O'Connor Damien: Dairy Industry Restructuring Amendment Bill — In Committee 
Text is incorporated into the Bound Volume 
O'Connor Damien: Dairy Industry Restructuring Amendment Bill — In Committee 
[Sitting date: 17 July 2012. Volume:681;Page:3544. Text is incorporated into the Bound Volume.] 
Hon DAMIEN O’CONNOR (Labour—West Coast - Tasman) 
: 
 Thank you Mr Chairman; I appreciate that. It is great to see this Dairy Industry Restructuring Amendment Bill back in the House. It is one of the most significant bills from an economic perspective that this country has seen for a few years. It is indeed about the restructuring and recapitalisation of our single— 
The CHAIRPERSON (H V Ross Robertson) 
: Order! Order! Can I just say to members it is a longstanding convention that members should not conduct conversations in the Chamber unless it is necessary to do so and then only so as not to disturb the proceedings. So would members leaving the Chamber please respect and show some courtesy to the member who is trying to address the Committee; it is good conduct and it is being considerate of others. 
Hon Trevor Mallard 
: And courtesy is contagious. 
The CHAIRPERSON (H V Ross Robertson) 
: Courtesy is contagious. Mr Mallard that is absolutely right. 
Hon DAMIEN O’CONNOR 
: Thank you Mr Chairman and Mr Mallard. Thank you very much. Can I just go back. We are talking about Part 1 of the bill—that is the amendments to the principal Act an Act that was passed in 2001 by the then Labour Government setting up Fonterra our single biggest company in the country and it has been a success by most if not all measures. This bill was introduced and the select committee process was a rushed one. The National Government thought it would rush it through before the farmers had an opportunity to vote on whether they wanted this to proceed. Indeed in fact the vote was a last-minute consideration. When the bill was introduced both the Minister for Primary Industries and Fonterra said a second vote was not necessary. Well thanks to the mismanagement of the National Government the bill was delayed and the farmers had an opportunity to vote on whether they wanted Trading Among Farmers to proceed. The result of that vote was that 66 percent of milksolids—that is the amount of milk produced by farmers—supported the bill in principle and what we are doing here. 
However a closer analysis—and we have not had the true figures—would indicate that about 50 percent of the farmers voted for this and 50 percent voted against us. That does leave this House and the National Government in somewhat of a dilemma. That is indeed why—well if I can go back one step—there was a second vote to tighten up the conditions around Trading Among Farmers and the restructure of Fonterra. Those conditions would have lowered the threshold of what we call a unit fund—the fund that investors can buy into—with a number of other conditions as well. Only 72 percent of milksolids voted for that when a 75 percent mandate was required. So that leaves Parliament and indeed Fonterra in somewhat of a dilemma—that is the mandate to support Trading Among Farmers is in theory supported but the conditions that the company the Fonterra Shareholders’ Council and the farmers were expecting actually have not been passed. 
That is why Labour in Opposition is putting forward an amendment to this bill that will put in place a statutory limit on the size of the investment fund that investors from outside Fonterra can buy into. The limit of that fund will be 23 percent. We initially proposed a 20 percent limit because Fonterra has indicated that it will—and indeed it did at the second vote—take to the farmers a proposal to lower the threshold from a 25 percent fund to a 20 percent fund. As I say because only 72 percent of the farmers voted for that we are left in a bit of a dilemma. Well if the company if the Fonterra Shareholders’ Council if the farmers and indeed if the Government are honest in their intent the 20 percent threshold will not be exceeded. But it is—not yet but hopefully—only a constitutional limit. We in Labour believe that a legislated limit is required because Fonterra itself admits the shareholders’ council admits that the size of the fund is critical to ensuring New Zealand owner control of our single-biggest company. We are proposing and accept the 23 percent limit on the basis of negotiation with Fonterra management that it needs some headroom above the 20 percent to enable it to manage back down the unit quantum—that is if the number of units exceeds 20 percent of the total equity capital of Fonterra then it has a legal obligation to manage it back down below the 20 percent. We have accepted the 23 percent reluctantly but in negotiation with Fonterra on the basis that the Government supports this also—and the National Party has yet to indicate its support for a legislated limit. 
The logic around that is that this is the single-largest company in this country. It is 100 percent owned and controlled by New Zealand farming operations. There will be some who say that there are some foreign investors who own farms and who have shareholding by way of that ownership. That is correct. But every farmer owning a farm and supplying Fonterra through the cooperative structure is an owner and gets their return through milk price and through dividend streams. That cooperative structure has served this country and the dairy industry very well for well over 100 years. We are reluctant and are concerned about the recapitalisation the ability of Fonterra to offer out securities in its own company to outside investors. We are concerned that that may change the focus of the company and undermine that New Zealand control and ownership. So we believe that we must limit the size of that fund. We look forward to the Government’s support for that and I hope that other coalition partners and other parties in this House will do so. 
There are other components of Part 1 of the bill that I will refer to briefly. The key issue in the changes is the establishment of a fair process to establish the raw milk price for Fonterra farmers. Whether they like it or not the farmers who have voted for Trading Among Farmers will now have downward pressure on milk price and upward pressure on dividend streams because those who invest in the unit fund securities will be seeking returns only through dividend streams and only through an increase in the unit price and consequently the share price. If it sounds a little bit complex I have to say that it is. I do not profess to understand all the intricacies of the Financial Markets Authority and the oversight bodies and all the wheeling and dealing that will go on here but what I do understand through many many years of studying the dairy industry is that farmers are moving into a new league under Trading Among Farmers and they should be fully aware of the dangers. 
What the Primary Production Committee has attempted to do is establish changes that ensure a fair price that do allow competitors—independent companies that might have innovative products to develop and that want to get out and find new markets around the world—to compete with Fonterra to get milk from farmers on a fair basis but we also are trying to support Fonterra as a cooperative to maximise the return to its farmers through the highest price it can possibly pay for milk and a dividend on their investment in the company. The reality in the dairy industry is that the vast majority of the investment occurs in the land in the plant and equipment and in the stock on the dairy farms. The investment through shareholding and into the cooperative is a relatively small part. Farmers for the most part will always focus on the return through milk price as their primary source of income and that is the way it should be under a cooperative structure. 
However the bill is changing Fonterra radically. It is splitting the focus of management into two streams: one of dividend returns to investors and the other of milk returns to the farmer shareholders. As long as they fully understand that that is fine. As long as they fully understood that when they voted for Trading Among Farmers that is fine. But I say to the Minister in the chair the Minister for Primary Industries and I say to the Government that the fact that only 50 percent of farmers in number voted to support Trading Among Farmers means there is a potential split in this company. The loyalty that has helped Fonterra to grow and develop may not be there into the future unless the management and the board of Fonterra fully understand that the returns primarily must go back to the dairy farmers through the milk price and not just through the dividend streams.