Prosser Richard: Dairy Industry Restructuring Amendment Bill — Second Reading 
Text is incorporated into the Bound Volume 
Prosser Richard: Dairy Industry Restructuring Amendment Bill — Second Reading 
[Sitting date: 21 June 2012. Volume:681;Page:3261. Text is incorporated into the Bound Volume.] 
RICHARD PROSSER (NZ First) 
: 
 I am pleased to rise on behalf of New Zealand First to speak to the second reading of the Dairy Industry Restructuring Amendment Bill. New Zealand First is opposed to this bill as I hope a majority of New Zealand’s dairy farmers will also be. This bill is quite possibly the single most important piece of legislation to come before this House in recent times and it is a shame its importance has been largely overshadowed by several other of this Government’s monumental failings. 
I have been privileged to be allowed to participate as a non-voting member in the proceedings of the Primary Production Committee as this bill has been examined and I wish to thank the committee members particularly the chairman Mr Ardern and the deputy chairman Mr O’Connor for their help and advice in assisting me to understand the workings of the dairy industry and the potential ramifications of some of the aspects of this bill. I also want to thank the committee for demonstrating so clearly how well the select committee process can work as a vehicle for promoting collegiality and true consensus politics even though that may not necessarily be reflected in the speeches in this House and the ultimate outcome of the voting process on this bill. It is enormously encouraging to see that cross-party discussions can be carried out in the way that they were during the committee’s deliberations. It gives me great faith that our parliamentary democracy can work as advertised and as intended. 
I went into this process thinking I knew a great deal about New Zealand’s dairy industry and the place and structure of Fonterra within it. I came away realising that the more I learnt and the more I understood the less I knew. If a person like me who has had dealings over many years with farmers can come to realise that my knowledge of this vital part of our country’s economy was not what I thought then I wonder how much understanding of it the average layperson can have and further to that how much understanding the general public may not have with regard to the potential effects this bill may bring to the dairy industry and New Zealand’s entire economy. 
At the heart of this bill is the authorisation for Fonterra to launch TAF its Trading Among Farmers scheme. Through Trading Among Farmers Fonterra proposes a one-off issue of non-voting bonus shares or dry shares to its farmer shareholders the proceeds of which will create a capital pool which Fonterra can use both as a hedge against the threat of redemption risk and as a fund for growing its offshore and value-added businesses. Fonterra shareholders have voted in favour of this scheme once already on the understanding that it would guarantee 100 percent farmer ownership and control of the cooperative. 
However the scheme as it is now proposed is very different from that originally suggested the key change being the addition of unit securities attached to the dry shares which can be bought and sold by any investor and not solely by Fonterra’s farmer shareholders. The problem with Trading Among Farmers is that Trading Among Farmers as it is presently proposed is not what farmers voted on originally. If Trading Among Farmers really was just trading among farmers there would not be a problem. But it is not. Trading Among Farmers is trading including farmers—TAF is TIF—and the trading part of Trading Among Farmers will benefit nobody but the traders. 
We are told that in order to provide itself with a hedge against the threats exposed by redemption risk Fonterra requires additional capital available. This capital can also be used by Fonterra to grow its brand businesses and its offshore ventures which are the future for what is entirely an export-orientated organisation. This is well and good. However redemption risk we believe has been overstated and also not well understood is the reality that the real risk from redemption is not the exit of capital from the cooperative but the exit of milk. 
Milk is the sole source of wealth and income for Fonterra. No matter how it is dressed up the only way Fonterra can pay its bills is by producing its own milk and that milk is valuable: $20 billion in turnover give or take; $10 billion in revenue give or take—95 percent of it exported—and more than fully one-third of all cross-border trade in dairy products globally is produced right here in New Zealand by Fonterra’s farmer shareholders. Twenty-six percent—more than one quarter—of all New Zealand’s export earnings are generated by Fonterra’s 10500 suppliers. 
We salute them for that. New Zealand First salutes New Zealand’s dairy farmers. They are small in number but they are mighty in wealth creation. These are the people who get up at 4 o’clock in the morning and go and stand outside in the cold and the wet at the back end of a cow getting covered in mud and other unmentionable materials and extracting the white gold that is the single biggest source of this nation’s wealth. We want them to succeed. New Zealand First wants these people these private business owners to succeed and become wealthy. 
 When they are successful New Zealand is successful. When farmers have money they spend it. They spend it into their communities and they spend it into the economy and we all benefit from that. In my previous employment I sold irrigators—more and more of them to existing and new dairy farmers. In a past life before that I sold tractors and farm machinery. Farmers buy these things and the money they spend stays in circulation in New Zealand. But if the shares in Fonterra and the dividend streams attached to them are owned by foreigners in foreign countries then that is where the money will go and all New Zealand will be the poorer for it. And if Trading Among Farmers goes ahead in its present form that is precisely what will happen. 
At the moment there is no real redemption risk and redemption risk has been overstated and oversold. It has happened only twice in Fonterra’s history both under circumstances of a perfect storm. But if Trading Among Farmers goes ahead the first thing it will do is create a redemption risk. It would do this because under Trading Among Farmers share values will rise. They have to rise. They must rise because if they do not traders will not make a profit and that is the entire point of a trading scheme. 
So if Trading Among Farmers goes ahead as it is proposed prospective investors will offer to purchase blocks of unit securities by way of tender. Farmer shareholders who wish to avail themselves of the return available will then arrange to purchase dry shares in the co-op and money paid for these shares will become part of the so-called shareholder fund. The investor will then purchase the unit securities from the fund along with the dividend stream from the shares in question. In order to encourage farmers to make dry shares and thereby unit securities available investors will offer buy prices in excess of Fonterra’s existing share values. This is the only way in which they can ensure that shares will become available. As that happens it will create a risk that some farmers may choose to take the win on increased share values quit the co-op and take the milk to another processor. At the same time existing farmers young farmers and new farmers will find themselves faced with a much greater hurdle in terms of the investment required in order to supply Fonterra—an investment that they will have to fund through their own bank borrowing. 
These things combined contain the potential to create another perfect storm whereby there is a great incentive for farmers to quit Fonterra and supply their milk to alternative processors the majority of which are neither cooperatives nor New Zealand - owned. Because the sole source of revenue for Fonterra is ultimately milk as share values rise so the pressure for dividends to rise will also increase. And because all the money comes ultimately out of that one bucket of milk the only way in which increased dividends can be funded will be for the farm-gate milk price to fall. 
So we will have farmers finding themselves in the situation where they have voted in favour of the Trading Among Farmers scheme because they have been assured that Trading Among Farmers will guarantee 100 percent farmer shareholder ownership and control but rising share values and a falling milk price will ensure that control rests with the people who set the share values and those will be the unit security owners. Ownership will rest with the majority shareholders and they will be the investors as well. 
It will not matter that neither dry shares nor unit securities carry voting rights because economic reality is that financial pressure would take our farmers’ vote on constitutional matters as far as Fonterra is concerned. And they will vote to save their own skins. Who can blame them for that? I would do the same thing myself. If that means that they vote to lift the cap on the proportion of dry shares that the shareholder fund may hold or the percentage of shares that any individual shareholder may own then that is something that will impact immediately and tangibly on the cooperative as a whole and its ongoing viability. In the select committee Mr McKelvie made the point that Fonterra’s dairy farmers have the right to vote themselves back to being peasants if they choose—and they do; they have that right. They are private business people. They are masters of their own destiny and long may that be the case. 
But Fonterra exists as a creature of statute. It is allowed to exist as a virtual monopoly in contravention of what would otherwise be laws providing protection against anti-competitive behaviour because it was recognised by Parliament a decade ago that the size and strength of a unified dairy industry would be to the greater good of “New Zealand Inc.” as a whole. And it has been. The thing that was allowed to be created by the Dairy Industry Restructuring Act 2001 has grown in such a way that the whole is greater than the sum of its parts. New Zealand has benefited greatly as a result of Fonterra’s size and strength in the international dairy trade and in international markets. New Zealand currently exports 95 percent of the dairy we produce and New Zealand accounts for 35 percent of all cross-border dairy trade globally. It is a $20 billion industry and the vultures are circling. Wall Street wants a slice of the New Zealand dairy industry and this bill will deliver it to them unless the farmers of New Zealand see the Trading Among Farmers scheme for what it is and vote it down. 
Trading Among Farmers is a partial float of Fonterra in all but name created by virtually the same people who suggested the float in 2007 and it was rightly rejected by farmers then. I have faith in the farmers of New Zealand. I have faith and I hope they will see the truth of this abomination and shoot it down in the same way that they shot down the “fart tax”. I hope so because there is no protection for them in this bill. If they vote for Trading Among Farmers they will lose their co-op and New Zealand will lose its dairy industry. They will go back to being peasants and we will all go with them. It will happen quicker than they can change their board and it will not be able to be undone. 
The farmers of Fonterra have been misled and misinformed. The Trading Among Farmers scheme is not what they have been led to believe it is. We have seen what happens to a dairy co-op that opens itself up to outside capital in this way and subsequently becomes demutualised. We have seen it in the example of Kerry dairies in Ireland. Once we go down this road there is no going back. This is a terrible bill and New Zealand First is opposed to it in its entirety. Thank you.