Carter David: Dairy Industry Restructuring Amendment Bill — Second Reading 
Text is incorporated into the Bound Volume 
Carter David: Dairy Industry Restructuring Amendment Bill — Second Reading 
[Sitting date: 14 June 2012. Volume:680;Page:3028. Text is incorporated into the Bound Volume.] 
Hon DAVID CARTER (Minister for Primary Industries) 
: 
 I move  
That the Dairy Industry Restructuring Amendment Bill be now read a second time 
. The Dairy Industry Restructuring Amendment Bill was tabled in the House in March 2012. It had its first reading on 3 April after which it was referred to the Primary Production Committee for consideration. The committee received and considered 99 written submissions and 43 oral submissions on the bill.  
The bill does three key things. Firstly it will enable Fonterra to proceed with Trading Among Farmers or TAF as it has become known if its shareholders so decide. But at the same time the bill will ensure that farmers will retain their ability to freely enter and exit Fonterra in a TAF world. Secondly if TAF does not proceed or if it is wound up it requires Fonterra to value its shares at a full fair value. This is also to ensure the freedom of farmers to enter or to exit at fair value. Thirdly the bill creates greater transparency for the way that Fonterra sets its farm-gate milk price bolstering the incentives for Fonterra to set a reasonable and efficient price and providing for a contestable milk market. This is in recognition of the importance of Fonterra’s farm-gate milk price to the entire New Zealand dairy industry.  
During the consultation period submitters queried a number of aspects of the bill. In relation to TAF some submitters considered that the Government should not be introducing this legislation because they had concerns with Fonterra’s proposed capital restructure. I have always said that Trading Among Farmers is a matter for the board and the shareholders of Fonterra. Although the bill enables Fonterra to proceed with TAF it in no way requires Fonterra to implement it. Rather it sets up a regulatory framework to ensure that farmers can freely enter and exit Fonterra in the absence of the share issue and redemption obligations that Fonterra currently requires.  
Any concerns with the design of TAF itself are for the Fonterra board and management to address. I am therefore delighted that Fonterra has decided to hold a final vote on TAF later this month. I note in particular that shareholders are being asked to approve a number of constitutional changes that provide greater protection around shareholder ownership and control. I see this as a positive step because a number of submitters raised concerns that TAF would lead to the demutualisation of the cooperative—an argument that I do not accept.  
One of the main criticisms of the bill was that it was being progressed through the House even though the final decision on TAF had not been made. I do not see this as an issue because the bill does not require Fonterra to implement TAF. However if Fonterra decides to go ahead with TAF it is crucial that the legislation is finalised to provide enough certainty to investors ahead of the proposed launch in November this year.  
The TAF provisions in the bill remain largely unchanged since its first reading. The provisions of new section 109K which relates to the behavioural obligations on Fonterra have been clarified so that certain conduct is prohibited only if it is for the purpose of restricting farmers’ freedom of entry and exit. Some technical changes have also been made to the Order in Council process to reflect concerns put forward by the Regulations Review Committee.  
The fair value share provisions in the bill received criticism from a number of submitters who considered that it is not appropriate for Government to intervene in the share valuation of a private cooperative. However Fonterra is not a normal cooperative. Its dominant position in the market means that its share value has an impact on the overall efficiency of the total dairy industry. If Fonterra was to set its share price at a nominal value this would clearly discourage farmers from exiting Fonterra and encourage other farmers to enter thereby impacting on the contestability of the farm-gate milk market. That is why unlike the share price of any other cooperative Fonterra’s share price is a public policy concern.  
A number of changes have been made to new section 77A since the bill was introduced. These changes clarify the Government’s policy intent that the share price should be set at a full fair value in the absence of Trading Among Farmers. In relation to Fonterra’s farm-gate milk price some submitters suggested that the milk price monitoring regime should be designed to promote competition and that the resulting competitive market will drive efficiency. However the bill provides for a contestable milk market.  
Contestability is not about actively promoting or precluding competition. Rather a market is contestable if the threat of entry prevents an existing firm from taking advantage of its market power irrespective of whether or not there was actual competition in the market. In a contestable market both a dominant firm like Fonterra and its competitors will have the incentives to operate efficiently and to innovate. I believe that contestability remains the appropriate standard to maximise the potential of the New Zealand dairy industry and that of course was the original premise of the Dairy Industry Restructuring Act in 2001.  
This bill will ensure that regardless of whether Fonterra chooses to proceed with TAF farmers will retain the ability to freely enter and to freely exit Fonterra. This bill is crucial to ensure the continuing growth of an efficient and innovative dairy sector. I would like to take this opportunity to thank the members of the Primary Production Committee chaired by Shane Ardern for the committee’s consideration of the bill. I commend this bill to the House.