O'Connor Damien: Dairy Industry Restructuring Amendment Bill — Second Reading 
Text is incorporated into the Bound Volume 
O'Connor Damien: Dairy Industry Restructuring Amendment Bill — Second Reading 
[Sitting date: 21 June 2012. Volume:681;Page:3257. Text is incorporated into the Bound Volume.] 
Hon DAMIEN O’CONNOR (Labour—West Coast - Tasman) 
: 
 I am very proud to rise and speak on this bill a very very important bill. It is perhaps opportune that we are not to complete this bill prior to a vote that will take place on Monday the 25th when farmers themselves will vote whether they want to support TAF which is Trading Among Farmers which will be enabled under this legislation. 
The bill does three things: it enables trading among farmers of their own cooperative shares it sets a milk price setting - process and in the absence of Trading Among Farmers it sets a process for setting share value. The bill is unique because nowhere else in the world has this structure been put in place for cooperatives. It is complex for that very reason and unfortunately the whole bill has been rushed. That is why Labour cannot support this bill at this point. We welcome the opportunity that the Committee stage of the bill will provide beyond the vote having got a clear message from farmers whether or not they want this to proceed. We welcome the opportunity to tinker with and improve the bill at that time. 
We were hampered in my view by advisers to the Primary Production Committee who did not have a wide knowledge of cooperatives. They had a very good knowledge of competitive law in New Zealand. I am very grateful for the efforts of James Morrison who was the independent adviser to the select committee who brought a truly independent and focused view. 
In 2001 the Labour Government set up Fonterra through the Dairy Industry Restructuring Act. It is the world’s No. 1 dairy cooperative. It is the most successful company in the most successful industry arguably in this country. At that time that company had effectively 95 percent control of the dairy industry. The Labour Government laid down some requirements. Firstly milk should be supplied to independents who might want to innovate and grow opportunities in the dairy industry. Secondly farmers should not be trapped in a company but they should have some flexibility to enter the company—and there was an obligation on Fonterra to take their milk—and they should be able to leave if they chose. So we set up open entry and open exit. 
The third requirement was a fair value share which again was a new concept for a cooperative. Some have said that that was flawed from the start. I tend to agree that it has not been perfect and it has not always given the good drivers for Fonterra and now it is time that that should be changed. The issue is how we should change things. 
We have major competitors in the country now taking farmers’ milk processing it and exporting milk products. We have opportunities for farmers to leave Fonterra. That ability to leave has created over time what Fonterra has deemed a redemption risk—that is farmers can say “We’re out of here.” and within 30 days of leaving at the end of the season require the company to pay out the capital. That has been a challenge for the company at different times. In fact in 2007 the company saw some real problems and thought it would need to go to the market and get outside capital to shore up the company and secure its balance sheet. 
The farmers rejected that proposal because they said that they did not want outside capital and that they could manage the challenge themselves. How the company got to that point is a reasonable question. Firstly the executives of Fonterra were incentivised through their salaries to have an increasing share price which was basically a flawed concept and driver for a cooperative company. They were also incentivised on the basis of a better payout than Westland Cooperative Dairy Co. Ltd which produces about 2 percent of New Zealand’s milk supply. Again arguably two flawed drivers of executive behaviour that led to the problems in 2007. 
Farmers rejected any notion that outside investors should come in and control or have any stake in ownership in the company. So we have ended up with a bill here now. The Primary Production Committee unfortunately did not get much of an opportunity because of the rushed process to go back to basics and ask why the bill is here why we are doing this and what the objectives are that we are trying to meet here. 
We were firstly told back in 2007 that the company needed new capital that there was redemption risk and that there was a need for permanent capital. These underlying drivers—reasons—have seen this progress in my view from a 2007 concept to one that is in the House here today. That evolution has meant that we do not have the right solutions to deal with the appropriate problems. The 2007 proposal did create a great opportunity for the New Zealand Exchange—that is a company of such size where farmers are committed through huge capital investment through hard work through innovation and through an ability to produce milk efficiently for the international market means that anyone investing in or having a stake in this company is arguably having a stake in one of the best companies in the world. The farmers rejected that notion. The 100 percent control and ownership of their own company has been an underlying driver that the board has been slow to realise but I think it finally got the message. 
So we have a bill here that does a number of things. It allows trading of farmers’ cooperative shares among themselves which farmers endorsed in concept 2 years ago. But officials have said I think for reasonable reasons of liquidity that there must be an equivalent fund that is fungible—that is that the value of the shares and the value of the units must be equivalent. They must be set out alongside the sharemarket for farmers so that people can purchase units and take the dividend streams—the economic rights and any increase in share value—from those units. 
The concern has been that this may create tension within the cooperative. I go back to a quote from our independent adviser who says: “the whole of the draft Bill including Trading Amongst Farmers (“TAF”) rests on the Fair Value Share which is fundamentally flawed.” I go back to as I indicated earlier a belief that this is perhaps right. But what occurs in this bill in trying to address that problem reduce the redemption risk and identify what officials call “well discovered price or share value” is it opens up an investment opportunity and a unit trading market the consequences of which the select committee had no ability to truly test. I can quote one of the submitters Tony Reilly a farmer—a director—who said that “redemption risk does not go away under TAF—it is simply shifted to farmers’ balance sheets. TAF will allow for much greater fluctuation in the share price.” We got no advice from officials on that proposition and have not been able to truly test whether that might or might not occur. 
The bottom line is that there is so much uncertainty that will be injected into the dairy industry from this legislation. There is so much uncertainty for the farmers themselves that Onno van Bekkum—again an independent cooperative expert—has said that “This hybrid structure created under the TAF concept is one that has not been tested and one that can’t identify the solution to the growing tension between the interests of investors through units and the interests of farmers who want to maximise the return from their milk price.” 
Labour has concerns that in spite of the belt and braces approach from Fonterra assisted by the select committee to tidy up the issues to reduce the fund size from 25 percent to 20 percent in the constitution of Fonterra and to tweak the milk price obligations to ensure that contestable markets do not mean an undermining of Fonterra’s position but do allow competitors to come in and have a fair go the share price in the absence of Trading Among Farmers does not undermine Fonterra. 
 We attempted to do all those things in the select committee but the bottom line is that this is a complex bill. It is being rushed through the parliamentary process and the advice to the members of the select committee in my view was inadequate. We welcome now the opportunity for farmers to speak first knowing what they are approaching and we will through the Committee stage of this bill take another look at what might be required to improve this legislation.