Dairy Industry Restructuring Amendment Bill (No 3)

Just a couple of questions for the Minister in the chair, the Hon Damien O’Connor, on the way through in this committee stage, and one of them is a question around the person who is deemed to be put on the milk price committee. I just have some questions around that person and to how the Minister sees that role being enacted; and, secondly, does that person have deemed director responsibilities?

Thank you, Madam Chair. I’m happy to answer any questions that come from the committee. Can I just say up front, look, I appreciate the process through the select committee, and after the select committee, actually, dealing with parties to get general consensus on the passage of this dairy industry restructuring legislation.

On the milk price panel, there is a view that it needs to be more robust and more independent. I guess the view and the—I guess—suspicion of independents is that it has been driven very much by Fonterra influence. I think it’s important both for Fonterra and for the whole dairy industry and for the milk price that there is a clear understanding that there is an independent, who will be appointed by the Minister, who has obligation to the process first and foremost. That is to just ensure that the information brought to the panel is considered objectively and the process of consideration—not to determine what the outcome is. That is indeed for the panel, but having a clear independent, appointed by the Minister, I think will give some reassurance to everyone across the dairy industry.

Thank you. So now on that note—because, you know, we do need some protections around a number of things, I think. My next question is—in this bill, there is a clause which helps Fonterra to be able to refuse a farmer if there’s an issue of environment or animal welfare. Now, I’m just wondering what protections there might be in there for farmers if Fonterra get something wrong, and also, you know, if there’s an element of Fonterra making a mistake around that issue, what protections there are for farmers, because a mistake can easily be made.

This piece of legislation doesn’t provide a legal process for review or redress, but, of course, through normal commerce law, contractual law, of course, there will be the right of any farmer to go and challenge a determination. While the bill does give Fonterra discretion, then clearly the discretion, as laid out in—in terms of environmental judgment, then there would be a process through normal courts of law and contract law for a farmer to challenge that. I appreciate that it may not be clear enough for people.

We are offering Fonterra an opportunity to exercise discretion, but we expect that they would do that in all fairness to everyone involved. They are still a dominant player in the dairy industry. Independent companies have come to me, and they are not entirely comfortable with the passage of this, the Supplementary Order Paper 547 that, effectively, removes open entry, because that enabled an insurance policy for farmers who would opt to supply the independents and then had the option to come back. They are fearful that Fonterra, through this legislation, may, I guess, exercise its dominant position, be a bully.

We—that is, Parliament—will always be keeping an eye on Fonterra. I think it’s important that we state that clearly. They are an entity of legislation that—nowhere else in our economy would we allow a player to be 80 percent, or thereabouts, of a market. As the legislation was originally designed, some competitive tension is necessary, and, indeed, for Fonterra farmers, they need to have benchmarking with the independents. So we are trying to find the right balance of allowing Fonterra some discretion but then always qualifying that with oversight of normal commerce legislation and protections for anyone through our economy and commerce.

Thank you. A question around—so I wasn’t on the committee when this legislation went through the committee, but I did sit on it for a fair proportion of the time. One of the major issues we had was around—I mean, I’m really comfortable with the way the open-entry thing has been dealt with, but there were questions around sharemilkers, and I’d just like the Minister in the chair, the Hon Damien O’Connor, to comment on whether he feels like—you know, we tried to define what it looked like for new entrants or people who hadn’t had a major share in our farming entity before, because sharemilkers are the life blood of our industry, and the last thing we want is for them to be blocked out.

It was quite a contentious thing to try and get—you know, we all agreed we wanted to do something, but if you define it, you start to leave somebody out. So I guess what I’m asking you, Minister, is do you feel that the legislation and the Supplementary Order Paper we’ve currently got will be—that there won’t be any issues with sharemilkers in the future with regards to new entrants being able to come into Fonterra?

Thank you, Madam Chair. I said to the Primary Production Committee when we introduced the bill that there was no clear direction from this Government as to, you know, what we thought was the absolute best way forward. This is a complex area, trying to find the right balance between competitive pressure and not undermining, you know, what is our biggest investment in a New Zealand company and what is the most significant industry, particularly post-COVID.

And so the select committee went through that quite comprehensively, and came back with a recommendation that consideration should be given for new farms, for people coming into the industry. And that was a fair point. But they also—and their advice back to me said that this is a tricky area to define. We went through that with our coalition partners—New Zealand First, the Greens, and consultation with the National Party—and did, I guess, agree that the definition of a new farmer was so complex that it was likely to be gamed in the future and that we were better off, through what we have come up with, clearly stating in this House, with the passage of this legislation, that we expect that Fonterra won’t unfairly block someone from coming into the industry. If they were to purchase a farm from someone who had been a supplier of Fonterra, then that new farmer, under what might have been the new definition, that person coming in had a reasonable expectation that they would be able to continue to supply Fonterra.

And that is indeed what we have come—and there’s been some to-ing and fro-ing on the wording, but, you know, the ongoing viability of that farm and what someone paid for that farm is based on a reasonable expectation that they will continue to supply Fonterra. So we, I think, have come to a position, as best we can—and it may be challenged in the future, perhaps, we can’t prevent that, but I think we’ve got it about right, and new people will be able to come in, and if it was a dairy platform, there’s a reasonable expectation that, of course, given the conditions around environmental obligations, animal welfare and all of that, the person be a good farmer.

Madam Chair, thank you for the opportunity to ask two blocks of questions of the Minister in the chair, the Hon Damien O’Connor. I do so acknowledging that the number of times the dairy industry restructuring legislation has been before the House, it’s been largely a bipartisan issue, whereby the two major parties, anyway, have a genuine interest in the importance of the dairy industry to New Zealand and the significance of Fonterra as our biggest company, and the fact that Fonterra’s performance actually affects the livelihood and standard of living of every New Zealander.

My first question is in relation to the milk price panel and the fact that, in this legislation, or the first time the Government has the ability to appoint somebody, one person will be on a panel, then, of five, as the milk price is determined. My questions are: what are the qualifications that the Minister has in mind for that appointment? What sort of person are we looking at? Are we looking at a person with an economic background, for example? What, then, is the process for appointment of that person? Is it just a normal Government appointment—Cabinet appointments and honours committee (APH) process initially? And, finally, before the appointment is finally made, what’s the consultation process? Is the Minister required to consult with the dairy industry, dairy farmers, with the company Fonterra, and, in fact, with other companies before that appointment is finally made? So that’s my first block of questions for the Minister.

My second issue is the issue which he’s just addressed in relation to questions from Barbara Kuriger regarding the tricky issue they had in ending open entry, open exit and ensuring that this did not disadvantage new potential entrants into the industry. Whilst I understand—I wasn’t on the Primary Production Committee, as I say—the select committee spent some time trying to come up with suitable wording, it went back from the select committee to the Government for them to have a look at it, and I think, correctly, the Government said, “Listen, this wording that you’ve arrived at, we know the intent of what you’re trying to do, but the wording you’ve arrived at in fact is too woolly. It’s not definitive enough.” Therefore, the Government, or the Minister, has tried very hard to come up with replacement wording—new section 73(3A) set out in clause 20B of Supplementary Order Paper 547. My question, in looking at this wording—I know exactly what the Minister’s attempting to do, but it is still, in effect, fairly undefined. Fonterra has to have regard to “(a) the effect … on the ongoing viability of the farm to which the application relates, if new co-op had a supply agreement in respect of the farm at any time in the previous season;”.

It’s not very exact wording, Minister. Fonterra has to have a look at the land-use opportunities available to the applicant. It means that somebody entering the industry expecting to be able to become a supplier to Fonterra—the very decision that person is making in buying the farm is with the expectation that he or she will be a Fonterra supplier, and then they’ve got to step through this regime, which, while I accept the Minister’s made every attempt to define it, still lacks exactitude. I’d like the Minister to comment on those couple of points.

Thank you, Madam Chair. The Hon David Carter raises a fair question. It is virtually impossible to be exact in this area. The intent, of course, as we understand, is that if someone buys a farm and converts it and then says that, you know, “This is the best land use. I have an expectation of Fonterra picking it up.”—no, they shouldn’t. I guess that’s what we’re trying to achieve. But if someone buys a farm in a similar area that has been a dairy platform, they paid a price per hectare on the basis that it produces dairy, then there’s a reasonable expectation that Fonterra should. Can I say that, as officials reminded me, I referred to the Commerce Commission’s oversight, but, in fact, section 120 of the Act provides access to Commerce Commission protection and review of any decision by Fonterra. So it is in the legislation there. Look, I accept that.

Can I go back to the issue of the milk price panel. In fact, I nominate a person but it’s still appointed by Fonterra. That may not give comfort to all the independents, but the process is one still of Fonterra appointing the milk price panel, but a nominee will come from the Minister. I would notify probably through APH, but it’s not, strictly speaking, a legal appointment by the Minister; it’s a nominee from the Minister. The skills of that person, in my view, as the member would know, as a Minister—we make judgments all the time, and I would hope that any Minister into the future gets the right mix of skills. I imagine they are audit skills. They are commerce skills, with some knowledge of, perhaps, the dairy industry. It may or may not be appropriate, but trying to achieve a fair outcome in what is possibly one of the most contentious areas of the dairy industry, which is that milk price. The independents have said for a long time that Fonterra has adjusted the milk price to serve its own purpose. We want to make sure that, indeed, its obligation to establish that milk price is a fair process. Then the companies can build off the opportunities from that.

A very quick supplementary question to that. What the Minister in the chair, the Hon Damien O’Connor, is saying there is the Government appointee to the milk price panel is, effectively, a nominee of the Minister to the panel, the rest of the members obviously being appointments by Fonterra. My question then is, having made the nomination, I assume the panel or Fonterra must accept that nomination, so it’s an appointment rather than a nomination, I’d suggest. We haven’t really had confirmation as to the consultation process that’s involved in making that nomination. I accept it presumably goes through an APH process, but, more importantly, if the Minister was in the unlikely event in the position to continue after the election on 19 September, and he’s moving to make this nomination, what process would he undertake in the way of consulting with the industry before making that nomination? Or would he simply have a name, run it through an APH process, nominate it to Fonterra for the panel and then the expectation, in fact the outcome, is that person is then on the panel?

Just to clarify, thank you, Madam Chair. It doesn’t require an APH process—it does not. So it’s a fair question around consultation. In the end, it will be the judgment of the Minister, who, I would always hope, is doing the best thing for the dairy industry across the board and would appoint someone with the right mix of skills. Ultimately, that’s the judgment that many of us as Ministers, as you would know, make from time to time or, in fact, quite often. We must trust this democratic process here in the appointment by a Minister who has the right objectives for the dairy industry to appoint the best person for the job.

So can I just have another supplementary on that? Does the Minister in the chair, the Hon Damien O’Connor foresee that it could be a possibility at some point in the future where the Minister nominates someone and Fonterra actually does not appoint that person?

Indeed, that’s a possibility, but I would assume that Fonterra should share the objectives of what we’re trying to achieve here. If they were to block that and the perception was that they wanted to dominate what should be a fair and objective process, then I’d suggest that would push back on them. In the end, we’re trying to find the right balance between what is a very dominant player and an industry champion, Fonterra—a national icon, I guess—but we have to keep some tension on them to ensure that they operate well. There’d be many across our economy who say that Fonterra hasn’t operated as well as it should have. We’re not reforming the Dairy Industry Restructuring Act in this situation, or the legislation governing the dairy industry, but we are changing it and making changes in the hope that we’ll get better and more consistent outcomes for Fonterra, for our economy, and for indeed the farmers’ suppliers.

Thank you, Madam Chair. I think that’s a really interesting point, and it’ll be interesting to see how that actually plays out if we do get to the situation where, for some reason in the future, Fonterra chose not to accept an appointment, and we would go from there. But look, I really wanted to come back to that new entry clause, because for me that’s a biggie. I’ve always been passionate about the young farmers entering the industry. There are a number of challenges. Over a period of time now, it seems to have become more difficult; that pathway is not quite what it used to be. So I’d be really concerned about restricting that any further.

I note the wording here. I just wanted to get some clarity from the Minister in the chair, the Hon Damien O’Connor, around Supplementary Order Paper 547 replacement section 73(3A)(a), set out in clause 20B, where it says, “the effect of its decision on the ongoing viability of the farm to which the application relates, if new co-op had a supply agreement in respect of the farm … in the previous season;”. So is that saying that they only have to consider that if Fonterra had a supply agreement on that farm, irrespective of whether or not it was a dairy farm? So if a young farmer, for example, comes along, buys a farm that may not be a Fonterra supplier but has previously managed or been an equity manager, potentially—whatever structure they’ve come from on Fonterra farms—wishes to supply Fonterra, but the farm had been supplying another processor, does that mean that Fonterra no longer have to consider that in this situation because of the wording there saying that it is only in respect of a farm they’ve had a supply agreement with?

Look, that’s a very fair point. No, if it’s supplied another company there would be no obligation for Fonterra to pick that up; that’s clearly the intent of this. As I say, it’s a bit vague; it’s not exact. In my view, Fonterra will want every drop of milk it can get its hands on, as will most other companies. So I don’t think that there will be lack of demand for the milk from a farm that has been a dairy farm. But the reality is that if a farmer moves to supply another company, then there’s no legal obligation for Fonterra to take back supply from that farm. So someone purchasing that farm has to understand that. That’s, I guess, the issue: the independents.

I’d like to put on record the fact that they fear that the dominant position of Fonterra may lead to bullying, as I say, and threats to a farmer—and it may be realistic—that is, that if you leave Fonterra as a company and you go to supply an independent, then there’s no automatic right to come back to it. Indeed, that’s what the intent of this change is, but they fear that that might be overplayed, and that farmers who might be forced—and there have been many situations where banks, in fact, have told farmers to sell their shares and lower their debt and supply another company.

So that’s, perhaps, an unfair situation. Should there be an obligation for Fonterra to take that milk back? This legislation says no. In my view, Fonterra, in reasonable situations, will probably take back that supply, which is, I guess, some of the concerns of the independents. We don’t want farmers to be locked in either way. We do want some flexibility. But the situation that we’ve had with open entry, of course, is that Fonterra has been obliged to provide capacity for farmers who might come back.

One of the big challenges for the dairy industry is environmental management, and we have seen the odd season, of course, where milk has had to be dumped because there hasn’t been capacity to process. There will always be seasonal fluctuations in the volume of milk, so every company will have to have some headroom. What I would like to put on record is the hope that there will be cooperation between companies. Historically, we’ve seen Fonterra and its predecessors work with companies like Tātua that are smaller and, perhaps, more fragile and exposed. There’s been cooperation when seasonal variation has occurred—they’ve been prepared to take surplus milk into the plants and process that.

There have been incidents more recently where Fonterra hasn’t always been as cooperative and prepared to take some of the milk from other companies. I can refer to Westland when sometimes we have events where, actually, plants have to shut down. Ensuring that there’s fairness—of course there has to be, I guess, commercial returns. No one’s saying that shouldn’t occur, but I would expect this Parliament to look at the legislation again if we were to see a situation where a company, through no fault of its own, was unable to process milk, that they asked Fonterra, who had the capacity to process that milk, then Fonterra said no, resulting in, I guess, a degradation of the dairy industry’s reputation or an environmental impact or some other negative that was unnecessary.

This industry has been built on cooperation, on the companies that came together to form Fonterra. Just because it has about 80 percent of the industry does not mean that it should then start to dictate to other farmers and other companies. Yes, there are international companies that have come in, taken the 50 million litres of milk, and built up, and sometimes competed with Fonterra, but I’d suggest that there’s enough opportunity across the world in the supply of high-quality dairy products that they don’t need to compete with one another in that market place.

So we hope that this legislation, while providing more discretion to Fonterra, doesn’t result in a domination that undermines the cooperation that has given us the success to date and that will be needed into the future as we develop and as we see companies invest in high-value products and that we see us move up the value chain, which is what this Government and, I’m sure, all people in this Parliament would like to see from the dairy industry.

Thanks for that clarity, Minister O’Connor. I guess the concern is that for a number of younger farmers, often that first farm purchase is not in the prime tier 1 country—it might be a little further out from an affordability perspective. So that may potentially raise some concerns for a company around distance to the factory from their desire to collect that supply, potentially. So that was really where I was coming from with that. I don’t want to see young farmers prejudiced and not able to get in off the back of that if, for whatever reason, the other company that may have been taking this supply agreement with that farm then chose not to continue with a new operator. I guess there’s an element of due diligence that has to come into play there for a potential purchaser, and we’ll certainly see how that plays out over time.

But just in relation to your second point as well around the capacity within different processing plants, I think that’s an important consideration. And certainly what we’ve heard and the reason we’re working through this process is that there have been a number of issues around getting that balance right—making sure that we aren’t over-invested in stainless steel all around the country, but at the same time matching the demand where necessary and those seasonal fluctuations are being catered for. I agree that if Fonterra’s in a position that they can take that supply, well, they should within reason. There’s still a commercial element to that as well. And if the other company is wanting them to process it on their behalf, the question would be: why? Is it simply a capacity issue? Well, then that’s maybe a bit different. But if it’s a cost or volume consideration, then I think it would be unfair to expect Fonterra to have to process that if their own view was also that it was not competitive for them to do so.

I agree though that fundamentally it’s that cooperative principle. So you would hope they would all be working together, but, at the same time, there are some commercial realities with that. So yeah, look, I just want to reiterate my concern, but also noting that it is pretty difficult to get to a position where we can have a defined answer for that, and I think it’s important that we are making clear our intent here in that, and we’ll see where it plays out, I suppose.

The question was put that the amendments set out on Supplementary Order Paper 547 in the name of the Hon Damien O’Connor be agreed to.

Amendments agreed to.

Parts 1 and 2, Schedules 1 and 2, and clauses 1 to 3 as amended agreed to.

House resumed.

The Chairperson reported the Dairy Industry Restructuring Amendment Bill (No 3) with amendment.

Report adopted.

Third Reading