Parker David: Dairy Industry Restructuring Amendment Bill — First Reading 
Text is incorporated into the Bound Volume 
Parker David: Dairy Industry Restructuring Amendment Bill — First Reading 
[Sitting date: 03 April 2012. Volume:679;Page:1570. Text is incorporated into the Bound Volume.] 
Hon DAVID PARKER (Labour) 
: 
 And I gladly reply. I think when accusations are made that the Labour Party is not in favour of a prosperous dairy sector we should have regard to history. It was the Labour Government under Michael Joseph Savage that formed the Dairy Board in its original form trying to vertically integrate the industry in order that farmers would get a decent slice of the value chain between farm gate and supermarkets—or the predecessors of supermarkets back then.  
Shane Ardern 
: Tooley Street buyers London. 
Hon DAVID PARKER 
: Tooley Street buyers thank you. It was the Clark Government that created Fonterra. Members do not have to have an especially long memory to recall that at that time the merger of the two main dairy cooperatives New Zealand Dairy Group and Kiwi Cooperative Dairies required the intervention of this Parliament because otherwise it would have been blocked because of domestic competition concerns under the Commerce Act. We in this Parliament led by the then Labour Government said that we thought that it was in New Zealand’s interests that we guard the export interests of New Zealand’s dairy industry which were best met with a strong cooperative that was New Zealand - owned that was vertically integrated and that maintained New Zealand ownership of that value chain in the same way that had been the objective of the original Savage legislation in much earlier years.  
We heard from John Banks—at times an entertaining speech—that we should be going past the woolshed as we went to see the dairy farmers. He was mixing his metaphors there. I would say to Mr Banks that what we need to watch out for here is that if we do not get this right in this Parliament it will not be the cows that are getting milked in the future; it will be the farmers. Unless they maintain long-term control of the vertically integrated structure that we currently have through Fonterra they and the New Zealand economy will be worse off.  
I agree with Mr Banks that in general terms the Government should stay out of business. We are not in the business of business. We should be getting out of the way of business where we are in the way of business. But previously Fonterra came to this Parliament and asked for special privileges that it said were in New Zealand’s wider interests. Mr Banks we do not sit here just for the interests of farmers we do not sit here just for the interests of Fonterra; we sit here for the interests of farmers and Fonterra and the New Zealand public. I did not hear you once mention the interests of the wider New Zealand public. We believe that that public interest is best preserved if the cooperative structure is preserved into the future. You ask why it is— 
The ASSISTANT SPEAKER (H V Ross Robertson) 
: Order! 
Hon DAVID PARKER 
: We were asked what the point of principle is that lies at the heart of our opposition to backing this bill the Dairy Industry Restructuring Amendment Bill at its first reading and it is that there is a fundamental flaw in this legislation that should not have been in it when it was introduced. 
Hon John Banks 
: Change it. 
Hon DAVID PARKER 
: Well fundamental flaws ought to be fixed before legislation is introduced. We do not trust that member or the National Government to fix this at the select committee and that is why we are opposing it. If it is fixed at the Primary Production Committee to our satisfaction we may revise our vote at later readings but we are not confident based on the unwillingness of the Government to address it until now that it will be.  
That point of principle is that if this legislation is passed without any further recourse to Parliament—without any further recourse to Parliament—two things could happen that could lead to the long-term loss of control of the cooperative the undermining of the cooperative structure and the eventual loss of our vertically integrated dairy sector. Those two steps that would need to be taken do not require any parliamentary intervention at all.  
The first is that the Minister of the day Mr Carter the current Minister for Primary Industries would have to pass a regulation to say that the new capital rules will apply. OK? What happens when those new capital rules come into force is that for the first time in our history of this cooperative the income stream from the cooperative share can be owned by someone else. As to the dividend flow from the co-op share at the moment for every kilogram or every 1000 kilograms of milksolids that a milk farmer delivers to Fonterra they have to own a co-op share and they cannot sell it to anyone else. Under this legislation not only will there be able to be trading amongst farmers of shares so that someone can have more shares in the co-op than they deliver milk and someone else can have fewer—that is a big change for a start—but in addition to that we are creating this new class of shares where the future dividend flow and increases and decreases in the value of the share above the value at the date it starts to trade pass to the person who holds the rights on those shares rather than the farmer. 
 Mr Banks you tell me what the control is on that moving to 100 percent over time. I will tell you the answer to that because I asked Fonterra and it told me that it is a provision in the constitution. So without any recourse to Parliament the limitation on the number of shares that can be separated from their income flow and traded on a separate platform can be changed—without any recourse to this Parliament. It could go from Fonterra’s current intention of it being about 5 percent or 10 percent to 15 percent to 20 percent to 30 percent to 40 percent. At which point does the tail start to wag the dog? There are overseas examples of the separation of profit flow from ownership in a co-op share in the traditional structural sense where over time the different incentives have resulted in the long-term breakup of the co-op. 
Hon Damien O’Connor 
: 20 percent. 
Hon DAVID PARKER 
: I am told by my colleague Damien O’Connor that that has happened with percentages as low as 20 percent of the shares being in this different platform.  
Why does this happen? Well it happens because the holders of different classes of shares have different incentives. The traditional cooperative model is driven by the belief that vertical integration is the long-term driver of profit. You do not have to be a brain surgeon to know that for the majority of the holders of these shares outside of the traditional co-op share structure in this market which is trading in rights to dividends and increases in value of the share their motivation is not necessarily the long-term vertical integration of the dairy industry which has proven successful in New Zealand. Their interest is in short-term to medium-term profit. If they can achieve short-term to medium-term profit by flogging off part of that vertically integrated enterprise overseas they will militate for it. I think it is wrong that legislation is brought to this House where there is no recourse back to Parliament that would allow Parliament to stop that happening. We would have to intervene after the Act was passed and everyone would say: “You’re interfering with private property rights. Compensate us please.”  
Since this Parliament intervened in favour of Fonterra that industry has grown to be New Zealand’s largest exporter—it was already the largest exporter but it has grown incredibly since and now I think about 22 percent of all new exports are in the dairy industry. 
Shane Ardern 
: 26. 
Hon DAVID PARKER 
: Twenty-six percent. Thank you. Twenty-six percent—a full quarter. There is a national interest here that goes beyond the Fonterra interest and the farmer interest and we are not satisfied that it is met.  
I will say one final thing. The shareholder support that there was for this at the time was against the background of the global financial crisis and a run on Fonterra’s balance sheet caused by people being under pressure and wanting to get some money out driven not just by the global financial crisis and the effect on land prices but also by a drought at the time by the liquidity problems that banks were having and by the pressure they were putting upon farmers. We also had the history of Fonterra not making retentions towards its own capital costs in the future because it was distributing every cent of profit and that was a mistake by the then directors of Fonterra. In fairness to them they now acknowledge that that was wrong but Fonterra is not stuck with that problem for the future so the idea that Fonterra is in some dire position if this legislation does not pass is not accepted. It has got to where it is under its existing structure. It has got through the global financial crisis that drought and its problems at the time without recourse to this structure. And although it might want the legislation it will not bring it to its knees if it does not get it.  
This legislation does not include essential protections. It is absolutely shoddy practice on the part of the Minister for Primary Industries not even to mention the facts that I have canvassed about how this could change over time without further recourse for Parliament to stop the growth in trading these shares outside the traditional co-op structure and that is the principal reason why I am objecting at this stage to this legislation.