O'Connor Damien; Dean JacquiThird ReadingHon DAMIEN O'CONNOR (Minister of Agriculture): I present a legislative statement on the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill.ASSISTANT SPEAKER (Barbara Kuriger): The legislative statement is published under the authority of the House and can be found on the Parliament website.Hon DAMIEN O'CONNOR: Thank you Madam Speaker. Indeed it's a pleasure to have you in the Chair. I think it's appropriate given your position in the dairy industry and I think that we can in partnership and cooperatively move this forward.I move That the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill be now read a third time.The bill was introduced in the House on 13 September this year. It had its first reading on 27 September after which it was referred to the Primary Production Committee for consideration. The select committee reported on the bill back to the House on 10 November and the bill has now had a second reading and passed through the committee of the whole House. I would like to take the opportunity to thank all members of Parliament and the submitters to the Primary Production Committee and the members on the committee in particular for their wise consideration of this. Thank you. They engaged in this accelerated process in a manner that afforded careful scrutiny and informed consideration of this very important piece of legislation. The fast passage of this amendment bill will provide Fonterra and the wider dairy industry with the certainty they now need to move forward.The success of Fonterra a New Zealand - owned cooperative with a membership around 10000 farmers is critical not just to our rural communities but to our wider economy. The New Zealand dairy industry which Fonterra is a key part of has this year earned more than $20 billion in export receipts. It's essential that Fonterra has the right settings to perform well.The Dairy Industry Restructuring Act—or DIRA—was passed in 2001. I have to say it was an honour to be the chair of the committee at that time. It was by a then Labour Government. It allowed the formation of Fonterra but it also included safeguards to ensure that Fonterra had the incentives to perform well. This was at a time when Fonterra accounted for about 96 percent of the farmers' raw milk market. The safeguards had at the time included certain disciplines around Fonterra's capital structure.Last year Fonterra's farmer shareholders voted in favour of a new capital structure to replace the current Trading Among Farmers share-trading system. I always thought it was a dog and indeed it proved to be such. Fonterra's new capital structure is intended to make it easier for farmers to become and stay shareholders in Fonterra. Fonterra will be better placed to attract and retain milk supply in an environment where milk production is forecast to plateau or decline. This will ensure Fonterra can make optimum use of its investment in dairy processing continue to compete strongly in global markets and remain the mainstay of rural New Zealand. The Government believes it is important for Fonterra to be able to make changes to its capital structure that 85 percent of its farmer shareholders have voted to support and to respond to the changing environment and to be able to proceed with certainty. That's why we introduced and advanced this bill at pace. However while being beneficial to Fonterra in the short to medium term its new capital structure also carries some long-term risks for farmers for Fonterra for the broader dairy sector and potentially for the wider New Zealand economy. One such risk relates to external confidence in the integrity and the robustness of Fonterra's raw milk pricing practices once it moves to its new capital structure. Fonterra's intended move to the new capital structure has already resulted in a roughly 40 percent discounted price for Fonterra shares. We acknowledge that. This will mean that in the future any dividend on Fonterra's shares will appear to provide a much higher return on shareholders' capital investment. This will provide Fonterra with the opportunity to potentially shift some of its capital returns from dividend to the milk price. As I said at the committee stages I acknowledge that for some farmers it has meant a hit on their balance sheets with the reduced value of those shares.As we all know though Fonterra's milk price determines the price other processors must pay to attract milk supply from farmers. If Fonterra's milk price were not right—either too high or too low and that's been an issue of some contention—it could distort business and investment decisions by farmers and processers including Fonterra itself potentially leaving less scope for investment and innovation for the whole industry. Given the importance of the dairy industry to the New Zealand economy any such distortionary effects could result in the wider economy forgoing opportunities for value creation or innovation.This is why the bill strengthens existing regulatory safeguards around Fonterra's internal milk pricing practices. This is not to say that Fonterra has acted in any way contrary to the DIRA regime. It is simply acknowledging that strengthening is required to mitigate for the risk that Fonterra may choose to act opportunistically in the future. Another key risk that this bill mitigates relates to the increasing divergence of shareholder interests inside the cooperative. Under Fonterra's new capital structure all suppliers will have to hold one share for 3—rather than the one share for 1—kilograms of milk solids that they supply to Fonterra but could choose to hold up to four rather than two shares for each kilogram of milk solids supplied. So someone who has some cash can buy three more shares for every kilogram of supply. Those who are looking for it of course can sell down two for every three that they have.This may result in competing shareholder priorities relating to Fonterra's future direction and strategy between farmers with minimum shareholdings—who are often the future of the industry—for supply and those with larger shareholdings—who might perhaps be on the exit side of the industry—held for investment purposes; for example larger corporate farming operations and those who are moving out. It is important that we ensure the interest of future farmers and those moving forward are not undermined by those moving out who will be seeking higher dividends. In the future there could be significant shareholder pressure on Fonterra's board to pay both a high milk price and also a high dividend to meet the expectations of both shareholder suppliers and shareholder investors. An outcome of such pressure could be that earnings are paid out without the necessary retentions to fund future innovation or capital needs. In the short term this may not be significant but over time this could undermine the stability of Fonterra's long-term capital structure and the effectiveness of its strategy execution.A challenge for Fonterra is to achieve the balance between maximising the milk price paid to farmers and holding on to those suppliers—a cornerstone of its constitution of course—and the retentions for future investment. This is why the bill requires Fonterra to maintain and publish a dividend and retentions policy something that was not in place when Fonterra was set up and the industry one could say might have lost billions of dollars as a result. That's spilt milk—to pardon the pun. We've got to make sure that those mistakes aren't made into the future.We're not going to direct or regulate Fonterra on how to do that. That is a challenge for Fonterra's board. The requirement in law to maintain and publish a retentions and dividends policy is however a marker of our expectations and a means of making Fonterra's actions transparent. I'm satisfied that the bill strikes the right balance between enabling Fonterra to pursue its commercial objectives in mitigating the risks to the wider dairy industry. The dairy industry can now move forward and focus on doing what it does best which is producing the best milk in the world. I'd like to once again thank the members for their scrutiny thank all those submitters who brought information and ideas to the select committee that were carefully considered and thank the officials I have to say who have done an outstanding job in a really tricky area of commerce. The Minister of Commerce and Consumer Affairs might do well to pick some of those people up for the Commerce Commission if he wants some outstanding officials. But don't take them too soon because I still need them.Can I say it's been an honour and a privilege to be part of the dairy industry from my birth on a dairy farm and to be able to play a part in what is the single biggest industry in this country. Unfortunately tourism took a hit. It plays a critical role. We do have some challenges. We've got to make sure that we have a sustainable industry that we get our settings right for not just water quality and local environment but actually in a world where there are expectations of lowering emissions that we apply the same innovation as we've applied in the past to continue to produce quality dairy protein while reducing our emissions. I know we can do it and we will move from volume—which has been a criticism an unfair one of Fonterra—not just to value but to values the values that drive the farmers and the people in this country to produce the very best. In that way we can be quite proud of the fact that we can be the best farmers for the world dairy farmers and across all the other sectors. Therefore I commend the bill to the House.ASSISTANT SPEAKER (Hon Jacqui Dean): The question is that the motion be agreed to.