Thursday, August 18, 2022

Fonterra baulks at two proposed DIRA changes

Submissions on changes to the DIRA show there’s opposition to some of the amendments proposed, though Fonterra is confident a good outcome can be obtained.

Fonterra plans to have its new flexible share structure and associated regulations ready for implementation by the end of the year, depending on the speed of amendments through the parliamentary process.

Chair Peter McBride is confident that Fonterra can reach agreement with Primary Industries Minister Damien O’Connor and his department, to whom Cabinet has delegated the protracted formulation.

The ministry has received submissions on its proposed response to Fonterra’s capital restructure, now published on the MPI website.

Amendments are being drafted to the Dairy Industry Restructuring Act (DIRA) which O’Connor will then place on the Government’s legislative timetable.

Fonterra has pushed back on two Government proposals; the so-called independence of the chair of the Milk Price Panel (MPP) and whether Commerce Commission findings over the milk price setting mechanism should be binding on Fonterra.

“We disagree with those proposals because we think adequate checks and balances already exist,” McBride said, while not speculating if Fonterra’s pushbacks would threaten the Government’s support.

“I believe that agreement will be reached and that we will be able to implement the changes to make Fonterra more competitive and capital-efficient,” he said.

Competing dairy companies have used the MPI consultation to hammer the milk price setting process and Fonterra’s alleged discretion over its level.

They also claim the restructuring will remove the remaining substance of the free-exit provisions in the DIRA, effectively tying farmers into the giant co-operative and raising the investment risks for independent processors.

Both are quite technical arguments that are fundamental to the DIRA and Fonterra’s position and powers in the dairy industry.

The largest competitor, Open Country, continued to allege that Fonterra manipulates and inflates the base milk price.

Without a fundamental revision of the Milk Price Model and the panel the proposed DIRA changes would give a stronger incentive and greater capability to Fonterra to inflate the base milk price, it submitted.

“(Fonterra) has a long track record of exploiting its discretion to set a milk price that is unfair and non-transparent,” Open Country said.

Any Commerce Commission findings, which in the past have criticised inputs to the model, should be binding in the year that they are made and not delayed to next season.

The three next-level processors, Synlait, Westland and Miraka, said the MPI proposals for amending the DIRA did not address the capital restructuring effects on competition at the farm gate for milk supply.

“Reduction of the share standard directly increases Fonterra’s power to retain and secure milk,” they said in a joint submission.

The steep fall in the price of Fonterra supply shares and the breaking of the bond with Fonterra Shareholders’ Fund units has frustrated the free-exit provisions.

They also complained about what they called a statutory bias in milk price calculations.

Fonterra’s Co-operative Council chair James Barron submitted that the DIRA requires the company to set the maximum sustainable milk price and that the robust process had worked well for the whole industry.

“Suppliers to the other companies are not complaining, only the companies themselves,” he said.

Fonterra said the MPI proposals over the MPP ran the risk of over-complication and would be unnecessarily prescriptive.

“The setting of the base milk price is robust because it is already set within a tightly defined and controlled governance process, with multiple elements providing independence from Fonterra.

“We do not understand why a separate and greater standard of independence should now be overlaid onto this regime for the chair, and we do not understand the benefits it would deliver, particularly in light of the potential costs and risks it raises.”

Not just anyone could serve on the MPP because of the industry and dairy markets knowledge required.

Fonterra took the opportunity to fire back at the other processors, saying they should be required to publish their own milk prices on a comparative basis.

“If we are setting the price too high then why are dairy companies being formed and being successful and why are we losing milk market share,” McBride said.

“Their rhetoric and their performances don’t align.

“We have to the pay the highest sustainable milk price and perform as a company, remain viable and pay dividends to our shareholders.”

The proposed changes to the capital structure put still more emphasis on Fonterra to perform.

He strongly defended the rigour of the milk price setting system and the MPP and that any recommendations of the Commerce Commission had either been pre-empted or followed promptly.

Pye Group, a large family-owned farming company in Mid-Canterbury with 10 farms, said it did not support any of the proposed MPI amendments on milk price setting because they would add no benefits, only costs.

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