DIRA
Released 27 Aug 2010
Ann Thompson, Federated Farmers policy advisor
Federated Farmers will be lobbying to ensure New Zealand's biggest exporter is able to maximise its earnings for the benefit of New Zealand farmers, after the Government re-set the regulatory expiry triggers in the Dairy Industry Restructuring Act (the DIRA). The triggers won't kick in before Fonterra's market share falls to 80 percent in the North Island and 80 percent in the South Island, excluding the area covered by the Westland Regional Council. But the DIRA won't necessarily expire when the new trigger level is reached; instead the Government promises a ‘full review' to examine the on-going need for the legislation.
The Raw Milk Regulations, introduced under the DIRA, require Fonterra to put aside around 5 percent of its total supply to provide rival processors with up to 50 million litres of Fonterra raw milk at a regulated price, each. While the Government has promised to reconsider who can buy this milk, Federated Farmers fears from past experience there will be too many loopholes to make any new arrangements water tight.
New Zealand's dairy industry has traditionally depended on the co-operative model, whereby profits are returned to the shareholders - the farmer suppliers. In a market with a dominant co-operative and several shareholder-investor companies, the co-operative effectively sets the farm gate milk price for the rest of the dairy industry. Shareholder-investor companies, on the other hand, pay the minimum to attract supply, because their objective is to increase profit/dividend payments to investors, not to suppliers.
In export markets with many sellers and only a few strong buyers (such as supermarkets) it is advantageous to be a strong seller. Only where this seller is a co-operative - like Fonterra - will the farmer-suppliers share in the profit.
Federated Farmers will be analysing both the Act and the Regulations in preparation for further work by the Government on the DIRA. The problems we foresee include the amount of milk in the regulations being increased and the DIRA being extended (so that Fonterra's market share falls to 70 percent before the DIRA expires). Either outcome could result in too many sellers in export markets.
To talk to us about this or any other issues, please call 0800 FARMING
