Carter David: Dairy Industry Restructuring Amendment Bill — First Reading 
Carter David: Dairy Industry Restructuring Amendment Bill — First Reading 
[Advance Copy - Subject to minor change before inclusion in Bound Volume.] 
Hon DAVID CARTER (Minister for Primary Industries) 
: 
 I move  
That the Dairy Industry Restructuring Amendment Bill be now read a first time. 
 At the appropriate time I intend to move that the Dairy Industry Restructuring Amendment Bill be considered by the Primary Production Committee and that that committee present its final report on or before 1 June 2012. 
The Dairy Industry Restructuring Act or DIRA was enacted in 2001 and was the legislation that allowed for the formation of Fonterra. Ten years on this amendment bill will ensure that the Act remains a durable platform for the continuing growth of an efficient and innovative dairy sector that is maximising its potential for the New Zealand economy.  
Before I get into the detail of what the bill contains it is important to reflect—[ 
Interruption 
]  
The ASSISTANT SPEAKER (H V Ross Robertson) 
: Order! Can we have some courtesy please. 
Hon DAVID CARTER 
: —on why Fonterra was created and why the Dairy Industry Restructuring Act was put in place. Parliament enabled Fonterra’s creation because it saw advantages in terms of efficiency of scale and scope. It was anticipated that Fonterra would be able to compete more successfully in world markets and that investment and innovation in the dairy industry would be stimulated. However providing an exemption to the Commerce Act to allow Fonterra to form had to come with conditions. Due to Fonterra’s dominance in the New Zealand dairy markets the Dairy Industry Restructuring Act legislation was the trade-off for the creation of Fonterra. It was essential that farmer suppliers could freely enter and exit Fonterra that independent processors could compete for farm-gate milk and that Fonterra continued to have the right incentives to remain efficient and innovative. Freedom of entry to and exit from Fonterra is largely what the Dairy Industry Restructuring Act is all about.  
With almost 90 percent market share Fonterra is still the dominant player in the New Zealand dairy industry. Therefore the conditions that applied on Fonterra’s creation are still applicable today. However there have been a number of developments since Fonterra’s inception and these mean that amendments are required so that the Act remains fit for purpose. Because of Fonterra’s dominance its farm-gate milk price is effectively the default price that all dairy processors in New Zealand must pay in order to attract supply from dairy farmers. The Dairy Industry Restructuring Act does not directly intervene in Fonterra’s milk price - setting processes; instead it promotes contestability through its freedom of farmer entry and exit requirements. The bill legislates for greater transparency of the way Fonterra currently sets its farm-gate milk price through its milk price manual to ensure that the farm-gate milk price is consistent with outcomes in a contestable market. A contestable market should in practice result in a farm-gate milk price consistent with that which would emerge in a workably competitive market. 
The Ministry of Agriculture and Forestry together with the Ministry of Economic Development and Treasury undertook a review of how Fonterra set the price it paid its farmers for milk at the farm gate. The review found that although the approach appears consistent with how the milk price would be set in a workably competitive market Fonterra could have the incentive and the ability to pay a price that could distort the market.  
Two rounds of public consultation were undertaken on potential amendments to strengthen confidence in Fonterra’s farm-gate milk price. The consultations confirmed the need for greater transparency in the milk price - setting process. To achieve this the bill includes the following measures: first embedding Fonterra’s current milk price governance arrangements into legislation; second requiring Fonterra to publicly disclose information in relation to its milk price setting; and third introducing a milk price monitoring regime to be undertaken by the Commerce Commission.  
The bill also includes a number of new provisions to allow for Fonterra’s proposed Trading Among Farmers regime or TAF as it has become known. Under Trading Among Farmers farmers wanting to purchase or sell Fonterra’s shares would trade in a market rather than transacting directly with Fonterra as is currently the case. In addition an external fund would be established and the farmers would be able to sell a portion of their shares to the fund in exchange for cash. Internal investors would be able to purchase the beneficial rights—in other words the dividend—and any changes in value to shares that the farmers sold into the fund.  
Fonterra will remain 100 percent farmer-supplier - owned as voting will stay with Fonterra farmer-suppliers. Trading Among Farmers also provides the opportunity for Fonterra to raise additional capital to pursue growth opportunities in New Zealand and in overseas markets. The bill contains provisions that will enable Fonterra to proceed with Trading Among Farmers should it choose to do so. These provisions are aimed at ensuring that Trading Among Farmers will be an effective substitute for the existing issue and redemption obligations by delivering deep liquid transparent and well-informed markets for Fonterra’s shares.  
It is important to note that the ultimate decision regarding Trading Among Farmers sits with Fonterra and not with the Government. The provisions in the bill supporting the Trading Among Farmers regime will expire if the Trading Among Farmers preconditions have not been met by 31 December 2013. However if Trading Among Farmers is not launched before the end of 2013 or if it is launched and subsequently wound up the bill introduces a new requirement relating to Fonterra’s administratively set share price. This would ensure that the price of a Fonterra share is set at a fair market value. The share issue and redemption requirements would then be retained in the absence of Trading Among Farmers. 
This is critical legislation that allows Fonterra and other dairy companies to make their full contribution to New Zealand’s export economy. I commend the bill to the House.