O'Connor GregDAIRY INDUSTRY RESTRUCTURING (FONTERRA CAPITAL RESTRUCTURING) AMENDMENT BILLFirst ReadingHon MEKA WHAITIRI (Associate Minister of Agriculture) on behalf of the Minister of Agriculture: I present a legislative statement on the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill.ASSISTANT SPEAKER (Hon Jenny Salesa): That legislative statement is published under the authority of the House and can found on the Parliament website.Hon MEKA WHAITIRI: I move That the Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Bill 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 10 November 2022 and that the committee have authority to meet at any time while the House is sitting except during oral questions during any evening on a day on which there has been a sitting of the House and on a Friday in a week in which there has been a sitting of the House and outside the Wellington area despite Standing Orders 193 195 and 196.Fonterra is New Zealand's largest dairy processor. It is a New Zealand - owned cooperative with a membership of around 10000 farmers. The dairy sector of which Fonterra is part will this year earn around $22.1 billion in export receipts. It is therefore essential that Fonterra has the right settings to perform well. The Dairy Industry Restructuring Act or DIRA was passed in 2001 to allow for the formation of Fonterra. The DIRA included safeguards to ensure that Fonterra had the incentives to perform well. This was at a time when it accounted for about 90 percent of the farm-gate milk market. The safeguards have over time included certain disciplines around capital structure. Fonterra and its shareholders are free to determine the cooperative's capital structure. The DIRA has aimed to ensure that whatever its form the capital structure did not adversely affect contestability for farmers' milk supply.Last year Fonterra's farmer shareholders voted in favour of a new capital structure to replace the current trading among farmers structure. The new capital structure will make it easier for farmers to become shareholders in Fonterra and supply milk. 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 a mainstay of rural New Zealand.The Government believes it is important for Fonterra to be able to make changes to respond to a changing environment and to be able to proceed with certainty. As part of its future capital structure Fonterra wants to partially de-link its unit fund from the farmers' shareholders market. The linkage is a key part of the current trading among farmers capital structure and it is embedded in the DIRA. If the DIRA is not amended Fonterra will face ongoing legal uncertainty. While the Government is prepared to support the change that Fonterra and its farmers want we are also aware that the new capital structure carries potential risk—risk for farmers and the performance of the wider dairy sector and also to Fonterra's own performance over the longer term.Fonterra will find it easier to attract and retain milk supply. That is a positive. But locking in farmers through new shareholding arrangements could have downsides if for example it stopped farmers supporting other potentially more innovative processes or stopped farmers moving from dairy into other land sustainable land uses. Fonterra needs a certain amount of competitive pressure from other dairy processors or from competing land-use. Competitive pressure ensures Fonterra performs at its very best. That performance means not only being the best at what it does now but also being an innovator and a driver of long-term sustainable dairying. So the bill amends some existing DIRA settings to help manage risk and support ongoing performance. These amendments relate to increased transparency robust governance and the independence of price-setting processes. First the bill improves the transparency and robustness of the governance operation and Commerce Commission oversight of Fonterra's base milk pricing arrangements. A transparent independent and robust base milk price - setting process is important. Fonterra's size in the market for farmers' milk means it essentially sets the farm-gate milk price for the whole dairy industry. To attract and retain farmers' milk supply other processors need to exceed Fonterra's farm-gate milk price forcing efficiencies across the whole industry. The DIRA therefore includes provisions that govern the calculation of the base milk price including monitoring by the Commerce Commission. The bill has two features to improve transparency and independence of the governance and operation of the milk price - setting arrangements. The bill increases the number of ministerial nominees to Fonterra's milk price panel from one to two and it requires the chair of Fonterra's milk price panel to be independent of Fonterra. Fonterra will also need the Minister's approval of a candidate before it appoints a chair. Fonterra will also have to regularly change the milk price group. The milk price group is the external body contracted to administer the base milk price calculation. This is to ensure that the milk price manual remains fully independent from Fonterra's board and management over time. Secondly the bill strengthens the Commerce Commission's oversight of the base milk price - setting regime. It gives the Commerce Commission the ability to direct Fonterra on the rules in its milk price manual and the inputs assumptions and processes that Fonterra uses in the base milk price calculation. This is a change from the current settings. At the moment the commission can comment but Fonterra need not take account of those comments. This amendment will enable the regulatory regime to address issues that have a material impact on the base milk price. It responds to longstanding concerns about the effectiveness of the base milk price - setting regulatory regime. It is worth noting that the Commerce Commission's new powers of direction do not mean that the commission is setting the price that farmers get paid for their milk; the farm-gate milk price is Fonterra's decision and nothing in this bill affects that. The bill will also support liquidity in the trade of Fonterra shares in its restricted farmer-only market. It improves transparency in relation to Fonterra's performance. Fonterra is moving to a farmer-only market for its shares. Because the market will be restricted farmers could find it difficult to trade shares readily to find a buyer in a timely manner or without undue financial cost. This could limit farmers' ability to exit from Fonterra either to supply other processors or consider alternative land-use. It's great if farmers want to be shareholders in Fonterra but they also need to be able to exercise choice including the choice to exit. The bill supports liquidity in two ways: by (1) requiring a market marker to be designated under NZX rules to support ongoing liquidity in the restricted farmers-only market; and (2) requiring Fonterra to make an independent market analysis of its performance which is accessible to farmers and unit holders. The market marker will facilitate the buying and selling of shares where there is low demand amongst farmers. This will enable entry and exit in a timely manner. The publication of market analysis by Fonterra will help ensure that farmers shareholders prospective farmer shareholders unit holders and prospective unit holders remain well-informed about Fonterra's performance to assist in participating in the shareholders market and related investment decisions. The Dairy Industry Restructuring Act has evolved since 2001 when it was first passed to enable the establishment of Fonterra and the amendments introduced by this bill continue that evolution. This bill recognises that Fonterra exists in a dynamic and changing environment. The cooperative and the legislation need to respond effectively. Fonterra and the dairy sector as a whole are facing increasing challenges: environmental and resource limits changes in social licence volatile global markets and changing consumer preferences. The bill is a measured response to changing circumstances. It enables Fonterra to move forward with confidence in an increasingly challenging commercial environment while recognising the need for some continuing safeguards to encourage the performance of Fonterra and the wider dairy sector. I commend the bill to the House. DEPUTY SPEAKER: The question is that the motion be agreed to.