O'Connor DamienDAIRY INDUSTRY RESTRUCTURING AMENDMENT BILL (NO 3)First ReadingHon DAMIEN O'CONNOR (Minister of Agriculture): I move That the Dairy Industry Restructuring Amendment Bill (No 3) be now read a first time. I nominate the Primary Production Committee to consider the bill. At the appropriate time I intend to move that the bill be reported to the House by 17 February 2020. As this House is aware the dairy industry makes an enormous contribution to the economic wellbeing of New Zealand. One of the 12 priority outcomes of the coalition Government is to build a productive sustainable and inclusive economy and the dairy industry is a crucial player in that journey. It is our largest export sector accounting for more than one of four export goods dollars that our country earns. It contributes nearly $8 billion to New Zealand's total GDP. The industry provides jobs and incomes for more than 40000 workers most of them on farms but many in dairy processing too. As a former farmer and part-time farmer now myself as someone who has followed the fortunes of the dairy industry very closely I know its reputation for being hard-working enterprising and innovation is indeed well deserved. There is much about the industry that we should admire. We're now at the point where change is necessary to help the dairy sector in better shape for the future. The wide-ranging review of the Dairy Industry Restructuring Act 2001 the Act which paved the way for Fonterra has recently been completed and this bill is the result of that review. The Dairy Industry Restructuring Amendment Bill (No 3) contains a package of measures that will ensure that the Dairy Industry Restructuring Act (DIRA) regulatory regime operates in the long-term interests of dairy farmers consumers and of the wider economy. The bill contains amendments to the DIRA itself and also to the associated raw milk regulations. I'm being absolutely transparent about the totality of the changes being made to the DIRA regulatory regime. This way the select committee will be able to examine the proposed regulations as well as the statute changes and the regulation amendments will be made at the same time as the bill is enacted.The Dairy Industry Restructuring Act was passed nearly 20 years ago. As mentioned it enabled the formation of the Fonterra dairy cooperative the objective being to have a company with the scale to be a strong international competitor and the drive to have innovation across our dairy industry. But the DIRA also recognised that there were risks to be managed in enabling the creation of an entity that effectively controlled 96 percent of farmers' milk production at that time and a near monopoly in the New Zealand domestic consumer markets. There were concerns that Fonterra's market dominance could impact on the performance of the dairy industry and that its dominance in the domestic consumer market could impose higher prices or limit choice. The DIRA therefore imposed some important disciplines on Fonterra.The key measures are firstly open entry. Fonterra is required to accept any farm as a shareholder and accept all milk from shareholding farmers subject to limited exceptions. These provisions prevent Fonterra from imposing blunt volume restrictions on new farmers' supply. Open exit is the next provision. Fonterra must allow farmers to withdraw from the cooperative without unreasonable restrictions or penalties which allows farmers to switch their supply to other dairy processors should they deem that Fonterra is not performing in their best interests. The third thing is the calculation of the base milk price. This aims to provide a transparent benchmark price so that Fonterra's shareholding farmers have a reference point against which they can assess Fonterra's and other dairy processors' milk price offers. And then we have the raw milk regulations which have two functions: to provide a limited initial supply of raw milk to new dairy processors to ensure there was some competition in the market place and to protect the interests of New Zealand consumers by ensuring that there was one major competitor to Fonterra in that consumer market. Eighteen years on the Government has reviewed DIRA to ask whether the regulatory regime is still needed to manage these risks. There have been changes in that time. Fonterra's share of milk production has fallen from 96 percent to about 80 percent. New processors have entered the market as both exporters and suppliers and the dairy industry has grown over that time. Its contribution to New Zealand's per capita GDP is 74 percent higher than it was in 2001 and dairy export receipts have more than doubled. The aim of the Government's review of DIRA which involved widespread consultation and independent expert analysis was to determine firstly whether the DIRA is operating in a way that protects the long-term interests of New Zealand dairy farmers of its consumers and of the nation's overall economic and environmental and social wellbeing. The second one was whether the DIRA has had any unintended consequences. Thirdly whether DIRA is still fit for purpose taking into account the wider economic trade and social context in which the dairy industry operates. We want to ensure that DIRA supports a higher performing sustainable dairy industry that is aligned with the Government's strategic priorities of productivity sustainability and inclusiveness.The DIRA review was not intended to be a review or critique of Fonterra's performance or its business strategies or structure. It does not direct Fonterra or any other dairy business on corporate strategy or product mix. These decisions are for the company and its shareholders. Again DIRA does not make judgments on whether the dairy industry is a good thing or not or how many cows we should have or where they should indeed be. Those things are up to the dairy companies and the industry.The review concluded having received many submissions many of them strongly held views that regulation and particularly retention of open entry and exit requirements is still required. Fonterra's share of farmers' milk has decreased but Fonterra remains the only dairy processor with a national presence still collecting 77 percent or more of farmers' milk production in most dairying regions. Even though there are now several large processors established in New Zealand they are individually and collectively small in comparison and generally setting their prices and other terms of reference to Fonterra's.There are a number of changes that will be put into place. If I can firstly move to open entry and say that the bill addresses a key point in the way in which Fonterra calculates base milk price. Sorry I've just gone to the wrong page here. It will allow Fonterra to have some discretion in taking new farmers' supply. It has been accepted that the growth of the dairy industry has come at some environmental cost and that Fonterra have asked for the discretion to be able to refuse milk supply from new suppliers. Those requirements will be put in place through the legislation. Can I say that they will have as I say performance criteria based on animal welfare hygiene unsafe work practices. Again these are risks to Fonterra should they be forced to take supply from farmers that indeed might not be up to world's best standard. There are a number of other provisions in there. I won't go into the technical side of regulated milk or base milk price other than to say that the changes that have been considered very carefully work through the balance of ensuring Fonterra and its management—giving some protection to farmers who often have no alternative to where they supply their milk keeping enough upward performance pressure on the board and management to deliver the returns for those farmers but again ensuring that there's no blind obligation to take milk anywhere from anyone any time. That has put pressure on Fonterra to invest in stainless steel. The reality is now that we probably will see less growth in the dairy industry and moving into that different situation it is important that Fonterra is not exposed to all the risks and that its competitors pick up all the opportunities. That is the balance that this Government is trying to achieve here. Can I say that we want to ensure that there is a review process of the legislation on a regular basis moving forward that we do not believe as a Government that this legislation should automatically expire. That was the view held by officials and the previous Government that at some point regulation would be unnecessary for the dairy industry. It is my view and the view of Government at this point that with such an important industry we need to ensure there is the right regulatory structure around what is our single biggest and most important company. And I look forward to the review the strategic review that they've carried out over the last six months. They are now a more honest company. They have fronted up with their deficiencies in terms of performance and capital structure. They are about to launch a strategy that I hope will align with that of Government of ensuring that we have a sustainable high-performing company that delivers economic sustainability environmental sustainability and the very best returns for this country for its dairy farmers and for the wider community.