Thursday, July 7, 2022

New rules give clarity, finally

More than five years after the then Minister of Agriculture Jim Anderton announced a review of the Dairy Industry Restructuring (Raw Milk) Regulations 2001, the Minister of Primary Industries (MPI) David Carter announced changes to independent milk processors’ access to raw milk from Fonterra.

The changes followed “an extensive consultation and review process on how best to achieve a fair and efficient dairy market in New Zealand”, he said. The nature of the arguments advanced by all interested parties during exhaustive rounds of submissions helped ensure the changes were predictable.

The biggest thing for the industry, even if they didn’t like it, was that decisions had been made, said former Ministry of Agriculture and Forestry (MAF) official Peter Fraser, who was hired as a consultant by some of the independent companies. He could not foresee major changes to the regulatory regime.
The new regulations, taking effect from June 1 next year, will:

* Limit access to raw milk to three seasons for large independent processors (defined as those which source more than 30 million litres of their raw milk directly from farmers).

* Set the total quantity of raw milk available at around 5% of Fonterra’s milk supply. This is consistent with the maximum quantity provided for in the Dairy Industry Restructuring Act (DIRA).

* Set a series of maximum quantity limits, restricting how much raw milk independent processors can take in different months of the season, based on the seasonal supply curve.

* Remove the 10c/kg milksolids (MS) margin on top of the farmgate milk price because of the introduction of the monthly limits (the margin was to compensate Fonterra for giving independent processors the opportunity to take regulated milk on a flatter profile than the seasonal supply curve).

* Enable processors who do not take much (or any) raw milk directly from farmers to pay a fixed price for milk accessed under the regulations and exempt them from Fonterra’s price “wash-up” at the end of the season.

Willy Leferink, Federated Farmers Dairy chair, agreed the rules gave independent processors certainty over what their future looked like. But he was disappointed a time limit had not been imposed on all independent processors, whether they had their own farm supplies or not, to create competition at the farmgate by asking farmers for milk.

The federation was disappointed, too, that the Government had increased the volumes of regulated milk from 600m litres this season to 795m litres in the 2013/14 season saying it was “too much”.

But Leferink welcomed the amount of milk available for independent processors being fixed at 50m litres and spread over the whole year in limited amounts to take into account the seasonal production curve.
He also welcomed the certainty of pricing, the Commerce Commission’s oversight of the Fonterra farmgate milk price and the requirement for the co-op to publish forecasts of this price each quarter.

Fonterra chair-elect John Wilson said the changes addressed most of its concerns about the rules around eligibility to regulated milk, including the requirement that independent processors take at least some milk during peak production months under the “October Rule”. He also welcomed the new three-season limit.

The regulations promoted competition at the farmgate, and ensured sufficient regulated milk was available for dairy food and beverage companies which processed raw milk but did not have their own supply, and for start-ups that genuinely needed it.

Tatua Co-operative Dairy Company chief executive Paul McGilvary tsaid DIRA milk had given it an opportunity to develop a more value-added business. By the time the DIRA milk disappeared in 2016 Tatua expected the returns from its value-added business to more than outweigh the loss of Fonterra milk. If more milk was needed, “we can go to the market or talk to shareholders about achieving production growth".

Fraser said the concept of an auction for deciding the price of regulated milk, which had been favoured by Anderton, had long since been killed. “The world has moved on”.

He regarded the regulatory regime 10 – 12 years ago as more transparently pro-competitive and commercially neutral than it is now, when – among other features – the regulated milk price has become Fonterra’s milk price.

But Carter said the aim of the changes was to foster competition without being unfair to Fonterra “and I think that’s been achieved”.

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