The first piece of good news was Fonterra’s half year financial results, which are a remarkable turnaround from the Co-op’s first ever loss posted last year. The loss wasn’t insignificant or so small it could be dismissed as a rounding error, the Co-op lost over half a billion dollars which only makes the recent turnaround even more impressive.
At a time of mass uncertainty when many people don’t know if they’ll still have a job in a few months, it is somewhat relieving that these results will see Fonterra inject more than $11 billion into the New Zealand economy through milk payments to their farmers. Those farmers will in turn spend over half of that in their local communities, communities which need money now more than ever before. It’s not just Fonterra farmers who will benefit from the Co-op’s strong performance; independent processors around the country will be benchmarking themselves off the Co-op’s strong performance.
The second piece of positive news, which I’m sure many will have missed, was the Primary Production Select Committee’s report on the Dairy Industry Restructuring Act (DIRA) Amendment Bill. This legislation created Fonterra nineteen years ago and it subjects the Co-op to frequent reviews. I expected that the cross-party committee would tinker with the legislation, creating a hodge podge of barely workable compromises like previous committees have done. What I wasn’t expecting was unanimous clarity and sweeping reform from the cross-party panel of MPs.
The Committee have decided open entry should go except for genuine new farmers who have never supplied milk before. Fonterra’s competitors fought hard to retain open entry, the rule that forced Fonterra to accept milk from anyone who wanted to supply them, because it made it far easier for them to poach supply from the Co-operative. The open entry provision also drove a massive spike in dairy conversions as it forced Fonterra to collect all the new milk.
Now there’s no safety net, people are still free to cash in their Fonterra shares and sign a contract with an independent processor, but they’ll be thinking a lot more carefully about the long term implications of that decision because there’s no guarantee Fonterra will take them back if they change their mind.
New processors who set up shop in New Zealand will no longer receive three year’s supply of raw milk at cost from Fonterra. This rule was designed to ensure competitive domestic supply but was cynically flouted, primarily by foreign owned processors, to get low cost raw material which they’d process and export for their products to compete against Fonterra’s on foreign supermarket shelves. Now they will only get this supply for one year, still not perfect but a vast improvement and something that levels the playing field significantly.
Goodman Fielder, a company that has had 20 years to secure their own supply chain yet failed to do so, complained long and hard that the 10 cents per kilogram of milk solids they paid to piggyback off Fonterra’s infrastructure was too onerous. The Select Committee disagreed and Fonterra have won the right to charge more for its services.
The Select Committee heard time and again that Fonterra, who are charged with paying their suppliers the highest possible sustainable milk price, were paying farmers too much. It was a common refrain from processors and their lobbyists seeking to drive down the price they paid their own suppliers in order to increase dividends for their overseas shareholders. The High Court found this was not the case when Open Country Dairy tried to litigate the matter, and the mechanism for determining milk prices remains largely unchanged in the new version of DIRA.
I don’t know if there was any one thing that convinced the Select Committee of the merits of Fonterra’s submission; strong support from farmers, excellent submissions by the Dairy Worker’s Union and Fonterra’s Shareholders’ Council or if it was just a committee unusually blessed with common sense.
Fonterra have weathered a lot of criticism recently for “cosying up to the Government”, for taking a leadership role in climate change, for working with the Government on fresh water and clean energy rather than fighting it every step of the way. I’ve been to enough meetings in recent times to know that not all directors or councillors were happy with this fresh approach to government relations, but this result with DIRA thoroughly vindicates the people who convinced the management team it was worth a try.
It’s not a done deal yet, the changes still need to be passed into legislation and things will be delayed due to COVID-19, but the fact it has cross-party support and unanimous endorsement from the Select Committee give me hope its passage through Parliament will be uncomplicated. After nearly two decades in existence, Fonterra will finally be free of some unnecessary constraints and can be left to focus on doing what it does best.
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