Smith Nick: Dairy Industry Restructuring (Raw Milk Pricing Methods) Bill — Second Reading In Committee Third Reading 
Smith Nick: Dairy Industry Restructuring (Raw Milk Pricing Methods) Bill — Second Reading In Committee Third Reading 
[Volume:661;Page:10120] 
Hon Dr NICK SMITH (Acting Minister of Agriculture) 
: 
 I move  
That the Dairy Industry Restructuring (Raw Milk Pricing Methods) Bill be now read a second time 
. The Dairy Industry Restructuring (Raw Milk Pricing Methods) Bill was tabled in the House in October 2009. It had its first reading on 28 October 2009 after which it was referred to the Primary Production Committee for consideration. The committee received and considered 11 written submissions and heard nine oral submissions on the bill. 
This bill improves on the Dairy Industry Restructuring Act 2001 by providing more flexibility in the pricing and allocation of regulated raw milk both now and in the future. The Dairy Industry Restructuring Act 2001 permits the Minister of Agriculture to make regulations that require Fonterra to sell up to 5 percent of its milk supply to independent dairy processors. The Dairy Industry Restructuring (Raw Milk) Regulations 2001 currently require Fonterra to supply up to 600 million litres of raw milk to independent processors at a price determined by a formula in the regulations. The formula was originally required because of the historical industry practice of bundling milk and capital returns into a simple payout for farmers. The industry has since moved on and Fonterra now provides a distinct milk price that is separated from capital returns. It is now time for the regulations to move on too and adopt a more modern approach to pricing. 
Upon the passing of the bill I will replace the old formula with the Fonterra farm-gate milk price plus 10c per kilogram of milksolids. The Fonterra farm-gate price represents the average price Fonterra pays farmers for raw milk across the season. The additional 10c per kilogram of milksolids represents some of the additional costs to Fonterra of providing independent processors with an even quantity of milk through the season. An even supply is more valuable than the seasonal or bell-shaped supply that Fonterra receives from its farmers. The new price will apply from 1 June 2010 which is the start of the 2010-11 dairy season. The new price will remove the immediate mispricing of raw milk that was identified during the 2008 review of the regulations. 
Some submitters on the bill raised objections to the new pricing system as they were concerned about the impact of a price increase on their business. Although this objection can be expected the change is needed to ensure that the independent dairy processors that buy milk under the regulations will pay the same price that Fonterra pays its farmers for the supply of that milk. The new price will provide independent dairy processors with improved economic incentives to source milk directly from farmers where practicable rather than under the regulations. By promoting contestability in the market for farmers’ milk this new price will better reflect the purpose of the Dairy Industry Restructuring Act to promote the efficient operation of dairy markets in New Zealand. 
The bill also allows for regulated raw milk to be allocated through an auction system or any other method. This future-proofs the Act by providing extra flexibility in the way that regulated milk is allocated to independent processors. Developing a system for managing excess demand for regulated milk will become increasingly important over the next three to four seasons as the dairy industry is becoming increasingly diversified and the number of independent dairy processors has increased. An auction would provide one method for efficiently allocating regulated milk amongst competing processor demands and is one possible long-term solution to regulated milk pricing. Submitters on the bill raised concerns about mainly the design features of an auction system. These features would be critical to ensuring that an auction system produced efficient prices and resulted in an efficient allocation of milk. If an auction system is to be introduced in the future the Ministry of Agriculture and Forestry will further consult the industry on the appropriate auction design features. 
The Ministry of Agriculture and Forestry is currently reviewing the longevity of the entire pro-competition regime that regulates Fonterra. The review is looking at the regulatory regime to see that it remains fit for purpose given the evolution of the structure of the dairy industry since 2001 and therefore should be continued for longer than currently planned. If the review finds that the raw milk regulations should be extended into the future then it may become necessary to introduce another mechanism for ensuring that regulated milk is both priced efficiently and allocated to those it was designed to protect without discouraging important contestability in the market for farmers’ milk. 
The flexibility provided by this bill means that a number of policy options including an auction system will now be readily available through amendments to the regulations only. The bill also includes a provision to allow our external documents to be incorporated by reference in any regulation made under the Dairy Industry Restructuring Act. The Primary Production Committee has recommended amendments to the incorporation by reference clauses in the bill in order to ensure that these are consistent with current standards. I support these recommendations. 
This bill is about a more modern and flexible regulatory framework for pricing and allocating regulated raw milk. By promoting contestability in the market for farmers’ milk this bill builds on the purpose of the Dairy Industry Restructuring Act to provide for the efficient operation of the all-important dairy industry and its markets in New Zealand. I particularly thank the members of the Primary Production Committee for the hard work and effort that has gone into this bill. I think that the Primary Production Committee is respected as one of this Parliament’s most effective committees for our most important agricultural industries and I thank the committee for the work that has gone into the report that was tabled on 22 February. I commend this bill to the House.