Burns Brendon: Dairy Industry Restructuring (Raw Milk Pricing Methods) Bill — Second Reading In Committee Third Reading 
Burns Brendon: Dairy Industry Restructuring (Raw Milk Pricing Methods) Bill — Second Reading In Committee Third Reading 
[Volume:661;Page:10136] 
BRENDON BURNS (Labour—Christchurch Central) 
: 
 I follow in sequence from the Minister in the chair the Acting Minister of Agriculture in acknowledging that I am no expert on the dairy industry either. However we are partners in crime in respect of the Dairy Industry Restructuring (Raw Milk Pricing Methods) Bill as we go through the Committee stage. 
I will comment a little further on the current beneficiaries of the raw milk pricing system. A number of those are present in the market place one of which is the Synlait dairy factory in Dunsandel. I understand that currently it has a shareholding owned by Mitsui of Japan of 22.5 percent. I have talked about its plans to quintuple production so obviously it will be seeking to expand greatly. The details of this bill will be important in terms of Fonterra being able to ensure that in the future its supply to that dairy plant in Dunsandel is done so on an equitable basis. 
New Zealand Dairies will be a dairy company known to many members in relationship to the Studholme family who started it but its total shareholding now belongs to a Russian company called Nutritek. That plant is at Waimate near the Waitaki River and the growth in the dairy industry has fed into that plant. 
Open Country Cheese is a Waikato-based dairy company. Amongst its shareholders is a former Deputy Prime Minister one Wyatt Creech who is known to the Minister in the chair at the moment. Olam International a company from Singapore is a major shareholder there. 
We also have the Cadbury’s factory in Dunedin a proud institution on the Dunedin landscape. Britain is the major shareholder or I think wholly owns that Cadbury’s factory. There are two others. Tatua has already benefited from the raw milk supply from Fonterra which is the subject of this bill and I think there are predictions that Westland Cooperative Dairy will in the next season also become a recipient of milk from Fonterra. 
One of the issues that the Primary Production Committee had to consider was the balance. It considered whether Fonterra was too dominant and whether it was getting the benefits it deserved from the current system and I guess there was a sense that Fonterra is not the bully over the little guys in this respect. Those smaller players are growing in strength and size and obviously we want a system that balances those interests. Some of those players can hardly be described as small. When we consider that Open Country Cheese collected about 850 million litres of milk last year it is not exactly a small player. 
In relation to the issues of the auction and that option is provided for in future the basis is that although the Fonterra farm-gate milk price reduces the underpricing associated with the current wholesale milk price—and the addition of a 10 percent premium provides an allowance for the seasonal pricing to smooth it out if you like—the fact remains that the current regulated milk remains underpriced. The full value of the seasonal price has been calculated at around 15c per kilogram of milksolids rather than at 10c per kilogram and the 10c premium does not attempt to capture the benefits for the independent processors. They are able to limit the risk to their factories through having a diversified milk supply and they have the enormous convenience provided by effectively being able to dial up a Fonterra tanker. That provides them with enormous financial strength effectively at the expense of the balance sheet of Fonterra. 
The reason to use the farm-gate price is that it ensures independent processors do not purchase raw milk from Fonterra under the regulations at a lower price than the average price that Fonterra pays its farmers for raw milk over the whole period of the season. Therefore employing the farm-gate price to regulated milk establishes a price equivalent of about 4 percent of the raw milk that Fonterra has to divest under the current regulations with Fonterra keeping the price of the remaining 96 percent. We have heard the figure from Shane Ardern that although it takes 96 percent of the milk it provides from that only 84 percent of the exports so that again really enshrines the nature of competition that Fonterra is facing. The price adjustment of 10c a kilogram of milksolids reflects the additional costs to Fonterra in providing what is called a square supply curve which is one that goes right the way across a season. The additional price above the farm-gate milk price is required to ensure a fair and efficient price because that farm-gate milk price reflects the average price paid by Fonterra for a farmer’s annual milk supply profile. 
I reinforce the point that Fonterra is our largest and our only truly large-playing New Zealand private company. Its success is our success. When Fonterra’s milk price drops the economy dips with it. When the milk fat price rises the economy rises with it. Farmers gear up on that milk fat price—sometimes one would have to acknowledge in a rather profligate fashion. 
We know that some of the banks at the moment are doing some restructuring in the dairy industry due to the expansion that a number of farmers engaged upon because they began to believe that prices nudging towards $8 a kilogram would be sustained. That is a foolhardy proposition. Anybody with any experience in the industry would know that prices can range from between $3 and $4 a kilogram and the top end price of I think $7.80 a kilogram which was achieved in the season before last. 
Dairy farmers in the Fonterra structure are given a lot of confidence in the future of the industry. It has been around a long time under various guises. It has had enormous growth. Through this bill we want to ensure that the success of Fonterra which has been a large part of the success of the New Zealand economy continues. We want to see that those who have taken their positions in the market as a result of the dairy industry restructuring of nearly a decade ago are not given golden windows of opportunity and are not having windows shut. I am confident that this bill as it was passed through the select committee process will deliver the sort of balance that we want to see in the New Zealand dairy industry. 
The question was put that the following amendment in the name of the Hon Dr Nick Smith to clause 2 be agreed to: 
to omit “1 April 2010” and substitute “the day after the day on which it receives the Royal assent”. 
Amendment agreed to. 
Clauses 1 to 6 and schedule as amended agreed to. 
Bill reported with amendment. 
Report adopted.