O'Connor Damien: Dairy Industry Restructuring Amendment Bill (No 2) — First ReadingText is incorporated into the Bound VolumeO'Connor Damien: Dairy Industry Restructuring Amendment Bill (No 2) — First Reading[Sitting date: 15 May 2013. Volume:690;Page:9992. Text is incorporated into the Bound Volume.]Hon DAMIEN O’CONNOR (Labour—West Coast - Tasman): I moveThat the Dairy Industry Restructuring Amendment Bill (No 2) be now read a first time. I nominate the Primary Production Committee to consider the bill. The purpose of this bill is to place a legislative limit on the proportion of Fonterra Cooperative shares that can be sold by farmers into the new co-op unit fund. The bill provides that Fonterra must ensure that the new co-op fund does not constitute more than 20 percent of the total number of cooperative shares. If the 20 percent limit is reached Fonterra must cease the sale of shares into the new co-op fund and take action to reduce the proportion of shares in the new co-op fund to below the 20 percent limit within 90 days. The current Dairy Industry Restructuring Act places no legislative limit on the proportion of Fonterra Cooperative shares that can be sold by farmers into this fund. I am proposing that a legislative limit is needed for this company.Fonterra is our single largest company. It is a cooperative. It controls about 40 percent of the global trade in dairy products throughout the world. It is a cooperative as I said and it is owned by New Zealand dairy farmers. There are very few companies of any size that are owned by New Zealanders in this country. The dairy industry has been built through the wisdom of the Labour Party from the 1930s to the 1950s through the 1950s through the 1980s—Hon Members: Ha ha!Hon DAMIEN O’CONNOR: Well firstly the Labour Party brought into place a price guarantee for dairy farmers; secondly it created the Dairy Board; and thirdly in 2000 we created Fonterra in legislation. The successful dairy industry is being guided by wise legislation endorsed by parties across this House. What we had last year was a new capital restructure of Fonterra. It was called “Trading Among Foreigners”—no Trading Among Farmers. The dairy industry is arguably as I say not only one of the most successful industries but also one of the most attractive industries for investors. Back in the 1990s the New Zealand Dairy Group the single largest cooperative processing company was focused on a corporate strategy for the Dairy Board. That was rejected by most participants in the dairy industry but in the formation of Fonterra I suggest some of that corporate strategy continued on with the new management and governance of the company. There has been for many years a determination by some—Sir Henry van der Heyden has been on the record as saying that he wanted to restructure the capital of the cooperative Fonterra and indeed to recognise his success he has done just so.The question is what that has done for Fonterra. In a relatively short space of time dairy farmers who are members of a cooperative that in its pure form has a nominal value share have moved from a fair value share of about $4.50 up to a listed unit priceof $5.50 and now I think today it is just short of $8 per unit or $8 per share value. Many observers of the stock market might say: “What a wonderful success.” The problem for suppliers in a cooperative company who are obliged to buy one wet share for every kilogram of milk solids that they produce is that they have to front with a larger amount of capital to be active participating shareholders and owners of the company Fonterra. On top of that we now have investors about $500 million worth of investors—or it would be greater than that—who have the right to the dividend flow from the shares of Fonterra. They are not dairy farmers and they have purchased the right through the purchase of units—a perfectly reasonable investment proposition allowed by the Trading Among Farmers legislation.What that has started to do is unravel the cooperative that we have been so proud of. I am sure Mr Ardern will get up and endorse some of the things I say. There are now dairy farmers who want to continue to be shareholding owners of Fonterra and grow their supply but they cannot afford to because paying $8 for every additional kilogram of milk solids is not a smart investment decision for them. I spoke today to a very astute farmer who has a number of farms and who has just signed a contract with Fonterra to supply them with just milk without any corresponding wet share purchase. That might seem a good deal too to someone but for the dairy industry and the success that it has been built on this is the beginning of a new structure and I say an unravelling of the dairy industry and its success. The incentive to increase production—which some say is a negative in terms of environmental impact—has now gone. That has now gone because it is not a sound economic proposition for many dairy farmers.The greatest beneficiaries of the Trading Among Farmers legislation have been foreign-owned companies and other dairy companies in this country because the disincentive to supply additional milk to Fonterra has meant that they have sought out opportunities with Open Country Dairy a privately owned company; with Synlait a Singaporean-owned company which is about to list; and with Westland Milk Products a cooperative company. Tātua has its doors closed but now on the horizon we have Yashili and Yili two companies that dwarf Fonterra in terms of their total size. They are Chinese-owned companies that have come down and started to invest in this country. Some might say that there is nothing wrong with that. I am certainly not opposed to Chinese investment in adding value to our economy. The problem is that their benefit may be off the back of Fonterra’s new capital structure and a shrinking supply of milk to our No. 1 company and the biggest participant in the biggest industry in this country. The jury is out on what that might mean over time.What Fonterra did in the lead-up was to say many many things to farmers to convince them that Trading Among Farmers was good for them. Many of those things were not true. Fonterra has said that if Trading Among Farmers does not work for farmers within 2 years it will close it down. That will not occur. It has said that it was not about capital raising. It has said that it will lock in ownership and control of Fonterra. Those things are not true because we are starting to see that unravel. What my bill does is put in legislation a limit to the total amount of Fonterra shares and units that can be traded on the open stock market because as sure as night follows day the chances are that those units if traded on the stock market will fall into foreign hands and we will lose the dividend streams. If the constitution of Fonterra was to be changed by over 75 percent of farmers—and that may occur because of internal pressure—then the size of that fund could be extended.Some will say that constitutional protection is enough. Banks will tell farmers what to do when the payout drops. The farmers will be demanding access to the full value of their shares on an open trading market because they desperately need the money. That will be the pressure that ultimately unravels Fonterra. What I say through this bill is thatbefore that happens Fonterra should come back to Parliament back to whatever Government is in power and ask for a change in legislation before it unravels before our eyes. The 20 percent limit on the unit fund size in legislation is the least that Parliament can do to protect our single largest company which is owned by New Zealand farmers and is the most outstanding performer in the world of international dairy trade. This is too valuable for us to lose. All I ask through this bill and I hope that the National Party will support it is that it step in and put in a legislative limit just as we put in place legislation to form the successful dairy industry—