Parker David: Dairy Industry Restructuring Amendment Bill — Second Reading 
Text is incorporated into the Bound Volume 
Parker David: Dairy Industry Restructuring Amendment Bill — Second Reading 
[Sitting date: 21 June 2012. Volume:681;Page:3266. Text is incorporated into the Bound Volume.] 
Hon DAVID PARKER (Labour) 
: 
 I rise to take a call on the second reading of the Dairy Industry Restructuring Amendment Bill. I begin by thanking the Primary Production Committee for its consideration of the bill. I also thank some of the representatives of the dairy industry who have been helpful to me and to the Labour Party in our understanding of the issues that lie under the bill and I will list a couple of groups. Can I thank Fonterra and the executives who have addressed openly and helpfully the questions the Labour Party has raised; I thank them for their efforts. Can I also thank members of the dairy industry who have an alternative view from Fonterra’s as to where the balance properly lies in these considerations for their thoughtful contributions to the issues before us. 
There are two aspects to this bill as we have heard from other speakers. One relates to the price of milk that is to be paid by Fonterra to the people who deliver milk to Fonterra and the division between that total payment as between a milk component and a return on the investment that people have in the Fonterra cooperative. The second is Trading Among Farmers and the trading amongst non-farmers of profit streams from the Fonterra shares. 
I want to deal firstly with the milk price issue. There are a number of reasons why it is important that we get the milk price right. Some of the things that Fonterra cuts across in New Zealand because of its size and its effective close-to-monopoly position in large parts geographically of New Zealand—in fact in large parts of New Zealand it is an absolute monopoly when it comes to the collection of milk—are the interests of consumers the long-term interests of the New Zealand economy and the long-term interests of Fonterra which mean that we need to get the milk price right. If we get the milk price too high then we prejudice New Zealand retail consumers of milk. People end up paying too much for milk and that means that somewhere there will be someone consuming Coca-Cola instead of milk. That is not good for the health of our country and it is not fair on consumers who are paying more for their milk than they should otherwise pay. 
 The milk price in New Zealand is significantly higher than it is in Australia— 
Hon Trevor Mallard 
: Yep and in the UK. 
Hon DAVID PARKER 
: —and in the UK—and it remains an open question as to whether that is because of the dominance of Fonterra in New Zealand and the fact that we have inadequate competition in what is called our fresh milk market but is actually increasingly reconstituted milk even in New Zealand out of season. So the ability of competitors to compete against that price of milk is in part reliant upon them being able to acquire milk at a fair price from farmers. If farmers are paid by Fonterra a higher price for milk than is a fairly competitive price for milk then those competitors will not be able to enter the market because they would always be at risk of Fonterra changing its pricing methodology undercutting them and effectively taking their market away from them. So there are very real issues as to why it is from that perspective important to get the division between milk price and return on Fonterra investment right. 
One of the other reasons it is important to keep that price correct is that in the absence of competition we know that monopolies are inclined to become inefficient—inefficient in terms of their price structures and inefficient in terms of the choices they make commercially both within New Zealand and outside of New Zealand. If Fonterra is not facing competition from entrants and potential entrants then as a monopoly it will become less efficient over time. That is standard competition theory. That is why we in the Labour Party believe in the efficiency of competitive markets because if you do have a competitive market then competition between participants in that market is you know survival of the fittest. Those that act non-competitively or have unduly high cost structures or unduly high profit structures fail because other competitors that have more efficient price structures or more efficient cost structures succeed at their cost and take their market share. So it is actually in the New Zealand economy’s interest and in Fonterra’s long-term interest that there be competition and the potential for competition in New Zealand which is enabled through having a fair milk price and is prevented if you do not have a fair milk price. 
I am not yet convinced that we have got this quite right in the legislation. I have heard and I am convinced that there are a couple of problems in the price-setting methodology for milk. The price for milk that is contemplated under this legislation is predicated upon a theoretical model for Fonterra that is based not on the actual efficiency of its milk production but on how efficient it might be if it was acting perfectly. Members opposite are shaking their heads—well I think that is right with respect based on the submissions that I have seen and my reading of the legislation. 
There is a theoretical product mix and a theoretical efficiency of the plant that Fonterra has that drive this milk model rather than the actual efficiency that it achieves out of its plants and rather than the actual product mix that it chooses to produce. I cannot understand why we are using a theoretical construct rather than the actual construct of what it is that it produces because that seems to me to mean a higher milk price than it can justify in practice based on a theoretical model that is different from what it achieves in practice. I am not yet convinced that that is right. I think the milk price should be a fair milk price based on what a competitive market would be. We do not have a competitive market; therefore we have to have a theoretical construct but that theoretical construct ought to be based on what is a competitive market rather than a theoretical rendition of it that cannot be achieved in practice. That is the first point I would make in respect of milk price. 
What does that mean in practice? I am told that there is some dispute as to the amount by which the milk price is overstated. It might be by as much as 50c per kilogram of milksolids. I know that Fonterra denies that. Its competitors say that it is 50c per kilogram of milksolids. What that means—and this will be of interest to the Greens—is that that would have an impact on land price of around $5000 per hectare which affects land-use choice and has an outcome in terms of whether something is being used for sheep and beef forestry somewhere or dairying. 
I want to turn in the brief time I have available to Trading Among Farmers. There is a national interest in Fonterra that arises from its importance in the New Zealand economy. That interest goes beyond the interests of the individual farmers and the interests of Fonterra both of whose interests are important. That national interest is why we have let Trading Among Farmers out of some of the Commerce Act restrictions that would otherwise have stopped the formation of Fonterra or its continued expansion. 
Redemption risk has been overstated in my opinion. Retentions policy is limiting that. We have seen Fonterra purchase the Waimate facility that the Russians owned that has gone broke. For people to have somewhere else to put their milk they have got to have somewhere else that is willing to process it. I do not think the redemption risk is as much as it was stated and so the Labour Party was concerned to limit the ability of Trading Among Farmers to grow like Topsy. We are not satisfied with the provisions in the constitution alone for Fonterra. We think there should be a statutory limit on the number of shares that can be owned by non-cooperative members. We have suggested a limit of 20 percent. We would be comfortable with a lower limit. We have yet to reach agreement with Fonterra. There has been some negotiation with Fonterra and maybe that will come to something maybe it will not but there should be a statutory limit on that. Otherwise we put at risk the long-term viability of the vertically integrated Fonterra through the tension between the new shareholders and the wet co-op shareholders.