Dairy Industry Restructuring Amendment Bill

I am very proud to rise and speak on this bill, a very, very important bill. It is, perhaps, opportune that we are not to complete this bill prior to a vote that will take place on Monday the 25th, when farmers themselves will vote whether they want to support TAF, which is Trading Among Farmers, which will be enabled under this legislation.

The bill does three things: it enables trading among farmers of their own cooperative shares, it sets a milk price setting - process, and, in the absence of Trading Among Farmers, it sets a process for setting share value. The bill is unique, because nowhere else in the world has this structure been put in place for cooperatives. It is complex for that very reason and, unfortunately, the whole bill has been rushed. That is why Labour cannot support this bill at this point. We welcome the opportunity that the Committee stage of the bill will provide beyond the vote, having got a clear message from farmers whether or not they want this to proceed. We welcome the opportunity to tinker with and improve the bill at that time.

We were hampered, in my view, by advisers to the Primary Production Committee who did not have a wide knowledge of cooperatives. They had a very good knowledge of competitive law in New Zealand. I am very grateful for the efforts of James Morrison, who was the independent adviser to the select committee, who brought a truly independent and focused view.

In 2001 the Labour Government set up Fonterra through the Dairy Industry Restructuring Act. It is the world’s No. 1 dairy cooperative. It is the most successful company in the most successful industry, arguably, in this country. At that time that company had, effectively, 95 percent control of the dairy industry. The Labour Government laid down some requirements. Firstly, milk should be supplied to independents, who might want to innovate and grow opportunities in the dairy industry. Secondly, farmers should not be trapped in a company but they should have some flexibility to enter the company—and there was an obligation on Fonterra to take their milk—and they should be able to leave, if they chose. So we set up open entry and open exit.

The third requirement was a fair value share, which, again, was a new concept for a cooperative. Some have said that that was flawed from the start. I tend to agree that it has not been perfect and it has not always given the good drivers for Fonterra, and now it is time that that should be changed. The issue is how we should change things.

We have major competitors in the country now taking farmers’ milk, processing it, and exporting milk products. We have opportunities for farmers to leave Fonterra. That ability to leave has created, over time, what Fonterra has deemed a redemption risk—that is, farmers can say “We’re out of here.”, and within 30 days of leaving at the end of the season require the company to pay out the capital. That has been a challenge for the company at different times. In fact, in 2007 the company saw some real problems and thought it would need to go to the market and get outside capital to shore up the company and secure its balance sheet.

The farmers rejected that proposal, because they said that they did not want outside capital and that they could manage the challenge themselves. How the company got to that point is a reasonable question. Firstly, the executives of Fonterra were incentivised through their salaries to have an increasing share price, which was, basically, a flawed concept and driver for a cooperative company. They were also incentivised on the basis of a better payout than Westland Cooperative Dairy Co. Ltd, which produces about 2 percent of New Zealand’s milk supply. Again, arguably two flawed drivers of executive behaviour that led to the problems in 2007.

Farmers rejected any notion that outside investors should come in and control, or have any stake in ownership in the company. So we have ended up with a bill here now. The Primary Production Committee, unfortunately, did not get much of an opportunity, because of the rushed process, to go back to basics and ask why the bill is here, why we are doing this, and what the objectives are that we are trying to meet here.

We were firstly told back in 2007 that the company needed new capital, that there was redemption risk, and that there was a need for permanent capital. These underlying drivers—reasons—have seen this progress, in my view, from a 2007 concept to one that is in the House here today. That evolution has meant that we do not have the right solutions to deal with the appropriate problems. The 2007 proposal did create a great opportunity for the New Zealand Exchange—that is, a company of such size, where farmers are committed through huge capital investment, through hard work, through innovation, and through an ability to produce milk efficiently for the international market, means that anyone investing in, or having a stake in, this company is arguably having a stake in one of the best companies in the world. The farmers rejected that notion. The 100 percent control and ownership of their own company has been an underlying driver that the board has been slow to realise, but I think it finally got the message.

So we have a bill here that does a number of things. It allows trading of farmers’ cooperative shares among themselves, which farmers endorsed in concept 2 years ago. But officials have said, I think for reasonable reasons of liquidity, that there must be an equivalent fund that is fungible—that is, that the value of the shares and the value of the units must be equivalent. They must be set out alongside the sharemarket for farmers, so that people can purchase units and take the dividend streams—the economic rights and any increase in share value—from those units.

The concern has been that this may create tension within the cooperative. I go back to a quote from our independent adviser, who says: “the whole of the draft Bill, including Trading Amongst Farmers (“TAF”), rests on the Fair Value Share, which is fundamentally flawed.” I go back to, as I indicated earlier, a belief that this is perhaps right. But what occurs in this bill in trying to address that problem, reduce the redemption risk, and identify what officials call “well discovered price or share value” is it opens up an investment opportunity and a unit trading market, the consequences of which the select committee had no ability to truly test. I can quote one of the submitters, Tony Reilly, a farmer—a director—who said that “redemption risk does not go away under TAF—it is simply shifted to farmers’ balance sheets. TAF will allow for much greater fluctuation in the share price.” We got no advice from officials on that proposition, and have not been able to truly test whether that might or might not occur.

The bottom line is that there is so much uncertainty that will be injected into the dairy industry from this legislation. There is so much uncertainty for the farmers themselves that Onno van Bekkum—again, an independent cooperative expert—has said that “This hybrid structure created under the TAF concept is one that has not been tested, and one that can’t identify the solution to the growing tension between the interests of investors through units, and the interests of farmers who want to maximise the return from their milk price.”

Labour has concerns that in spite of the belt and braces approach from Fonterra, assisted by the select committee, to tidy up the issues, to reduce the fund size from 25 percent to 20 percent in the constitution of Fonterra, and to tweak the milk price obligations to ensure that contestable markets do not mean an undermining of Fonterra’s position, but do allow competitors to come in and have a fair go, the share price, in the absence of Trading Among Farmers, does not undermine Fonterra.

We attempted to do all those things in the select committee, but the bottom line is that this is a complex bill. It is being rushed through the parliamentary process, and the advice to the members of the select committee, in my view, was inadequate. We welcome now the opportunity for farmers to speak first, knowing what they are approaching, and we will, through the Committee stage of this bill, take another look at what might be required to improve this legislation.

This bill, the Dairy Industry Restructuring Amendment Bill, is the thin edge, the setting up of the selling out of the Fonterra cooperative and its family farmer members. So the Green Party will not be supporting this bill. This bill is the dairy farmers’ poor cousin of the Mixed Ownership Model Bill, which was set up to privatise State assets.

In the Dairy Industry Restructuring Amendment Bill, the so-called Trading Among Farmers provision—TAF—allows outside investors in to trade on the dividend stream of Fonterra farmer members and begins an inevitable demutualisation of Fonterra and increased foreign control of New Zealand’s primary industries. We already have much foreign control in New Zealand primary industries, particularly timber, and we do not need more in the pastoral area.

This is not Trading Among Farmers; this is actually “Trading Against Farmers”, nothing less. Even if Trading Among Farmers is not agreed by Fonterra’s farmer members—and they have not been well-informed by their executive—the milk pricing and so-called fair value share regime sets the scene for the rot to set in at Fonterra, devaluing family farmers’ worth.

Fonterra—the cooperative of 10,500 New Zealand farmers representing 3 percent of global dairy production, 25 percent of New Zealand’s export earnings, and some $19.9 billion in revenue, according to Fonterra—has got the greedy looking at how to get a slice of the action, albeit that some are actually insiders.

This bill has suffered from poor process, with the Fonterra executive pushing a willing Government into rushing legislation through a rushed submission and hearings process at the Primary Production Committee, and now we are dealing with this reading of the bill while farmers are actually in the middle of voting on whether they even want this version of the runaway Fonterra executive’s plan for bringing in outside investment and influence.

The Dairy Industry Restructuring Amendment Bill should not be before Parliament at this time. Independent expert advice and informed responses that show serious flaws in the Trading Among—or, arguably, “Trading Against”—Farmers concept are still being circulated as we speak among decision makers, including farmer shareholders and members of Parliament.

The Green Party points out again the limited time given to the Primary Production Committee and the farmer members of Fonterra, the limited access to full information from Fonterra, the limited time for more expert discussion and advice, and the subsequent difficulty in exploring the nuances of the bill, especially considering its complexity.

Let me reassure the House—and you well know, Mr Deputy Speaker—that the select committee did spend dedicated time on extended hours to hear many, and often substantive, submissions and advice, and spent a reasonable time in deliberations. However, the information available to the select committee was never complete, nor was there opportunity for farmers to submit to the committee on the information circulated very, very late in the process by Fonterra to them.

Fonterra has tried reselling the “TAF” concept, the Trading Among—or “Against”—Farmers concept on the basis of redemption risk, which is the need to be buffered against an outflow from Fonterra of farmer members to other milk processors or land-use choices. The need to pay out their shares on their exit is redemption risk, and we will come back to that.

The Minister for Primary Industries said just today that this bill is about allowing free access in and out of Fonterra by farmers and about allowing free competition in the dairy sector. That is clearly setting a scene for his friends, including ex-frontbench National colleagues and the independent processors, to have less competition from the most successful farmer cooperative we have known.

Primary production cooperatives, or single desk - type collectives, work to the advantage of their members to ensure the best returns for their farming or sector production. Fonterra has been a good example of this and Zespri, although not a cooperative but a producer collective, is another. That is particularly evidenced by its management of export sales. ENZA—formally the New Zealand Apple and Pear Marketing Board—however, is an example of where deregulating and fierce competition, including outside investment, blew the sector apart, and it can no longer be considered a successful export sector to the level that dairy and kiwifruit are.

This bill, the Dairy Industry Restructuring Amendment Bill, also missed an opportunity. The bill includes provisions that can influence land use, land price, commodity trading, or value-adding. It may have been designed to reward best environmental practice also. The focus of the bill on the efficient operation of dairy markets in New Zealand missed an opportunity, and it fails to allow those broader gains, such as organics. Fonterra has already dropped 50 percent of its organic producers, and certainly is not paying them any form of premium from its organic programme, due primarily to what it considers inefficient milk pick-up runs and processing plant operations. What is inefficient? Unsustainable production is inefficient. Larger-volume independent processors show no sign of picking up what can be seen as more environmentally sustainable production. “Efficient” is primarily a term used for volume-based production and marketing. It does not address long-term economic efficiency, that being sustainable production.

The dairy industry has presented to me how it wants a 10 percent lift in production while holding its environmental footprint to the status quo, as though that is OK. Well, that is not such a fantastic outcome when the status quo in environmental outcomes is seriously way below par. This bill could have included drivers that would have focused on value-adding on-farm through certifiable, sustainable production, such as organics, not further commodification for outside and, more often than not, foreign interests, making New Zealand farmers peasants on their own land.

Some consultants suggest it may take 15 years for the breakdown of Fonterra following the cracking of this cooperative nut, but I suggest that with the vested interests of this loyal Fonterra board and management and the outside investors, demutualisation will occur much more quickly once Trading Among Farmers or wildly fluctuating share values and milk pricing chip in.

We all need to remember that Trading Among Farmers, as proposed in the bill, has had an evolution from origins that intended open stock exchange listing. Fonterra’s push for Trading Among Farmers follows that, and Trading Among Farmers maintains as much of that as Fonterra’s executive, the Government, and officials think that they can get past the Fonterra farmers. That does not fit the cooperative model that has allowed the success of Fonterra to date.

Fonterra has said that it needs this move to achieve the capital to allow offshore farm and infrastructure development. Then it says: “No, no, no, that is not what we are saying. It is to cover redemption risk.” It is very easy to doubt the veracity of the Fonterra executive’s statements. Spin, fact, or fable—whatever the statements, the real need for Trading Among Farmers as presented to the select committee is, in part, contradicted in its complex communications to its farmer members.

Many submitters pointed out that buffering for redemption risk can be achieved by other means, such as a retention policy that has already been shown to be successful in accruing significant capital. Figures show that retentions taken from 2008 have managed any redemption risk, and, in fact, $438 million was taken in 2010, it was retained, and another $487 million was retained last year. Effectively, half a billion dollars a year can be retained, and Fonterra was saying that it needs to do this smart thing of letting outside investors in for redemption risk. That is clearly not the case.

I will just point to Mr van der Heyden and his friends, who seem to have gone for a walk from their members. They have certainly alienated their members. But their very latest missive—and they are pushing very, very hard—

💬 Mr DEPUTY SPEAKER: Order! The member’s time has expired.

It gives me great pleasure to rise and speak in support of the Dairy Industry Restructuring Amendment Bill. I think to begin with it would be very important to get some facts on the table during the second reading. In 2010 farmers voted in support of Trading Among Farmers. Fonterra in 2012 by 25 June has allowed farmers to have another vote as to whether they want to support Trading Among Farmers. This bill provides the appropriate platform by setting out that structure as to what that would look like. It does help Fonterra to manage the redemption risk, and when we look at it, if farmers vote for or against—and we on this side of the House have confidence in farmers’ choice—there is a default situation, and that sits around the fair value share. So this bill does provide the mechanisms necessary to allow our most successful cooperative to go forward. It guarantees 100 percent farmer ownership, and it gives me great pleasure to commend this bill to the House.

I am pleased to rise on behalf of New Zealand First to speak to the second reading of the Dairy Industry Restructuring Amendment Bill. New Zealand First is opposed to this bill, as I hope a majority of New Zealand’s dairy farmers will also be. This bill is quite possibly the single most important piece of legislation to come before this House in recent times and it is a shame its importance has been largely overshadowed by several other of this Government’s monumental failings.

I have been privileged to be allowed to participate as a non-voting member in the proceedings of the Primary Production Committee as this bill has been examined, and I wish to thank the committee members, particularly the chairman, Mr Ardern, and the deputy chairman, Mr O’Connor, for their help and advice in assisting me to understand the workings of the dairy industry and the potential ramifications of some of the aspects of this bill. I also want to thank the committee for demonstrating so clearly how well the select committee process can work as a vehicle for promoting collegiality and true consensus politics, even though that may not necessarily be reflected in the speeches in this House and the ultimate outcome of the voting process on this bill. It is enormously encouraging to see that cross-party discussions can be carried out in the way that they were during the committee’s deliberations. It gives me great faith that our parliamentary democracy can work as advertised and as intended.

I went into this process thinking I knew a great deal about New Zealand’s dairy industry and the place and structure of Fonterra within it. I came away realising that the more I learnt, and the more I understood, the less I knew. If a person like me, who has had dealings over many years with farmers, can come to realise that my knowledge of this vital part of our country’s economy was not what I thought, then I wonder how much understanding of it the average layperson can have, and, further to that, how much understanding the general public may not have with regard to the potential effects this bill may bring to the dairy industry and New Zealand’s entire economy.

At the heart of this bill is the authorisation for Fonterra to launch TAF, its Trading Among Farmers scheme. Through Trading Among Farmers, Fonterra proposes a one-off issue of non-voting bonus shares, or dry shares, to its farmer shareholders, the proceeds of which will create a capital pool, which Fonterra can use both as a hedge against the threat of redemption risk and as a fund for growing its offshore and value-added businesses. Fonterra shareholders have voted in favour of this scheme once already, on the understanding that it would guarantee 100 percent farmer ownership and control of the cooperative.

However, the scheme as it is now proposed is very different from that originally suggested, the key change being the addition of unit securities attached to the dry shares, which can be bought and sold by any investor and not solely by Fonterra’s farmer shareholders. The problem with Trading Among Farmers is that Trading Among Farmers, as it is presently proposed, is not what farmers voted on originally. If Trading Among Farmers really was just trading among farmers, there would not be a problem. But it is not. Trading Among Farmers is trading including farmers—TAF is TIF—and the trading part of Trading Among Farmers will benefit nobody but the traders.

We are told that in order to provide itself with a hedge against the threats exposed by redemption risk, Fonterra requires additional capital available. This capital can also be used by Fonterra to grow its brand businesses and its offshore ventures, which are the future for what is entirely an export-orientated organisation. This is well and good. However, redemption risk, we believe, has been overstated, and also not well understood is the reality that the real risk from redemption is not the exit of capital from the cooperative, but the exit of milk.

Milk is the sole source of wealth and income for Fonterra. No matter how it is dressed up, the only way Fonterra can pay its bills is by producing its own milk, and that milk is valuable: $20 billion in turnover, give or take; $10 billion in revenue, give or take—95 percent of it exported—and more than fully one-third of all cross-border trade in dairy products globally is produced right here in New Zealand, by Fonterra’s farmer shareholders. Twenty-six percent—more than one quarter—of all New Zealand’s export earnings are generated by Fonterra’s 10,500 suppliers.

We salute them for that. New Zealand First salutes New Zealand’s dairy farmers. They are small in number, but they are mighty in wealth creation. These are the people who get up at 4 o’clock in the morning and go and stand outside in the cold and the wet at the back end of a cow, getting covered in mud and other unmentionable materials, and extracting the white gold that is the single biggest source of this nation’s wealth. We want them to succeed. New Zealand First wants these people, these private business owners, to succeed and become wealthy.

When they are successful, New Zealand is successful. When farmers have money, they spend it. They spend it into their communities and they spend it into the economy, and we all benefit from that. In my previous employment, I sold irrigators—more and more of them to existing and new dairy farmers. In a past life before that, I sold tractors and farm machinery. Farmers buy these things, and the money they spend stays in circulation in New Zealand. But if the shares in Fonterra and the dividend streams attached to them are owned by foreigners in foreign countries, then that is where the money will go, and all New Zealand will be the poorer for it. And if Trading Among Farmers goes ahead in its present form, that is precisely what will happen.

At the moment, there is no real redemption risk, and redemption risk has been overstated and oversold. It has happened only twice in Fonterra’s history, both under circumstances of a perfect storm. But if Trading Among Farmers goes ahead, the first thing it will do is create a redemption risk. It would do this because under Trading Among Farmers share values will rise. They have to rise. They must rise, because if they do not, traders will not make a profit, and that is the entire point of a trading scheme.

So if Trading Among Farmers goes ahead as it is proposed, prospective investors will offer to purchase blocks of unit securities by way of tender. Farmer shareholders who wish to avail themselves of the return available will then arrange to purchase dry shares in the co-op, and money paid for these shares will become part of the so-called shareholder fund. The investor will then purchase the unit securities from the fund, along with the dividend stream from the shares in question. In order to encourage farmers to make dry shares and thereby unit securities available, investors will offer buy prices in excess of Fonterra’s existing share values. This is the only way in which they can ensure that shares will become available. As that happens, it will create a risk that some farmers may choose to take the win on increased share values, quit the co-op, and take the milk to another processor. At the same time, existing farmers, young farmers, and new farmers will find themselves faced with a much greater hurdle in terms of the investment required in order to supply Fonterra—an investment that they will have to fund through their own bank borrowing.

These things combined contain the potential to create another perfect storm, whereby there is a great incentive for farmers to quit Fonterra and supply their milk to alternative processors, the majority of which are neither cooperatives nor New Zealand - owned. Because the sole source of revenue for Fonterra is ultimately milk, as share values rise so the pressure for dividends to rise will also increase. And because all the money comes ultimately out of that one bucket of milk, the only way in which increased dividends can be funded will be for the farm-gate milk price to fall.

So we will have farmers finding themselves in the situation where they have voted in favour of the Trading Among Farmers scheme because they have been assured that Trading Among Farmers will guarantee 100 percent farmer shareholder ownership and control, but rising share values and a falling milk price will ensure that control rests with the people who set the share values, and those will be the unit security owners. Ownership will rest with the majority shareholders, and they will be the investors as well.

It will not matter that neither dry shares nor unit securities carry voting rights, because economic reality is that financial pressure would take our farmers’ vote on constitutional matters, as far as Fonterra is concerned. And they will vote to save their own skins. Who can blame them for that? I would do the same thing myself. If that means that they vote to lift the cap on the proportion of dry shares that the shareholder fund may hold, or the percentage of shares that any individual shareholder may own, then that is something that will impact immediately and tangibly on the cooperative as a whole and its ongoing viability. In the select committee, Mr McKelvie made the point that Fonterra’s dairy farmers have the right to vote themselves back to being peasants if they choose—and they do; they have that right. They are private business people. They are masters of their own destiny, and long may that be the case.

But Fonterra exists as a creature of statute. It is allowed to exist as a virtual monopoly in contravention of what would otherwise be laws providing protection against anti-competitive behaviour, because it was recognised by Parliament a decade ago that the size and strength of a unified dairy industry would be to the greater good of “New Zealand Inc.” as a whole. And it has been. The thing that was allowed to be created by the Dairy Industry Restructuring Act 2001 has grown in such a way that the whole is greater than the sum of its parts. New Zealand has benefited greatly as a result of Fonterra’s size and strength in the international dairy trade and in international markets. New Zealand currently exports 95 percent of the dairy we produce, and New Zealand accounts for 35 percent of all cross-border dairy trade globally. It is a $20 billion industry and the vultures are circling. Wall Street wants a slice of the New Zealand dairy industry, and this bill will deliver it to them, unless the farmers of New Zealand see the Trading Among Farmers scheme for what it is and vote it down.

Trading Among Farmers is a partial float of Fonterra in all but name, created by virtually the same people who suggested the float in 2007, and it was rightly rejected by farmers then. I have faith in the farmers of New Zealand. I have faith, and I hope they will see the truth of this abomination and shoot it down in the same way that they shot down the “fart tax”. I hope so because there is no protection for them in this bill. If they vote for Trading Among Farmers, they will lose their co-op, and New Zealand will lose its dairy industry. They will go back to being peasants, and we will all go with them. It will happen quicker than they can change their board, and it will not be able to be undone.

The farmers of Fonterra have been misled and misinformed. The Trading Among Farmers scheme is not what they have been led to believe it is. We have seen what happens to a dairy co-op that opens itself up to outside capital in this way and subsequently becomes demutualised. We have seen it in the example of Kerry dairies in Ireland. Once we go down this road, there is no going back. This is a terrible bill, and New Zealand First is opposed to it in its entirety. Thank you.

I raise a point of order, Mr Speaker. I am taking this point of order before the member speaks because I know he is a rural member, although I am not sure of his particular circumstances. Last time this bill, the Dairy Industry Restructuring Amendment Bill, was up, something occurred that caused me some concern, and that was that the honourable member Shane Ahern—

💬 Mr DEPUTY SPEAKER: Ardern.

Ardern, sorry. He made a declaration at the beginning of his speech around his financial interests in farming matters and, I think, to do with dairy farms. That caused me to do a little bit of research and to look in particular—and I think what is quite important in the House is that we have consistency as to declarations so that we do not have some members declaring and others not making declarations to the House when they are in the same circumstance on the legislation.

It caused me to look at Speaker’s ruling 76/6, which is one from Mr Speaker Kidd. It says: “The fact that an amendment might open up a business opportunity for a number of companies in which members have an interest is not a direct financial benefit. Such a business opportunity might or might not eventuate from a particular clause of bill becoming law. The matter is entirely speculative.” The view that I would like to put to you is that dairy farmers with regard to this change in Fonterra are in that situation. Whether there is a financial advantage to them or not is a matter of speculation.

The other, more longstanding Speaker’s ruling that almost certainly applies is 76/3, a 1956 ruling from Volume 310 by Mr Speaker Oram. I think most members—well, no, not most members of the House; that would be wrong. Many members of the House who have looked at the Standing Orders and some of the old Speakers’ rulings know that he was a wise old owl, and there are quite a few of his rulings here. What he indicates is that “A farmer member does not have a financial interest in a bill that provides for the payment for and marketing of dairy produce.” The point that I would like, or the submission—

💬 Mr DEPUTY SPEAKER: Could the member—

Well, I am nearly there.

💬 Mr DEPUTY SPEAKER: Please continue.

Well, the point I would like to make is that it is my view that that applies, and, therefore, members who are farmers should not be declaring an interest as they enter into a speech in the House, in the interests of consistency in the Parliament.

I thank the member for raising the point of order. The member has obviously done some homework. We will find those rulings on pages 75 and 76 of Speakers’ Rulings. There is actually quite a suite of them. In the case of members getting up, I think there is no specific and direct interest, as far as I am can see, but if a member wishes to declare that they have one, then I think that is up to them on this occasion. I do not see that any of these points of order direct either one way or another. In the case of Mr Shane Ardern, he also made it very clear when he chaired the select committee. If, in fact, this was legislation to demutualise, then that would have a more specific application. So I am quite happy to let members make that declaration as they desire.

I raise a point of order, Mr Speaker. I think that is where we run into a problem, because Speaker’s ruling 76/3 is actually very clear that a farmer member does not have a financial interest, in my submission to you. If members declare that they do have a financial interest, when the Standing Orders and Speakers’ rulings say that they do not, then that is where we run into problems and we run into inconsistencies.

I think, and I am going from recollection here, that Mr Ardern said that he had an interest in the dairy industry. I do not think that he actually linked it to the legislation, and that is why he spoke with some passion about that. I do not think any member—and I would need to check the record, but I was in the Chair at the time—said that they had a particular interest directly relating to this bill, but some acknowledged an interest in the dairy industry.

Given the recent point of order, I will very quickly take the opportunity to declare my lack of interest in the dairy industry. At the start of this process—

💬 Chris Hipkins: Oh, outrageous! What electorate does he represent?

At the start of—

💬 Hon David Cunliffe: Why is he speaking?

I have got only a couple of seconds here. At the start of this process I did have an interest in the dairy industry. I no longer have one as of 1 June. I just want to take this opportunity to speak, and I guess it saddens me to think that we had to listen to what I can only think of as a scurrilous attack on an industry that has served this country amazingly for 100 years by the Green member who spoke earlier. I think it is a shame when we have to put up with that sort of stuff. I accept that we do not all agree with things, but there is no need to attack an industry that has served our country in the manner that it has.

The Dairy Industry Restructuring Amendment Bill, surprising as it may seem, is probably the most important piece of legislation that will go through this House in this term of Government. When you think of the contribution this organisation makes to New Zealand and the fact that it is a creature of statute, we have no choice but to re-regulate it. That is how the system works. It will have a massive impact on New Zealand’s dairy industry and on New Zealand’s future. Having sat through the select committee process, I spent a lot of time getting myself confident and comfortable with the fact that this is the best possible solution for the New Zealand dairy industry in general. And the reason for this being the best possible solution is that—

💬 Hon David Parker: You don’t know that.

I said that I am satisfied myself. If we do not make progress in life, we go nowhere. It is time for Fonterra and the New Zealand dairy industry to take the next step. The last 10 years have been hugely successful for the industry, and I think that will continue. So I have no problem supporting this bill, having given it a great deal of consideration, and I think that the Primary Production Committee did a fair bit of work on that as well. I have no problem supporting this bill as it goes forward in the House. Thank you.

I rise to take a call on the second reading of the Dairy Industry Restructuring Amendment Bill. I begin by thanking the Primary Production Committee for its consideration of the bill. I also thank some of the representatives of the dairy industry who have been helpful to me and to the Labour Party in our understanding of the issues that lie under the bill, and I will list a couple of groups. Can I thank Fonterra and the executives who have addressed openly and helpfully the questions the Labour Party has raised; I thank them for their efforts. Can I also thank members of the dairy industry who have an alternative view from Fonterra’s as to where the balance properly lies in these considerations for their thoughtful contributions to the issues before us.

There are two aspects to this bill, as we have heard from other speakers. One relates to the price of milk that is to be paid by Fonterra to the people who deliver milk to Fonterra, and the division between that total payment as between a milk component and a return on the investment that people have in the Fonterra cooperative. The second is Trading Among Farmers and the trading amongst non-farmers of profit streams from the Fonterra shares.

I want to deal firstly with the milk price issue. There are a number of reasons why it is important that we get the milk price right. Some of the things that Fonterra cuts across in New Zealand, because of its size and its effective close-to-monopoly position in large parts, geographically, of New Zealand—in fact, in large parts of New Zealand it is an absolute monopoly when it comes to the collection of milk—are the interests of consumers, the long-term interests of the New Zealand economy, and the long-term interests of Fonterra, which mean that we need to get the milk price right. If we get the milk price too high, then we prejudice New Zealand retail consumers of milk. People end up paying too much for milk, and that means that somewhere there will be someone consuming Coca-Cola instead of milk. That is not good for the health of our country, and it is not fair on consumers who are paying more for their milk than they should otherwise pay.

The milk price in New Zealand is significantly higher than it is in Australia—

💬 Hon Trevor Mallard: Yep, and in the UK.

—and in the UK—and it remains an open question as to whether that is because of the dominance of Fonterra in New Zealand and the fact that we have inadequate competition in what is called our fresh milk market, but is actually, increasingly, reconstituted milk, even in New Zealand, out of season. So the ability of competitors to compete against that price of milk is, in part, reliant upon them being able to acquire milk at a fair price from farmers. If farmers are paid by Fonterra a higher price for milk than is a fairly competitive price for milk, then those competitors will not be able to enter the market, because they would always be at risk of Fonterra changing its pricing methodology, undercutting them, and, effectively, taking their market away from them. So there are very real issues as to why it is, from that perspective, important to get the division between milk price and return on Fonterra investment right.

One of the other reasons it is important to keep that price correct is that in the absence of competition we know that monopolies are inclined to become inefficient—inefficient in terms of their price structures, and inefficient in terms of the choices they make commercially, both within New Zealand and outside of New Zealand. If Fonterra is not facing competition from entrants and potential entrants, then, as a monopoly, it will become less efficient over time. That is standard competition theory. That is why we in the Labour Party believe in the efficiency of competitive markets, because if you do have a competitive market, then competition between participants in that market is, you know, survival of the fittest. Those that act non-competitively or have unduly high cost structures or unduly high profit structures fail because other competitors that have more efficient price structures or more efficient cost structures succeed at their cost and take their market share. So it is actually in the New Zealand economy’s interest and in Fonterra’s long-term interest that there be competition and the potential for competition in New Zealand, which is enabled through having a fair milk price and is prevented if you do not have a fair milk price.

I am not yet convinced that we have got this quite right in the legislation. I have heard, and I am convinced, that there are a couple of problems in the price-setting methodology for milk. The price for milk that is contemplated under this legislation is predicated upon a theoretical model for Fonterra that is based not on the actual efficiency of its milk production but on how efficient it might be if it was acting perfectly. Members opposite are shaking their heads—well, I think that is right, with respect, based on the submissions that I have seen and my reading of the legislation.

There is a theoretical product mix and a theoretical efficiency of the plant that Fonterra has that drive this milk model, rather than the actual efficiency that it achieves out of its plants and rather than the actual product mix that it chooses to produce. I cannot understand why we are using a theoretical construct rather than the actual construct of what it is that it produces, because that seems to me to mean a higher milk price than it can justify in practice, based on a theoretical model that is different from what it achieves in practice. I am not yet convinced that that is right. I think the milk price should be a fair milk price, based on what a competitive market would be. We do not have a competitive market; therefore, we have to have a theoretical construct, but that theoretical construct ought to be based on what is a competitive market rather than a theoretical rendition of it that cannot be achieved in practice. That is the first point I would make in respect of milk price.

What does that mean in practice? I am told that there is some dispute as to the amount by which the milk price is overstated. It might be by as much as 50c per kilogram of milksolids. I know that Fonterra denies that. Its competitors say that it is 50c per kilogram of milksolids. What that means—and this will be of interest to the Greens—is that that would have an impact on land price of around $5,000 per hectare, which affects land-use choice and has an outcome in terms of whether something is being used for sheep and beef, forestry somewhere, or dairying.

I want to turn, in the brief time I have available, to Trading Among Farmers. There is a national interest in Fonterra that arises from its importance in the New Zealand economy. That interest goes beyond the interests of the individual farmers and the interests of Fonterra, both of whose interests are important. That national interest is why we have let Trading Among Farmers out of some of the Commerce Act restrictions that would otherwise have stopped the formation of Fonterra or its continued expansion.

Redemption risk has been overstated, in my opinion. Retentions policy is limiting that. We have seen Fonterra purchase the Waimate facility that the Russians owned that has gone broke. For people to have somewhere else to put their milk, they have got to have somewhere else that is willing to process it. I do not think the redemption risk is as much as it was stated, and so the Labour Party was concerned to limit the ability of Trading Among Farmers to grow like Topsy. We are not satisfied with the provisions in the constitution alone for Fonterra. We think there should be a statutory limit on the number of shares that can be owned by non-cooperative members. We have suggested a limit of 20 percent. We would be comfortable with a lower limit. We have yet to reach agreement with Fonterra. There has been some negotiation with Fonterra, and maybe that will come to something, maybe it will not, but there should be a statutory limit on that. Otherwise, we put at risk the long-term viability of the vertically integrated Fonterra through the tension between the new shareholders and the wet co-op shareholders.

I referred to a report in my speech, and it is not part of the submissions of the Primary Production Committee. I seek leave to table a report by Dr Onno van Bekkum. It is called Fonterra Farmers’ 2nd Vote on TAF: A Second Opinion.

Leave is sought for that purpose. Is there anyone opposed to that course of action? There appears to be no objection. Leave is granted.

Document, by leave, laid on the Table of the House.

I will take a short call on this very important bill before the House, the Dairy Industry Restructuring Amendment Bill. The previous speaker made mention of the pricing capacity. The reason for that is that Fonterra processors have to be in a position to process all the milk, in case the competitors that Fonterra is required to supply under this legislation choose not to take it. So Fonterra has to be in a position to process that milk.

I just want to briefly discuss the huge implications of this legislation. I want to commend members of the Primary Production Committee, which I have been privileged to be a little bit of a part of, from across the political spectrum for the robustness and integrity shown by members to tease through this very important legislation and work it to be as it should be. I also want to acknowledge the fact that this is a very, very important part of my electorate’s economy, and so I have a very, very significant interest in watching the progression of this bill through the House. At the end of the day, what this legislation is about, and what dairy is about, is ensuring that we have the most efficient dairy industry possible in this nation.

Just in closing, with regard to Trading Among Farmers, I just want to make this point. Ultimately the judge of this will be the farmers who will vote on Trading Among Farmers itself. I have great pleasure in commending this bill to the House.

This is a split call. Two 5-minute calls, so there will be a 1-minute bell.

Members opposite may be wondering why an Auckland member is taking a call on this bill, the Dairy Industry Restructuring Amendment Bill. I would just like to say—

💬 Hon Trevor Mallard: Maybe it’s because you drink milk.

My mother brought me up to drink milk. That is dead right. But actually, for my colleague’s information—

💬 Hon Trevor Mallard: He’s the drinkers’ representative.

That is it. I am the drinkers’ representative. I actually grew up in the shadow of the Clandeboye dairy factory in South Canterbury, and worked on farms in that area.

💬 Hon Trevor Mallard: Wasn’t there quite a lot of pollution down there?

It had some impact, I think it is fair to say, colleague Trevor. To my great interest, I later found myself working as a consultant to the New Zealand Dairy Board around the time that consideration was being given to the merger into what became known as Fonterra. I have a longstanding interest in these issues, and I am delighted now, as Labour’s economic development spokesperson, to be able to make a contribution—a small one—to this debate.

I would like to pick up where my colleague the Hon David Parker left off, and just address the issues around Trading Among Farmers. There is a very fine balance, it seems to us, to be struck. On the one hand, we need to ensure that the benefits to farmers, which are considerable, and the benefits to the nation, which are also considerable, of the cooperative ownership structure are not gradually unravelled. We do not want to see New Zealand’s No. 1 export industry suddenly become owned by foreigners, because the value of that industry to New Zealand is roughly akin to, I do not know, the banking industry. Banking and finance, as we know, rather than having a positive impact on our current account, are a perennial drain to the tune of billions of dollars, because the ownership is offshore. We cannot afford—we absolutely, as a country, could not afford—that to occur with Fonterra. So there is a huge national interest, a long-term national sovereignty interest here, as well as a very tangible and quite proper farmer interest, in retaining a long-term cooperative structure.

So the question that arises is whether the advantages of the Trading Among Farmers proposal—in terms of redemption risk, in terms of permanent capital, and, underlying that, in terms of the ability of the organisation to draw in outside equity so that it might further invest in the development of consumer products and more advanced nutraceuticals, getting more value out of a bucket of milk, if you like—would be outweighed by the risks of a gradual erosion of corporate ownership and control. The argument against that risk is that Trading Among Farmers sets up the trading of units—not full shares—and those are non-voting, and that is accepted. But I can be absolutely clear to members of this House that, notwithstanding that, the stock market and many of the institutional investment interests there are absolutely drooling at getting their hands on Fonterra units. They only wish it was more than $500 million—at least double would have suited them. It is essential, in the face of that pressure, that the balance is retained. That is why, as my colleagues have said, Labour has been in discussions with Fonterra around a legislated cap on the amount of units. Those discussions have not yet concluded. For this moment in time, of course, we have no option but to maintain our opposition to this bill, because in its current form it seems to us that the risks of a gradual and progressive erosion of farmer ownership and control, and, therefore, of national sovereignty and long-run national interests, are just too high. They are too high because there is nothing in the law to cap the level of units, and the constitution could be changed under market pressure at some future point.

The interests of external investors are not the same as the interests of farmer shareholders. They will—to some extent, quite legitimately—pull in different directions. It is essential that the law, to some extent, allows for that but does not allow for so much of it that that pressure gradually pulls the cooperative apart.

There are some significant process issues around this bill to do with the rush and haste with which it was forced through the Primary Production Committee. I want to pay tribute to the work of the committee, but I want to reflect the views of many members from around the House that this bill went through too fast, and that farmer submissions and other submissions were not fully or adequately heard. They want to recognise that farmers themselves are having some serious second thoughts about aspects of this proposal. Notwithstanding the Fonterra Shareholders’ Council support, farmers themselves are going to have to vote. That will be quite finely balanced, and we look forward to picking up this debate in the light of that vote.

I rise to take a short call on the Dairy Industry Restructuring Amendment Bill. Before I start, I would just like to say that the criticism that Mr McKelvie made of my colleague—

💬 Mr DEPUTY SPEAKER: I am sorry to interrupt the member, but this bill is set down for resumption next sitting day.

Debate interrupted.

The House adjourned at 6 p.m.