Desperate Lobbying For The Status Quo -- July 2020

You could be forgiven for thinking the Dairy Industry Restructuring Act (DIRA) reforms were a done deal; a cross-party panel of MPs had unanimously recommended a raft of sweeping changes that addressed issues that have been plaguing the industry for years, and they did so with a refreshing display of clarity, common sense and unity.

After eight years with no changes, a period during which independent processors have been given a leg up at the expense of New Zealand dairy farmers, the Select Committee decided that DIRA had achieved its goal of fostering competition in the dairy industry and it was time for all processors to stand on their own merits.

Having failed to convince the Select Committee to maintain the status quo with their formal submissions, the independent processors are now publicly lobbying to keep the uneven playing field tilted in their favour. They have arranged a last minute meeting with the Minister of Agriculture in an attempt to stop the legislation being passed before the election so they can have another go at arguing for the retention of DIRA’s open entry provisions.

The removal of open entry would mean farmers that leave the co-operative to supply other processors can no longer automatically return at a later date.

Fonterra’s competitors have fought hard for many years to retain open entry, the rule that forces Fonterra to accept milk from anyone who wants to supply them, because it makes it far easier for them to poach supply from the Co-operative. This provision has been responsible for a massive spike in dairy conversions as it forces Fonterra to collect all the new milk whether they want to or not.

I’m disappointed but not surprised by this cynical politicking; Miraka admitted to the Select Committee that they had no desire to attract any more suppliers, so I can only conclude their passion for retaining the open entry provision is to weaken Fonterra.

As all independent processors benchmark their milk price to farmers on Fonterra’s payout, a weaker Fonterra means higher margins for themselves.

Open Country Dairy were so determined to force Fonterra’s payment to farmers down, they recently took the Commerce Commission to the High Court over the way Fonterra’s milk price is calculated. The High Court ruled that Fonterra, the only processor with transparent milk price calculations, were paying farmers correctly and fulfilling their obligation to give their farmer shareholders the highest possible return for their milk.

In a scenario where open entry is removed as the Select Committee recommended, independent processors would be faced with having to convince potential new suppliers of the economic benefits of switching processors. Part of this could entail showing how they arrive at their milk price rather than just promising to be in the vicinity of Fonterra’s payout, and if there’s one thing these foreign backed processors don’t want it’s transparency.

One thing became abundantly clear as I watched the independent processors make their submissions to the Select Committee, their entire motivation for maintaining the status quo was to hamstring Fonterra in an attempt to boost their own margins.

Having failed to make that argument at an open hearing they now want to try it behind closed doors, and I can only hope the Minister sees that it hasn’t improved with age.