Fonterra Chairman, Sir Henry van der Heyden, said a Bill currently in the New Zealand parliament was ‘crucial’ to the industry in his opening remarks to the Primary Production Select Committee.
The Dairy Industry Restructuring Act (DIRA) Amendment Bill, established in 2001, is being discussed before a verdict around 1 June progresses it to a second reading.
The update aims to increase scrutiny of Fonterra's farmgate milk prices and modify the Trading Among Farmers (TAF) scheme.
Issues to overcome
A sticking point in the proposed updated legislation is TAF, which would change Fonterra's current obligation to trade shares with suppliers, as farmers would purchase or sell shares in a market rather than directly with the firm.
Van der Heyden said that while they mostly support the bill, some sections have been identified that need to be amended to ensure TAF can operate effectively.
Speaking to the committee he said: "The bill will put Fonterra in a position where it can introduce Trading Among Farmers. And Trading Among Farmers will enable Fonterra to remain the national champion our farmer shareholders and New Zealand need.
"We need a stable permanent capital base to implement our refreshed business strategy that will drive returns for our shareholders, and to also protect the Co-op from future shocks such as a major drought.
"At the same time, it will maintain and enhance open entry and exit - a cornerstone of the Dairy Industry Restructuring Act since it became law in 2001.”
A review by the Ministry of Agriculture and Forestry and the Ministry of Economic Development and Treasury, found how Fonterra set the price it paid its milk farmers was consistent with the competitive market but the firm could have the “incentive and ability to distort the market”.
Milk price regulation
Speaking in parliament last month, David Carter, New Zealand minister for primary industries, said the act does not directly intervene in Fonterra’s milk price and it promotes contestability through its freedom of farmer entry and exit requirements.
“The bill legislates for greater transparency of the way Fonterra currently sets its farm-gate milk price through its milk price manual, to ensure that the farm-gate milk price is consistent with outcomes in a contestable market.”
The firm, which has around 90% market share in the New Zealand dairy industry, is seeking technical refinements to the detail of the Commerce Commission's milk price oversight function.
Van der Heyden said: "The bill will enshrine in legislation Fonterra's mechanism for determining the farmgate milk price, which is robust, transparent, and can't be influenced.
"Our view is that the bill entrenches things we already do. It also establishes a role for the Commerce Commission in reviewing and auditing this process. We don't think this regime is necessary, but we can live with it."