The DIRA provides a framework to regulate the activities of Fonterra, including the “open entry and exit” requirements, and monitoring of its farm gate milk price setting processes.
In August 2019, the Dairy Industry Restructuring Amendment Bill (No 3) was introduced to remove regulatory requirements that are no longer necessary, support and encourage better environmental performance of the dairy industry, provide Fonterra with more flexibility to manage some aspects of its operations, and provide increased clarity on aspects of the regulatory regime for Fonterra and other dairy industry stakeholders.
The Bill passed unanimously in July 2020. The changes will start coming into force from 1 June 2021, with the removal of open entry effective from 1 June 2023, and changes to the requirement to supply independent processors from 1 June 2024.
Industry Regulations
Open Entry & Exit
DIRA was introduced to ensure that New Zealand dairy markets remain contestable and efficient. The DIRA’s open entry and exit provisions allow farmers to start and stop supplying milk to Fonterra at the start of any season, subject to limited exceptions.
From 1 June 2023, the open entry requirements will be removed, meaning Fonterra will not be required to accept milk from farmers wishing to join Fonterra, but in deciding whether or not to accept milk, Fonterra needs to “have regard to”:
(a) The effect of its decision on the ongoing viability of the farm if the farm supplied Fonterra in the previous season; and
(b) The land-use opportunities available to the applicant.
Separately, in November 2020, Fonterra’s Constitution was amended to require Fonterra to accept supply from any farm if the farm is supplying Fonterra at the time of the application, and Fonterra is satisfied that the farm/applicant comply with Fonterra’s standard terms and conditions of supply.
Ministry for Primary Industries
For more detail on the DIRA freedom of entry and exit requirements go to the Ministry for Primary Industries website.
Raw Milk Regulations
Under the Dairy Industry Restructuring (Raw Milk) Regulations 2012, Fonterra must make up to 600 million litres of the milk it collects each season available to eligible independent processors at the regulated price.
Of that amount, the volume of raw milk that Fonterra must supply to:
- Goodman Fielder New Zealand Limited is limited to 250 million litres per season, increasing to 350 million litres from 1 June 2021, and
- any other independent processor and their interconnected bodies corporate is limited to 50 million litres per season.
From 1 June 2021, Goodman Fielder will be required to pay Fonterra an extra 10c/kgMS for all regulated raw milk it purchases. Goodman Fielder will also be able to purchase regulated milk at the quarterly fixed price.
From 1 June 2024, Fonterra is not required to supply raw milk to independent processors if their own supply is 30 million litres or more for a season. “Own supply” can be from farmers or any other source but does not include milk from Fonterra farmers.
Fonterra is required to disclose certain information including the forecast and actual figures for the season of:
- The total quantity of raw milk to be supplied by shareholding farmers
- The total quantity of raw milk contracted to supply to independent processors
- The total cost of milk
- The farm gate milk price
- Kilograms of milk solids supplied
- The additional cost of winter milk for each island
- The additional cost of organic milk
DIRA Disclosures
For more detail on the DIRA Disclosures.
Farmgate Milk Price Methodology
Fonterra currently collects around 80% of New Zealand’s milk production. Because Fonterra purchases such a large proportion of New Zealand’s total milk, there is no market price for milk that is independent of the price paid by Fonterra. As a result, since its formation in 2001, Fonterra has calculated a Farmgate Milk Price that enables total returns to be allocated between payments for milk and returns on the capital invested by Fonterra farmer shareholders and by unitholders in the Fonterra Shareholders’ Fund.
Farmgate Milk Price Governance
The Fonterra Board sets the total amount to be paid by Fonterra for all milk supplied to it in New Zealand in each season.
Both Fonterra’s Constitution and DIRA require Fonterra to maintain a Milk Price Manual, which sets out Fonterra’s policies and methodology for determining the Farmgate Milk Price. The Manual must reflect the Milk Price Principles set out in Fonterra’s Constitution. The Farmgate Milk Price has been calculated in accordance with the Manual since the start of the 2009 season.
The Fonterra Board has established a robust governance structure to oversee the setting of the Farmgate Milk Price. A detailed description of the Farmgate Milk Price governance structure can be found in Fonterra’s annual Milk Price Statement.
For more detail on Farmgate Milk Price Methodology and Governance (including access to Fonterra’s annual Milk Price Statements).
Commerce Commission Reviews
As required under the DIRA, the Commerce Commission carries out a review of both the Milk Price Manual and the Farmgate Milk Price calculation annually.
Review of Fonterra’s Milk Price Manual
Under section 150H of DIRA the Commission is required to review Fonterra’s Milk Price Manual for each season and publish a report on the extent to which it is consistent with the purpose set out in section 150A of the Act. To assist the Commission’s review Fonterra needs to provide the Milk Price
Manual for the current season, together with recommendations of Fonterra’s Milk Price Panel in relation to the setting of the “base milk price” (i.e. the Farmgate Milk Price calculated under the Manual), notification of required changes in the business environment that requires a change to the Manual, certification of why it meets the DIRA 150A purpose, and supporting reasons for the certification before 1 August each year. The Commission is required to issue its final report by 15 December each year.
Review of the Farmgate Milk Price
Under Section 150O of DIRA the Commission must review Fonterra's calculation of the “base milk price” for each season and report on the extent to which it is consistent with the purpose set out in section 150A of the Act. To assist the Commission's review Fonterra must provide (by 1 July in each year) the assumptions adopted and the inputs and processes used by Fonterra in calculating the base milk price for the preceding season. Fonterra must also provide certification (including reasons) that the assumptions, inputs and processes are consistent with the purpose set out in section 150A of the Act. The Commission is required to make its final report by 15 September each year.
Shares and Units
As a co-operative, Fonterra requires supplying farmers to hold shares in proportion to the volumes of milk produced by each supplier each season.