NM Farmer for March 2010
There have been big changes in the dairy industry since the watershed year of 2001 – the year that Fonterra was established. At that time 27 per cent of our exports were from the dairy sector. With the creation of Fonterra came the Dairy Industry Restructuring Act 2001, brought into force to accommodate the major changes taking place within the industry.
As the dairy industry has, in broad terms, gone from strength to strength, the Government is now bringing the amended Dairy Industry Restructuring (Raw Milk Pricing Methods) Act into force on 1 April 2010.
As a member of the Primary Production Select Committee overseeing these amendments I am keen to point out the importance of creating legislation that supports Fonterra. This very successful co-operative of farmers has contributed enormously to the wealth of our nation.
We expect the changes made under the Dairy Industry Restructuring Act to have a positive impact on the industry as a whole. The main purpose of the Bill is to permit regulations to be made to allow all or some regulated milk to be allocated through an auction process and the Bill sets out the design details of such an auction. This is the fairest way to ensure long term profitability.
What is the rationale behind this key change? Outside of the co-operative, Fonterra establishes the price for milk made available to other processors – the farm gate price plus 10 cents. This is a very fair price as everyone knows it costs a lot more in terms of feed to produce milk out of season. Other producers are now in a better position that when the previous legislation was struck.
There are many companies with other suppliers but they can still access the 600 million litres Fonterra has to make available to other competitors - last year that equated to 460 million litres. Inside the new legislation there is a requirement for Fonterra to make available up to 5 per cent of its own production.
The new legislation provides the Minister with the authority to establish an auction system (or any other method) for allocation to ensure Fonterra gets a fair price for the milk it has to make available.
The debate on price was largely around the shoulders of the season when either in early spring or autumn when production is low. At these times Fonterra has many millions of dollars worth of stainless steel tanks it cannot fill yet it has an obligation to make milk available to its competitors. It was important to ensure that this new legislation did not hamstring the vital economic driver – we need to ensure Fonterra remains robust and internationally competitive.
To summarise: under this new legislation Fonterra is still required by law to pick up milk at what are best described as the ‘extremities’ of New Zealand. In doing so, some milk is simply not profitable. Paying the same price for milk that is well off the beaten track is a big call and it’s important the Government sees Fonterra is given a fair run in dealing with less economic collections. For this reason there will be a change in the pricing structure.
I’d like to wrap up by pointing out that the dairy industry has embraced a collaborative model that has worked exceptionally well and I feel it behoves the meat industry to position itself in the market in a similar fashion. The companies that currently compete for market share in Europe and the USA could consider the Fonterra model.