O'Connor DamienDAIRY INDUSTRY RESTRUCTURING AMENDMENT BILL (NO 3)Second ReadingHon DAMIEN O'CONNOR (Minister of Agriculture): My mouth is clear Madam Speaker so yes. DEPUTY SPEAKER: I'm pleased to hear it.Hon DAMIEN O'CONNOR: I can enunciate a lot more clearly thank you.I move That the Dairy Industry Restructuring Amendment Bill (No 3) be now read a second time.This bill has followed a review of DIRA the Dairy Industry Restructuring Act. The review was undertaken to ensure that the regulatory regime was fit for purpose and able to support a sustainable dairy industry. It was referred to the Primary Production Committee in August 2019 and was reported back to the House in March this year. I wanted to thank the members of the Primary Production Committee for their consideration of the bill. I'd also like to thank the many people who provided written and oral submissions. These submissions have been taken on board and have contributed to the bill we now have before the House.The bill as reported back is not the same as the bill that was introduced the primary change being that the committee recommended repealing the requirement that Fonterra accept any application to become a shareholder and supply milk known as open entry".When DIRA was passed in 2001 open entry was seen as a foundation of the regulatory regime that was established as a way to manage the risks associated with a company that had market dominance. At the time Fonterra controlled around 96 percent of farmers' milk production and had a near monopoly in New Zealand of domestic consumer markets. There were concerns that Fonterra's market dominance could impact on the performance of the dairy industry and being a dairy nation on our economy as a whole. The bill as introduced retained the requirement for open entry but recognised that there were aspects that needed to be adapted particularly in regard to giving Fonterra more control in how they were able to manage their investment in processing capacity. The bill therefore sought to include measures that provided Fonterra more business autonomy but that also didn't allow Fonterra the right of carte blanche. The suggested changes included firstly that Fonterra could refuse milk from new conversions and secondly that Fonterra could issue capacity constraint notices for up to three seasons rather than only one. At the time of initial drafting this seemed to be an appropriate balance between managing the continued risks of Fonterra's high-value market share and also managing any perceived negative impacts of continued regulation. However this approach is no longer seen to be the best way forward.The select committee received nearly 100 written submissions and heard many oral submissions. Open entry was the focus of many of these submissions and there was strong support for its removal. A key concern was the cost that open entry imposes upon Fonterra. This was because the company has to maintain extra processing capacity to deal with unforeseen volumes of extra milk. This is seen to create a risk of inefficient investment in commodity processing capacity which in turn may firstly divert investment away from the more innovative and potentially more value-added products; secondly potentially leave stranded assets as milk production in New Zealand plateaus as a result of environmental limits; and thirdly it could possibly reduce competitiveness in the global markets on which we depend for so much of our economic wellbeing. The select committee therefore recommended that open entry with one exception be removed. It is almost a year since the bill was introduced. The recent COVID-19 emergency has demonstrated the importance of New Zealand's primary industries to us all. The primary industries kept New Zealand and much of the world fed through that period of crisis. They generated revenue when much of the economy needed to slow or to shut down. As we move from crisis to economic recovery we need to ensure that these industries—including the dairy industry in general and Fonterra in particular—are well placed to continue to make that contribution. We therefore support the removal of open entry in the bill as reported back. This will ensure that Fonterra can manage its milk supply and its investment for the best possible outcomes for the company for its farmers and for the economy as a whole.The select committee recommended one exception to the removal of open entry. The committee considered that Fonterra should still be required by law to accept any application to become a shareholder and supply milk where the applicant was a first-time farmer. We do not intend to support this particular change to the bill. It is undoubtedly important to have succession planning in the dairy industry to ensure that new farmers can enter the industry but I do not believe that this proposal is the best way to achieve that. The committee itself recognised that there would be difficulty in getting a definition of "first-time farmer" correct. If the definition of "first-time farmer" is too wide there is a risk that Fonterra could be required to give open entry to corporate firms; too narrow and there is a risk of excluding the people who are intended to benefit.There are risks of costly legal review and diluting intended benefits to Fonterra by removing open entry. To remove these risks but still reflect the intent of the committee's proposal I intend to introduce a Supplementary Order Paper. This paper will remove the requirement for Fonterra to accept applications from first-time farmers and will instead give Fonterra a clear direction that it must when considering applications consider the ongoing viability of a dairy farm when a new applicant applies after a Fonterra farm has changed hands and also that they have regard to the land-use opportunities available to that applicant. I consider that this strikes the right balance between giving Fonterra more control over capacity and also manages risks to the overall future of the dairy industry while giving farmers the opportunity to make decisions about land use for the benefit of their farm business and the economy as a whole.I also intend to make some consequential changes to the bill as a result of removing open entry. The bill as introduced contained measures to enable Fonterra to mitigate risks while open entry remained in place. They would have allowed Fonterra discretion to accept or decline an application to become a shareholder if the application came from a new conversion or it was evident that the applicant could not meet Fonterra's terms of supply. The bill also allowed a capacity constraint notice to be issued for three seasons rather than one to enable better management of capacity when supply volumes were uncertain. As Fonterra will have full discretion under the amended bill to accept or decline applications these measures will not be required and can be removed from the bill.I have outlined the key changes that have arisen since the bill was first introduced and how I propose to deal with them. I will now briefly recap other matters covered by the bill which remain largely as introduced. On the issue of raw milk regulations the bill amends the raw milk regulations to phase out the eligibility of large export-focused processors to buy up to 50 million litres of raw milk at a regulated price. This measure was introduced in 2001 to provide some initial and limited stimulus for new larger processors to enter the market and compete with Fonterra. However the dairy sector has changed markedly since that time and this measure is no longer required to help generate competition. The bill therefore reduces the current eligibility conditions. A processor that has its own supply of 30 million litres or more in a single season will no longer have an entitlement to buy raw milk from Fonterra at regulated prices.The bill also widens the concept of what constitutes a processor's own supply so that this provision cannot be gamed or misused. Currently own supply only relates to raw milk purchased directly from farmers; in future own supply will also include raw milk purchased wholesale—for example from another processor or an intermediary.I have noted also in the bill that the New Zealand consumer market is well served by a range of small speciality dairy processors. There are however only two companies that provide nearly all of the basic household dairy staples of fresh milk and tabled cheese. Those companies are Fonterra and Goodman Fielder. When Fonterra was created the Government recognised the risks to the interest of New Zealand consumers of having only one large company controlling the whole market for domestic consumer products. There were risks of a lack of choice of pricing and of supply. DIRA therefore made a specific provision for Goodman Fielder to have a supply of raw milk. The Government now considers it important to maintain the regulatory backstop for Goodman Fielder. This is not to protect the company; it's to protect the interests of New Zealanders who want to be able to buy fresh milk and other dairy basics year-round.This Government is moving to pass this piece of legislation to give certainty to the dairy industry to ensure Fonterra get on and add value to the milk that they get but to ensure some protection for dairy farmers to have a competitive pressure on their own company and to ensure that there are opportunities for new and innovative people who want to get into the dairy industry. I commend this bill to the House. Thank you."