Dairy Industry Restructuring Amendment Bill

When the House adjourned, I was explaining that Mr Ian McKelvie’s criticism of my colleague Steffan Browning was misplaced. Mr Browning was explaining why the Green Party opposed the Dairy Industry Restructuring Amendment Bill. It was not an attack on Fonterra. As our largest company, Fonterra is important to our economy. We want it to flourish, and we want it to be in the dairy business long term. What we have criticised is Fonterra’s current business strategy and the relentless increase in cow numbers and milk supply, because that fails to recognise that there are environmental limits to growth given dairying’s serious impact on our waterways and on our climate.

The result of yesterday’s vote on Trading Among Farmers was not an overwhelming mandate. The fact that one in three shareholders rejected Trading Among Farmers highlights the depth of concern about what this bill proposes. That is because for Fonterra the cooperative structure has been a huge part of its financial success. When the three main players in the industry—the New Zealand Dairy Group, Kiwi Cooperative Dairies, and the New Zealand Dairy Board—were merged in 2001 to create Fonterra, there was a deliberate decision to establish it as a cooperative. That was seen as the best way of protecting farmer interests, because in a cooperative you have effectively got an alignment between the interests of the supplying farmers, the processing and the marketing arms of the company, and the fiduciary duties of the directors, so that the cooperative members receive the best possible price for the milk they, their cows, and nature produce. That has certainly been reflected in the higher dairy payouts.

Providing for Trading Among Farmers cuts across this. It creates a significant risk for the future of New Zealand’s dairy farmers and for Fonterra, because when a dairy farmer sells her units into the Trading Among Farmers fund she is selling her rights to the dividend, and also the equity in the cooperative. While the farmer will certainly retain the mutual supply and collection contract with the company, and voting rights, he or she is giving up the stake that those shares represent in the financial ownership of the milk tankers, the milk processing plant, and other cooperative plant. That is where the risk lies.

It risks introducing a tension between what the Hon Shane Jones has called the producer capital and the investor capital—those external investors who own the dividends from these unit shares—and, as the independent adviser to the Primary Production Committee, James Morrison, noted in his report, those tensions will inevitably arise between the farmer suppliers to Fonterra, the external investors, and the fiduciary duties of the board of Fonterra to those investors. So there is potentially going to be ongoing conflict between investors and the supplying farmers over the company’s strategy and the company’s operational decisions, and there is a risk that over several decades the ownership of Fonterra and its key strategic decisions become increasingly separate from dairy farming.

The stated purpose of these Trading Among Farmers shares is to provide a capital base to use as a buffer against redemption risk, but submitters who oppose it said that that redemption risk had been overstated; it had been sold to farmers on the basis of one extreme year when we had the San Lu scandal, drought, and the global financial crisis. So those submitters and those who voted yesterday against Trading Among Farmers framed it as a choice between keeping Fonterra New Zealand - owned or making it a target for large-scale investors who would be more interested in the dividend returns from their shares. That is the risk—that this is the top of a slippery slope, which will lead to more corporate investment and overseas investment, which would weaken the voice and potentially overwhelm the farmer milk producers. That is why the Green Party opposes this bill.