Reviews of Fonterra’s farm gate milk price setting, the Raw Milk Regulations and the regulatory regime to accompany Fonterra’s Capital Restructuring

Amendments to the Raw Milk Regulations, November 2012

On 14 November 2012, the Government announced amendments to the Raw Milk Regulations. The new Regulations will take effect on the first day of the next dairy season, 1 June 2013. The amendments follow an extensive consultation process on how to ensure that the Regulations are best meeting the following objectives:

• Providing an entrance pathway into the farm gate milk market; and
• Supporting competition in domestic dairy product markets.

The new Raw Milk Regulations will be available at www.legislation.govt.nz. For further detail on the changes, the following material may be of interest:

• Press release from Minister Carter
• Questions and Answers on amendments to the Raw Milk Regulations
• Regulatory Impact Statement

Amendments to the DIRA, July 2012

On 24 July 2012, the Dairy Industry Restructuring Amendment Bill passed its third and final reading. The Bill amends the Dairy Industry Restructuring Act (DIRA) to achieve three key things:

• Improve the transparency of, and confidence in, Fonterra’s farm gate milk price setting;
• Enable Fonterra to proceed with Trading Among Farmers if it so chooses; and
• Ensure that Fonterra’s share price reflects fair value if Trading Among Farmers does not proceed, or proceeds and is unsuccessful.

The amended Dairy Industry Restructuring Act will be available at www.legislation.govt.nz. For further detail on the changes, the following material may be of interest:

• Press release from Minister Carter
• Questions and Answers on amendments to the DIRA
• Regulatory Impact Statement
• Cabinet Paper 1: Fonterra's Milk Price Setting
• Cabinet Paper 2: Fonterra's Capital Restructure and Share Valuation

To allow full consideration of the large volume of submissions received in relation to the Raw Milk Regulations, the Government will separately announce amendments to the Raw Milk Regulations.

Archived material: January 2012 consultation on reviews of Fonterra’s farm gate milk price setting, the Raw Milk Regulations, and the regulatory regime to accompany Trading Among Farmers.

Submissions closed on 24 February 2012 and MAF received over 800 submissions. There were a number of submissions from various groups such as dairy processors, farmer groups, speciality food and beverage companies, Consumer NZ, and the Federation of Maori Authorities.

The remaining submissions were from farmers and other interested individuals.

Key points raised by farmers and interested individuals in written submissions

The majority of written submissions were in relation to the Raw Milk Regulations. The key points were as follows:

• Support for the 3 year rule, but many submitters preferred a sliding scale, i.e. independent processors would receive, for example, 50m litres in their first year, then 40m litres in their second, and 30m in their final year of accessing regulated milk.
• There was an overwhelming view that existing established processors should not continue to have access to 50m litres for the next three years but should be either cut off immediately, or weaned off over the next 3 years, their entitlement reducing by a third each year beginning with the 12/13 season.
• The majority of submissions were extremely concerned about the potential for shell companies / virtual processors to be set up, enabling independent processors to continue taking regulated milk beyond their 3 years or accessing more than their allocated 50 million litres each season.
• All submitters that commented on the proposal to mimic the seasonal production curve supported this proposal but did not want the monthly limits to be optional. They remain concerned about independent processors taking milk only on the shoulders. Broadly, two solutions were proposed: to retain the October rule in some form, or to make all processors take regulated milk on the curve, rather than ‘up to’ the curve (for those not wanting to take the full 50 million litres, it was suggested that their take still follow the curve, proportionally).
• The majority of submitters did not comment on the total volume, but those who did, did not support raising the cap to 5%.
• The majority of submitters did not comment on the removal of the $0.10 margin, but those who did, did not support this proposal. Some, however, commented that if independent processors are compelled to take ‘on’ the curve, then removing the margin is justified.
• A relatively small number of submitters commented on the proposals around price monitoring, and the comments were mixed. Some supported the proposal as “Fonterra has nothing to hide” while others were opposed to “government interference in a private company.”
• Only a small number of submitters commented on TAF, and those who did were opposed to TAF in general but did not comment on the proposed legislative package. Many were seeking more time and for Fonterra to go back to shareholders for another vote.
• Only a very small number of submitters commented on the proposal around the share price. These submissions did not support regulation of the share price.
• Many submitters favour the inclusion of a take or pay provision in the regulations.
• Many submitters remained concerned about the issue of foreign ownership of independent processors, competing against Fonterra in offshore markets and taking profits out of New Zealand.
• Many submitters believed that the key objective of the Raw Milk Regulations is to ensure competition in the domestic market (with a focus on the retail price of milk) and proposed that any processor taking regulated milk must use it to supply the domestic market.

Other submissions received

• Consumer NZ
• Federation of Māori Authorities (FoMA)
• Fonterra Co-operative Group - Dairy Industry Restructuring Amendment Bill
• Fonterra Co-operative Group - Dairy Industry Restructuring (Raw Milk) Amendment Regulations 2012
• Fonterra Shareholders’ Council
• Goodman Fielder
• Green Valley
• Karikaas Natural Dairy Products
• Klondyke Fresh
• Miraka
• Serra Natural Foods
• Stoney River Dairy
• Tatua Co-operative Dairy Company
• Westland Milk Products

Archived Consultation Material

Consultation has opened on the government's proposed response to reviews of Fonterra's farm gate milk price setting and the Raw Milk Regulations.

• Press release from Minister Carter

Throughout 2011, the Ministry of Agriculture and Forestry led reviews on three work streams relating to the regulatory regime that underpins New Zealand's dairy industry

• Fonterra's farm-gate milk price setting
• The Raw Milk Regulations
• The regulatory regime to accompany Fonterra's proposed capital restructure.

While these work streams are each looking at separate issues, they all aim to ensure the long term growth and dynamic efficiency of New Zealand's dairy industry. MAF considers it important to bring these work streams together and to publicly consult on the preferred options in combination. After the public consultation process is completed, options will be presented to the Government for consideration, which may result in legislative or other amendments being made.

The public consultation document is available here:

Proposals to Amend the Dairy Industry Restructuring Act and Raw Milk Regulations. This document is made up of a number of consultation and background documents. As the documents may be of varying relevance to different stakeholders, they can also be separately downloaded below:

• Consultation document 1 is MAF's Discussion Paper. It provides an overview of the various work-streams, guides respondents to further material where relevant and seeks feedback on specific aspects of the proposals.
• Consultation document 2 is a draft Regulatory Impact Statement (RIS) which provides background, problem identification, and discusses policy options in relation to Fonterra's milk price, Fonterra's share price, and the regulatory regime to accompany Fonterra's proposed capital restructure.
• Consultation document 3 is the exposure draft Amendment Bill which illustrates potential amendments in relation to Fonterra's milk price, Fonterra's share price, and the regulatory regime to accompany Fonterra's proposed capital restructure.
• Consultation document 4 is the exposure draft Raw Milk Amendment Regulations which illustrate potential amendments in relation to the Raw Milk Regulations.

In addition to the key consultation material, further background information is provided, as follows:

• Background document 5 is a Summary of MAF's key findings from the 2011 review of Fonterra's Milk Price Manual.
• Background document 6 is a Summary of the Proposed Amendments to the Dairy Industry Restructuring (Raw Milk) Regulations.
• Background document 7 is the February 2011 MAF Discussion Paper titled "Regulatory Regime to accompany Fonterra Capital Restructuring".
• Background document 8 is the July 2011 MAF Discussion Paper titled "Review of Raw Milk Regulations".
• Background document 9 is a July 2011 report to MAF by Castalia Limited titled "The 'Hypothetical Efficient Competitor' and Fonterra's Farm-gate Milk Price".
• Background document 10 is an August 2011 memo to MAF by Covec titled "Farm Gate Milk Price: Policy Objectives & Problem Definition".
• Background document 11 is a December 2011 memo to MAF by Covec titled "Valuation of Fonterra's Shares".
• Background document 12 is an August 2011 memo to MAF by Castalia titled "Summary of Milk Pricing Approaches.