O'Connor Damien: Dairy Industry Restructuring Amendment Bill — Third Reading 
Text is incorporated into the Bound Volume 
O'Connor Damien: Dairy Industry Restructuring Amendment Bill — Third Reading 
[Sitting date: 24 July 2012. Volume:682;Page:3815. Text is incorporated into the Bound Volume.] 
Hon DAMIEN O’CONNOR (Labour—West Coast - Tasman) 
: 
 I rise to take the opportunity to put Labour’s position on this bill the Dairy Industry Restructuring Amendment Bill. It is with some sadness that we cannot support this bill. We have a proud history in dairy industry legislation going back from the 1930s. We formed Fonterra when we last came into Government and we would have liked to vote for this bill. In the end although there has been much discussion and good discussion within the Labour Party caucus there is the refusal by the Government to support a legislated cap on the fund size. This is a fund that Fonterra itself has said is critical in terms of its total size critical to the management pressures and direction of Fonterra but the Government refuses to put in place a legislated cap. 
The Minister for Primary Industries went through the timing of the bill. It was a rushed process. Thankfully through the Government’s own mismanagement it allowed farmers to vote on Trading Among Farmers before the legislation had progressed through the House and for that I guess we welcome the National Government’s incompetence. 
 The outcome of that vote was confusing. The Minister himself misleads the House by saying that 66.45 percent of shareholders voted for Trading Among Farmers. No the vote based on milksolids was 66.45 percent of those who voted. The estimates—and Fonterra refuses to give the figures on this—are that of those farmers who voted about 50 percent voted for and about 50 percent voted against. That is not a clear mandate and that is why Labour is concerned that the Government’s position on this has been to refuse to put in place a legislative protection for what is the largest and the most successful company—and arguably industry—in this country bar none owned for the most part by New Zealand farmers which is something that we should be quite proud of. 
Fonterra itself says that it will manage the investment fund. This is the opportunity for non-farmers to buy units in our biggest company at about 7 to 12 percent of total share capital value. New Zealand Exchange’s outgoing Chief Executive Officer Mark Weldon commented that until the fund actually gets to 20 percent it is not going to operate efficiently. My concern is that tension that will be there from day one is unlikely to be managed by the board or by farmers and without a legislated cap it could very well see that unit fund blow out to a figure that is beyond critical and that is beyond the level that Fonterra itself says is wise and prudent in terms of the long-term objectives of a cooperative company. 
This is an unusual company. I acknowledge here and now that in 2001 when we put Fonterra in place we established a fair value share for a cooperative that in itself was unusual. We did put in place open entry and open exit provisions which brought discipline on management to ensure it held the confidence of farmer-supplier shareholders. We are changing that through this legislation and that is the risk. In spite of the global financial crisis this company has grown has improved its equity and has come back from a near crisis on its balance sheet in 2007 to a position of strength under the existing structure. This bill is about to change that. 
It is important that farmers realise exactly what is going on. Yes in the House I did refer to Sir Henry van derHeyden’s statement in 2010 in a consultation document that “Trading Among Farmers gets rid of redemption risk once and for all which makes every farmer’s investment in Fonterra more secure.” That is a lie. I repeat that statement because in the due diligence report released in 2012 a summary of quite a lot of work that went on states “balance sheet cover of NZ$120-200m required under TAF to manage Fund size is significantly lower than the NZ$500-850m of cover required to manage redemption risk …” the point being that redemption risk remains with the company at a lower level. 
 But what we have through the passage of this bill is some added risks to the company. We had an independent adviser to the Primary Production Committee. The advisers that came from the Ministry of Economic Development and from the Ministry for Primary Industries were competition advisers. They were skilled in the area of contestability competition and commerce law. They did not understand cooperatives and their basic objectives. Our independent adviser James Morrison in his report to the committee says: “This investor-supplier conflict of interests is why every cooperative that has introduced external investors to its capital structure has either eventually demutualised or reverted back to a full cooperative by excluding the external investors”. 
Farmers should be under no illusion that this legislation is going to protect and strengthen their cooperative. There are pressures that will build—ultimately I think from within the cooperative—under difficult times of trading and with international prices coming down and the concern is that bankers may force farmers to seek full value in their share. In fact in terms of the fall-back provisions in the bill around share valuation there was much debate around proposed new section 77A in clause 7. That debate was whether this cooperative should be driven by cooperative principles which are basically nominal value shareholding. It can be a change in nominal value but the fair value provisions and concept that we introduced in 2001 are faulty. What this bill had attempted to do was to change the fair value provisions in the absence of Trading Among Farmers. 
Indeed without the endorsement of the Fonterra Shareholders’ Council Trading Among Farmers cannot be introduced. There is a legal requirement for the Fonterra Shareholders’ Council—approximately 35 shareholding farmers who have the responsibility to provide oversight and a watchdog process for the Fonterra board—to sign off and endorse this concept. It has not done so yet. It needs to be fully aware that we have to have a fair process for the establishment of the value of the share if the council does not endorse Trading Among Farmers and indeed if through this legislation the fund was to be wound up. What we have done in this bill is try to compromise on the tension between officials who wanted full value shareholding—full value shares open value shares in Fonterra—and the intention of the select committee which was to have a cooperative value share. I am sure the chairman of the committee will outline that even further. 
The last provisions in here are the milk price provisions—that is we have a raw milk price that enables independent competitors to come and buy milk on a contestable basis from other farms and to get on and innovate. We welcome that and we want that. A complex milk price manual and milk price panel arrangement will be set up to try to do the best for Fonterra and the dairy industry. 
 In summary Labour would like to support this bill but we choose not to on the basis that the Government has refused to put in a basic legislative protection for what is the single biggest and most successful company in this country. We wonder why this is happening. John Key is on record saying that he would like to see Fonterra floated; we hope that does not happen. We have seen shares in numerous entities across this country—we will see them in State-owned enterprises—go into overseas ownership. Control will eventually drift into overseas ownership and we do not want that to happen for Fonterra our single biggest company. We hope that the board of Fonterra has the best intentions to provide and maximise the return to farmer shareholders not to provide and maximise the return to the outside investors who will now be part of Fonterra New Zealand’s biggest cooperative company.