Friday, March 29, 2024

DIRA changes don’t go far enough

Neal Wallace
Fonterra has criticised proposed changes to the Dairy Industry Restructuring Act as not going far enough because they continue to impose constraints on the co-operative that help its competitors.
Reading Time: 2 minutes

The proposed changes to DIRA announced by Primary Industries Minister Nathan Guy provided a mixed bag for Fonterra which its Farm Source chief operating officer Miles Hurrell labelled a “lost opportunity to address artificial constraints”.

While an end was in sight for the requirement to sell milk to its largest competitors, Hurrell said Fonterra was still obligated to accept and process all milk produced which meant shareholders having to invest in stainless steel.

“The current requirement for Fonterra to take all milk forces us to build large-scale commodity plants instead of investing capital into assets that produce high-value consumer and food-service products,” he said.

“This is the wrong outcome as it constrains our ability to create maximum value for our farmers and their rural communities.”

He acknowledged the proposals provided some small victories, such as removing the requirement to sell regulated milk at cost to big, export-focused processors from the 2019-20 season.

A large processor was determined as having the capacity to process more than 100 million litres of milk a year and exporting more than 50% of production by volume.

The proposals also reduced from 795m litres to 600m litres the total volume of milk each season that Fonterra must make available to independent processors.

Companies buying milk from Fonterra would from the 2018-19 season have less flexibility in forecasting the volume they intended to buy.

From that season a processor’s estimated requirement one week out from delivery would have to be within 20% of the three-month estimate.

Hurrell also acknowledged the proposal removing the requirement to accept all applications from new dairy conversions to become shareholders from the 2018-19 season was a step in the right direction.

But the proposals ignored changes to the New Zealand dairy industry since DIRA was introduced 15 years ago.

“Many new competitors, most of them backed by global businesses, have arrived and invested in NZ for strategic reasons.

“Competition helps keep businesses efficient, giving individual dairy farmers more options and choice.”

Nathan Guy

Primary Industries Minister

“DIRA has to keep up with the pace of change and the new competitive environment.”

Guy also announced a proposal to remove DIRA’s efficiency and contestability provisions in the South Island, citing a Commerce Commission report saying competition was not sufficient to warrant deregulation.

Those existing provisions were triggered in 2014-15 when independent processors collected 22% of total milksolids produced in the South Island.

Guy considered switching the trigger to 25% or 30% but said on current trends competitors would handle 25% of South Island milk in 2021-22.

In his report to Cabinet, he recommended the removal of default expiry provisions and a new review of DIRA in the 2021-22 season and every five years after that.

“Once sufficient competition is in place, competitive pressure, rather than the DIRA regulatory provisions, should drive the efficiency of NZ dairy markets.

“Competition helps keep businesses efficient, giving individual dairy farmers more options and choice.”

The proposals, however, defer consideration of potential changes to regulate milk for Goodman Fielder and small or domestic-focused suppliers.

“Officials will start a body of work to understand the complexities in this area and any outcomes will inform the next review.

“The next review will commence by the 2020-21 season – 20 years since DIRA was created.

“The scope of this review will be wider than just competition policy to take into account any impacts from the work on downstream milk markets," Guy said.

An amendment bill was likely to be considered by the Primary Production Select Committee early next year, which would allow further opportunity for public input.

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