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Fonterra tells the select committee that he respects the national interest in the price of raw milk. Picture/file
Dairy market dominator Fonterra says he opposes any inference that he is “playing” the country’s milk pricing system in a defensive submission to the parliamentary select committee hearing his case for a capital restructuring.
The farmer-owned co-op, which collects around 78% of New Zealand’s raw milk production, needs changes to the Dairy Industry Restructuring Act 2001 (Dira) to restructure its its capital.
Its submission to the Primary Production Select Committee today indicated that many of the Government’s proposed amendments to the Fonterra Capital Restructuring Amendment Bill “appear to respond to perceptions concerning the transparency and independence of the milk price regime”.
“We respect the national interest in our milk pricing, given that in the last financial year, Fonterra’s milk payments (to farmers) accounted for $13.7 billion paid into the New Zealand economy. .
“And, as our competitors will tell you, Fonterra’s milk price sets the benchmark for the industry. So all New Zealand dairy farmers, whether they supply Fonterra or not, benefit from the fair, transparent and independently monitored price we pay for our farmers’ milk.
“However, for the record, we oppose any inference that the cooperative or those involved in the process are somehow playing with the system. In fact, Fonterra argued for greater price transparency. milk in the industry in all of our Dira submissions.
“We continue to propose that the Dira be amended to oblige all processors to publish the prices paid for farmers’ milk. Improved transparency of milk prices paid by other processors will address the current imbalance of information available to farmers and promote contestability in the milk supply.
“It is interesting that our competitors are resisting this suggestion, while questioning the integrity of our milk price calculation – which already includes significant monitoring by a majority independent (milk price) panel, including including a ministerial nominee and Commerce Commission oversight.”
Fonterra said that since 2012 the commission had only raised two concerns related to the inputs, assumptions and processes used to calculate the milk base price which Fonterra had not promptly resolved to the satisfaction of the watchdog. competition.
The submission said that while Fonterra supported many elements of the bill, he was concerned about some of the government’s proposed measures, “including important measures that were not consulted prior to the introduction of the bill. “.
He said the bill would amend Dira to remove the legal risk associated with the company’s proposal to cap the size of the publicly traded Fonterra unit fund, as part of the recapitalization.
In addition to removing this risk, the bill introduced additional measures to mitigate the perceived risks of the recapitalization, according to the brief.
Fonterra said the recapitalization, approved overwhelmingly in a vote of its 8,000 shareholders last year, was “critical” to its future.
The capital restructuring would help it maintain a sustainable milk supply in declining milk production, making it easier for new and young farmers to join and existing farmers to stay in the cooperative. Unlike most of its smaller competitors, Fonterra requires farmers to buy stock in order to supply. The restructuring will make this cheaper by reducing the minimum shareholding requirement.
“The new flexible share capital structure will help level the playing field with our overseas-backed competitors in an environment where we expect total New Zealand milk volumes to decline or be flat at best, due environmental pressures, new regulations and alternative land uses.”
(The country’s second-largest dairy processor, Open Country, is not foreign-backed. It is 100% owned by the Talleys family of Motueka.)
The submission said Fonterra executives had spent the better part of two years consulting with its farmers on the proposed change.
“One of the most significant comments we received was the concern of farmers who were planning to retire from farming or move to a competitor and the impact that the restricted market discount would have on shares traded on a set-aside market farmers would have on their plans.
“In response, we made a key change to the transition plan to allow these farmers up to 15 seasons initially and reduce to 10 seasons to sell their shares.”
Fonterra said the move supports farmers’ ability to freely leave the cooperative during the transition period to a new capital structure and beyond.
The impact of the proposal to restrict farmers’ share trading and its alleged impact on their ability to freely exit the business is one of the most criticized parts of the restructuring proposal – along with competitors’ claims, this strengthens Fonterra’s milk pricing strength. Fonterra’s share price plunged after the proposals were announced last year, wiping around $3 billion off its market capitalization.
But Fonterra’s submission said farmers voted 85% for the new scheme and ‘collectively made this decision knowing there would be a significant impact on the value of our Fonterra shares’.
Fonterra is challenging several government measures contained in the bill, including new third-party enforcement provisions allowing anyone to sue the company directly for injunctive relief or damages for violating provisions of milk price monitoring.
“This is a significant extension of the current enforcement provisions and has not been the subject of consultation. These provisions have a significant impact on Fonterra. We believe it is important that any new enforcement tools enforcement…does not undermine, contradict or confuse the commission’s new directive powers (if our submission to remove directive powers is not accepted) and that all enforcement tools do not can only be exercised by the commission (and not by third parties).
“We are deeply concerned that third-party rights of action could also allow other parties to access a great deal of commercially sensitive information about Fonterra’s business through discovery processes – which is inappropriate. We see a significant possibility for these powers to be misused by third party parties.”
Fonterra also takes issue with a new provision on individual liability in the bill for anyone involved in a breach of the milk price monitoring scheme and argues that it should be removed.
While he does not object to the bill’s intention to increase the number of ministerial nominees on the milk pricing panel to two, he believes independence is currently assured.
He doesn’t think the Commerce Commission needs steering powers, arguing that it duplicates proposed governance changes to the milk pricing regime and adds a significant annual cost with no clear benefit.
The company is also concerned about a provision in the bill requiring it to publish information provided or requested as part of the commission’s milk price review processes.
This has not been consulted, Fonterra says, and he is “very concerned” that the requirement could result in commercially sensitive Fonterra information being made public and accessible by domestic and international competitors.
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