Dairy Industry Restructuring Amendment Bill — Second Reading 
Text is incorporated into the Bound Volume 
Dairy Industry Restructuring Amendment Bill — Second Reading 
[Sitting date: 14 June 2012. Volume:680;Page:3028. Text is incorporated into the Bound Volume.] 
Dairy Industry Restructuring Amendment Bill 
Second Reading 
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.  
Hon SHANE JONES (Labour) 
: 
 Tena koe Mr Speaker. Before I turn my attention to the Dairy Industry Restructuring Amendment Bill I would like to echo what the Minister for Primary Industries has said acknowledge the role played by Shane Ardern as the chair of the Primary Production Committee and say that it is one of the most interesting select committee experiences that I have had the opportunity to either endure or enjoy since 2005. More in sorrow than in anger we oppose this bill. We do so knowing that we were the architects under the leadership of Helen Clark who enabled this monopoly to come into existence. It was a monopoly that enjoyed the privilege of escaping the purview by and large of the Commerce Commission—no small gesture made by the Government at that time. Unfortunately the size of the gesture has been inversely related to the level of gratitude from those who have benefited from it in the rural community. As a rural-born Labour politician I have learnt to live with that. I look forward to the Committee stage of this bill because deep down I do not think there is a single member in the House who would not like to see a broad level of support given the centrality and the power of the dairy industry in our New Zealand economy. But at this stage I stand on behalf of my party and no doubt the sentiments I offer will be echoed by my other colleagues. 
At the pith of the debate that bedevilled us during the select committee process was whether or not “New Zealand Inc.” was going to be better served by enabling TAF to come into existence especially the unit trust which will allow for beneficial entitlements derivatives or unit instruments to be held by non-producers. That was a key debating point. I formed the view that I was not convinced by what the Fonterra advocates had to say. I want to say also that they put forward a quality level of submissions as did their opponents. But during the course of the debate I was and remain troubled that the existence of this particular unit trust does provide over time a slope that could inexorably lead to demutualisation. For those reasons we are actually looking forward to discussing with the Government and other stakeholders a set of amendments later in the process.  
I want to follow up on what the Minister has had to say. Not surprisingly a number of the members on this side of the House—in particular the Maori members—have been lobbied and have been cajoled in my case by a dairy company that is partly owned by Dalmatians and a dairy company that is owned by Maori. They have both had interesting things to say: that this bill may actually lessen the level of rivalry between what I might call the minnow players and the mother ship Fonterra. I think all New Zealanders have an interest in seeing a flourishing Fonterra. No New Zealander has an interest in seeing a calcified institution or an institution that unwittingly allows the cooperative legacy to slip away from it because rest assured the sophistication of the analysts the advisers and the observers once the TAF proposal gets up and running must not be underestimated—but that is for another day.  
We did have concerns and reflected them through the select committee process as to whether or not the new standards for setting the milk price were going to enable Fonterra to set itself up as a model not so much of how it performs as an institution but perhaps of how a notional efficient firm performs. At one level no one wants to see a level of subsidy being delivered through an unreasonable milk price from Fonterra to its rivals but at the same time we shared a concern that in the absence of rivalry Fonterra may not actually prove to be as strong as it should be. Also in the absence of rivalry we could not be confident that the actual milk price—which does impact on the daily lives of New Zealand families—could be managed.  
The Minister has talked about the term “contestability”. We have—I certainly have—sought advice and looked through various sources of information as to what this will likely be. In the absence of a very tight definition as to what “contestability” means I fear that we could see a reversion back to the Telecom-like litigation of the 1990s and after 2001-02. I certainly know that the Minister being a strong pro-commerce man does not want to see that. We do not want to see that. The Commerce Commission is going to enjoy a level of oversight over how the milk price is set and I think where that probably will come undone is that it will be first quite bureaucratic and second highly unlikely to enjoy the power to exert considerable levels of influence or game-changing behaviour. But that has been where the bill settled.  
I want to also talk about the importance at one level of enabling Fonterra to continue its strategy. During the submissions I amongst others said we were not particularly interested in hearing about your brand strategy the geopolitical considerations. That is a job for the shareholders their directors and their managers: to go out and do perhaps what the Catching the Knowledge Wave conference failed to do—actually go and turn from a raw commodity more wealth. I do not think there is a single member on this side of the House who does not want to see that happen. But does one need to do it in such a way where we run the risk of importing shareholders—owners of capital—into a cooperative structure and inevitably building a potentially level of tension? We were told that sounds conspiratorial. We were told that sounds quite lurid; that farmers will continue to enjoy total control as to what happens to the cooperative. As we currently understand the law that may or may not be the case. But as night follows day once these derivatives start to be traded I am absolutely certain a level of influence will emanate from this new class of shareholder—the directors or the broader stakeholders the actual producers—the guys and girls in “Strugglers’ Gully” so to speak managing debt milking cows looking for sharemilkers deciding whether a Kiwi or a Filipino should fit the bill. That is my fear. I fear that we will have investor capital and we will have producer capital and inevitably the cost of that tension will be the erosion of the underlying principles and the core meaning of what it is to have a cooperative.  
We did have concerns that the select committee process was truncated but those of us who have been Ministers in the past realised that certain imperatives are set down. Government members of the select committee I must say were—certainly to me anyhow—slightly indulgent to enable us to ask a whole bunch of questions. I do not want what I am saying to be used in any sense to deride the level of camaraderie that we as fellow parliamentarians enjoyed in trying to deal with this bill. But at the end of the day it got to very deep fundamental beliefs. Does one believe that this bill is in the best interests of New Zealand’s largest exporter which enjoys a level of commercial privilege shared by no other commercial entity in New Zealand? That is an inescapable fact. And are we doing the right thing as parliamentarians by enabling this kind of evolution? It can be said that that level of sovereignty belongs with the owners of the cooperative. We heard that argument very powerfully but I say to those stakeholders in that cooperative by dint of the Government of the time society has enabled you to enjoy what is virtually a State-trading level of privilege. So there has to be give and take.  
We are not blind to the fact that there are large capital issues at stake to drive an expansion in Fonterra etc. but without straying into the commercial mechanics as to how one does that in the absence of safeguards which may or may not come to pass in the Committee stage we at this stage as I have said will not be supporting this bill. We fear the long-term implications not only to our economic sovereignty and to the performance of this particular institution but of whether we are allowing and acquiescing in the demutualisation of a proud cooperative structure which has defined the growth of New Zealand’s most enduring industry—the dairy industry. So despite the fact—as referred to—that friends on the other side of the House were very charitable in the time made available we were unable to close the gap. I look forward to hearing what might come through the Committee stage. Thank you. 
SHANE ARDERN (National—Taranaki - King Country) 
: 
 It is a pleasure to rise in this debate on the Dairy Industry Restructuring Amendment Bill. Before I start my discussion I need to declare an interest as I through a family trust am a shareholder in Fonterra. I want to thank the Primary Production Committee members and the officials—the long-suffering officials—who were taken round and round the paddock many times. Mr Deputy Speaker I am sure you are pretty aware with the close eye you were keeping on proceedings there of just how much that was the case. I will not make mention of the membership of the committee entirely because I fear I might be in breach of Standing Orders but the wisdom that was brought to the job by a number of members on that committee was well appreciated.  
As the Minister for Primary Industries said we received 99 submissions and we heard 43. The importance of this decision on “New Zealand Inc.”—and the previous speaker Shane Jones touched on that a number of times—I do not think can be overstated. Fonterra is the largest company in New Zealand. It is the biggest exporter in New Zealand. The industry itself as a whole including the independents is by far the biggest part of the New Zealand export industry. So getting this right is hugely important to “New Zealand Inc.” and not putting up any barriers or other such things that might stand in the way of that type of growth is absolutely essential.  
I guess the question is why is the legislation needed and where it came from. I think it is worth reminding those who might be listening to the debate that it actually came from the industry itself. Fonterra over a number of years had a look at its capital structure identified that it potentially had a substantial redemption risk and came to the Government seeking some kind of redress through the legislation that is before us to introduce what it describes as a permanent capital model. That is where the concept of Trading Among Farmers was born. As the Minister rightly stated—and there is confusion amongst some of the shareholders of Fonterra and the farming sector at large—this legislation is enabling. It does not require TAF. If the farmers themselves decide and the board of directors itself decides on 25 June—this month—not to proceed with TAF then it will not proceed.  
In the view of the committee we worked tirelessly to achieve a structure that would allow the company to carry out that wish if that is the majority view of those who are part of that decision making. The legislation should not be a political football and I was heartened by the fact that there is still some hope of getting Labour across the line in the Committee stage. I was disappointed to hear the Hon Shane Jones say that he would not be supporting the legislation at this stage because I think it would be much more enduring if we could enjoy cross-party support for this legislation. I look forward to the amendments that may come forward from the member or from the Labour Opposition in this regard and we on this side of the House will certainly be seriously looking at those amendments and taking them into consideration.  
I am aware that all members of the select committee and many members of Parliament were lobbied very heavily by all interest groups in the industry—all the stakeholders—and there was some interesting debate around what model might or might not work and why the State may need to intervene or otherwise in this general process. The only comment that I would make there is that sometimes you need to look at the evidence of what has happened. You also need to ask I guess the basic philosophical question of where the State stops and where the State starts. Obviously in the case of Fonterra it was a construct of legislation. Those of us who have been part of the industry for our whole entire lives as in my case—and I certainly was here at the time when the first bill was passed and debated—understand absolutely that this was a construct of legislation and that because of that there are going to be some regulations placed on what was at the time of its formation about 90 percent of New Zealand’s total milk processing. Now I understand it is about 86 percent of farm-gate collection of milk. It gives the entity Fonterra known as a new co-op at the time a very substantial stake in the total industry. So from that of course there is going to be some regulation. It should be widely acknowledged that that is going to be necessary and I think by most it is. It is just a question of how much and where that stops and starts.  
So the process that the select committee went through was to try to set those parameters and I think the recommendations the committee made back to the Minister which have by and large been accepted and the officials’ support were certainly well and truly tested. I think they have ended us in a position where the compromise—which it overwhelmingly is and I think we have to accept that it is a compromise—is about right.  
We look forward with some enthusiasm to the process going through Parliament. I would certainly like those out there in dairy industry land who are considering this proposal now to seriously read all of the information that has been provided to them by Fonterra. I would like them not to make a rushed decision but to ask the questions of their industry leaders that they want answered and to satisfy themselves. I am confident that they will. Certainly the industry over the years has demonstrated that it has the ability to do that. Nothing is without risk but doing nothing also carries its own risks. So I urge you to consider all the options that are before you before you make that call. But at the end of the day make the call and move on.  
I certainly want to recognise the substantial contribution to the select committee that was made by those who submitted to it. We had a range of submitters including Fonterra of course and others who gave us specialist advice from outside. We had an independent adviser. I do not know what else could have been done to be frank that would have given this process more scrutiny. There was suggestion by some that this was a truncated process. Well the select committee met during adjournment and it met during extended hours. I thank the Opposition members who were part of the select committee for their leave for that process to take place. The members of the committee at times threw their hands up in the air and said: “We’ve had enough.” That would indicate to me that we were not denying anyone the opportunity to work through the concerns that they may have. As I said at the beginning sometimes we went round in circles a few times. That was as far as I was concerned designed to allow everyone who had questions the opportunity to ask them and to have them satisfactorily answered.  
I look forward to the passage of this bill. I am certainly curious to see what might come out of the Committee stage. I hope that members on the other side will eventually get to the point where we can get cross-party support for such an important piece of legislation for “New Zealand Inc.” and that this bill will progress. Thank you. 
CHRIS HIPKINS (Senior Whip—Labour) 
: 
 Pursuant to a discussion just held between the whips I seek leave for the House to rise a few moments early so that the next speaker can have their full 10 minutes uninterrupted. 
Mr DEPUTY SPEAKER 
: Leave is sought for that purpose. Is there anyone opposed to that course of action? There appears not.  
Debate interrupted.