible. Of course, some additional workforce would help with that. A bit less compliance and red tape would help with that as well. A number of factors around the environmental standards, and a bit more certainty in those areas which are outside the scope of this bill but are worth mentioning, because there are significant challenges still in the food and fibre space.

But we do support this bill passing through, now, its final stage, enabling Fonterra to have some of the flexibility they wanted with some additional checks and balances in place to help appease their competitors. And I don’t know that we’ll ever get away from some of those conversations or concerns that have been raised in the past around the transparency of that milk price panel. But ultimately, I think, on balance, we have a good piece of legislation, and so I commend it today.

Thank you, Madam Speaker. It is my pleasure to stand and take a brief call this evening on the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill.

So, as the Minister said earlier, this is an amendment to the 2001 Act, which was passed, and set up Fonterra. And I like to think, being the MP for Whanganui, which includes South Taranaki, that my electorate is in the heart of Fonterra land—the wonderful, mighty South Taranaki.

Tim van de Molen: Not a patch on Waikato.

STEPH LEWIS: Oh, it doesn’t quite get there. Pipped at the post by South Taranaki.

Anyway, back to the bill. This is a bill that Fonterra asked us to pass so they can make some amendments to their capital structuring. In particular, their goal is to make sure that it is easier and cheaper for young farmers, in particular, to get in and buy shares in order to be able to supply Fonterra with milk.

On that note, I also want to thank the officials who have helped us pass this bill through the select committee stage. And thank you, as well, to the submitters who participated in the select committee stage—it was a very robust discussion.

There are, as the Minister and previous speaker have mentioned, some mitigations that have been added into the bill to make sure that it is fair to some of the other players in the market, like Open Country and Synlait, to make sure that the way that the milk price which is set by Fonterra is transparent and fair to those other competitors. And that can only be a good thing. So, for example, one of the initiatives is that the Minister has the ability to appoint up to two members to the milk price panel and there are some additional powers given to the Commerce Commission to work with Fonterra around how the milk price is set.

So I think this is an excellent bill, and, once again, I thank my colleagues on the Primary Production Committee, the officials, and the submitters. And I commend the bill to the House.

Thank you, Madam Speaker. I rise on behalf of the Greens to speak on the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill—there’s a mouthful. I’d just like to thank the select committee, the Primary Production Committee, for getting the spades in the ground and digging into the dirt around this bill, and also to acknowledge the answers that the Minister of Agriculture has given us tonight during the committee of the whole House part of this session. I guess, as I talked about in the committee of the whole House, when I think about transparency, what I would’ve liked to have seen is sort of more transparency on what the process is, about exactly how they would get to that particular milk price. I’m cognisant, and I know members around the House have been as well, about those smaller players, because not everybody wants to go to the big church; some people want to go to the little churches as well. So I wonder if this will actually hit the mark around making sure that there’s more independence and less of a monopoly controlled by Fonterra, because that is the concern for us as the Greens, and that is, you know, you could check in to the “Hotel Fonterra”, but you might not ever leave.

I was interested in the answers that the Minister gave in terms of the movement out, the exiting out of Fonterra into other spaces—of course, very important to make sure that if people want to retire, they can do that, but also how do they move out if they want to move to different land uses, more sustainable land uses? That was not clear for me. I do, however, appreciate the Minister’s optimism, but, unfortunately, optimism isn’t going to stop environmental degradation.

So what I wanted to see in the discussions tonight is actually how this will track to the other things that the Government has signed up for—for example, the national emissions reduction plan, the national adaptation plan, Te Mana o te Taiao, the National Policy Statement for Freshwater Management. This sort of clarity helps everybody: helps rural communities; it helps us to meet our climate obligations internationally and locally as well. It’s that transparency which is really, really important—transparency on the milk price, about exactly how it got there, so that the competitors, the people that aren’t in the “Hotel Fonterra”, know exactly how that got there and they get a bit of clarity about how that got there as well, but also, if we’re going to talk about emissions and making sure that we can support farmers, support rural communities, to do the things that make them move to more sustainable land uses, that that is all in place.

The Greens don’t see that in this bill, and I have talked about it in the first reading and the second reading as well, because we need to, in order to achieve our 2050 target, including the requirement to reduce biogenic methane emissions by 24 to 47 percent by 2050—reducing agricultural emissions will enhance our reputation, actually, because we’re living in the middle of a climate crisis. It gives you a competitive edge, it gives you all the edges, if you can show to the market—and also, by the way, great for our communities, great for our tamariki, and great for our mokopuna that we are actually doing all of the things that we need to be doing to make sure that we have a low-emissions future, making sure that we do all of those things to make sure that we support our communities but, actually, we have that transparency about how we’re going to get there, through to the national emissions reduction plan, the national adaptation plan, and all those other plans as well. That wasn’t clear for the Greens, so, unfortunately, we will not be supporting this bill.

Thank you, Madam Speaker, and thank you very much for the opportunity to speak to the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill. Being very collegial, I want to thank the other members of the Primary Production Committee that canvassed this piece of legislation in its entirety. The committee had a robust—and, I’d sometimes argue, enjoyable—debate, and scrutiny of all three stages of this legislation, right from its first reading, subsequent submission process, second reading, committee stage, and here we are.

I think we all worked well with the officials; the officials were very succinct in their delivery and deliberations with us, to iron out the kinks and concerns that were raised in the legislation. There was certainly quite a lot of concern raised by various submitters—and equally a lot of support for this piece of legislation.

It has been previously articulated in the House by various other speakers tonight and previously, when this bill has been debated, that it amends the Dairy Industry Restructuring Act 2001 (DIRA) to support Fonterra Co-operative Group Ltd to move to its new capital structure, and we understand that we have an international shrinking milk pool. The new DIRA would regulate the activities of Fonterra to assure Fonterra suppliers and the dairy market for all New Zealand that the milk production remains contestable and transparent, and I think that was well-canvassed in the previous committee of the whole House stage. Transparency is key in this legislation, for farmer owner-operators and other processors, that they can have full transparency about the milk price panel—who sits on it, how it will work.

The committee heard 15 oral submissions and also 23 written ones. One notable submission—and I read it extensively—was from Open Country Dairy, Synlait, Westland Milk, and Miraka. This was a joint submission, and it made fair and honest and what I think are legitimate concerns. Vigorous discussion was warranted, and I think the committee reconciled their differences over this. We canvassed the contestability, the transparency moving forward with this legislation, around the role of the Commerce Commission because that was tantamount to having good outcomes with the base milk price setting.

Also the entry and exit provisions in the bill. Now, it’s been well articulated tonight that entry and the share requirements of those coming into Fonterra, and the potential fiscal burden had been negated with the entry provision, but the exit policy was equally as concerning by those somewhat older farmers like myself, seeking to leave the industry and potentially lose some of their equity. We all know that those farmers in those instances had contracts, often, and obligations for banks via loans and potentially created liquidity issues for them. Such clarity was necessary and important for those farmers divesting from Fonterra in terms of their capital structure, as I’ve previously mentioned. These were fair questions when posed in the debate, and it was tantamount to a good outcome—in this House, this is an open market of free ideas and share debate—that we canvass those.

What will the time frames be for the $350-odd million that was previously discussed in the committee of the whole House stage? This was raised by shareholders that were potentially going to leave the industry—sharing-down process, what will that ultimately look like for Fonterra suppliers leaving the industry? I think it was important that these time frames had some surety, and the Minister did his utmost best in the previous committee stage to allay those concerns. Would there be any predatory pricing? The role of the Commerce Commission, I think, in this legislation has further put forwards and given those in the industry some solace moving forward that there will be contestability, transparency, and that will be publicly transgressed to all of New Zealand.

The ACT Party did raise significant concerns about this process. We thought it was tantamount to a good outcome that there was a contestable free market, and it was unconstrained in a fashion to give surety to all suppliers of milk and the processes therein.

I think, at the end of the day, equally and importantly, it strengthens the governance structure for Fonterra. It gave pause to those that were concerned about how the milk price panel would work, and it gave consideration to improving the independence of that base milk price calculation.

Really and truly, the ACT Party did canvass this extensively, we were concerned that it did not have full clarity. We understand the importance and the rationale to create an environment to give that transparency for New Zealand and, equally, Fonterra suppliers. We have raised these concerns before. We will agree with the bill in its third reading. We look forward to seeing how this new DIRA will give surety to Fonterra suppliers both leaving and coming into the industry, and, equally, how the Commerce Commission will go through each role in holding Fonterra to charge over these to give surety to competitive processes. We support this legislation.

I declare the House in committee for consideration of the Climate Change Response (Extension of Penalty Transition for Forestry Activities with Low Volume Emissions Liabilities) Amendment Bill.