Fonterra Seeks Practical Raw Milk Regulatory Changes

In its submission on the draft Dairy Industry Restructuring (Raw Milk) Amendment Regulations 2012, Fonterra said that to continue to win in the world for the good of New Zealand, the Co-operative needed a robust and sustainable dairy sector in its home base.

Feb 27 2012 --- Fonterra Co-operative Group Limited welcomes Government moves that would see independent processors with their own supply lose eligibility to regulated milk, but says proposed amendments to the Raw Milk Regulations need refinement to achieve this outcome.

In its submission on the draft Dairy Industry Restructuring (Raw Milk) Amendment Regulations 2012, Fonterra said that to continue to win in the world for the good of New Zealand, the Co-operative needed a robust and sustainable dairy sector in its home base.

Fonterra Chairman Sir Henry van der Heyden said the Co-operative supports the Government's efforts to promote effective competition at the farmgate, and ensure that sufficient regulated milk is available for dairy food and beverage companies who process raw milk but do not have their own supply, and for start-ups that genuinely need it.

"The Co-op and our farmer shareholders have consistently said the Raw Milk Regulations require change. While it is our view that the proposed amendments to the Regulations won't work in their current form, we have identified some practical changes that would help deliver genuine competition for New Zealand milk which will make Fonterra and the dairy industry stronger, more efficient, more innovative and more resilient."

Fonterra's submission highlights three priority issues:

- Any amendment to the Raw Milk Regulations should require those getting milk to have their own investment in manufacturing plant on the ground to process it. Currently volume limits can be by-passed by "virtual" processors that are like shell companies with no visible presence or investment in physical assets.
- The Amendment Regulations propose maximum monthly amounts of regulated milk that Independent Processors can take, but no minimum. This allows Independent Processors to take milk in the spring and autumn or avoid the peak months altogether. Fonterra submits that Independent Processors must take at least some milk during peak production months, as is the case now under what's commonly called the "October Rule".
- Instead of the proposed "cold turkey" exit from 1 June 2015 which would see established Independent Processors lose access to regulated milk on that date, Fonterra believes a more carefully programmed exit would benefit all parties. By phasing down volumes over two years from 1 June 2013, Independent Processors would be better able to gradually build up their own additional supply base, while Fonterra would have greater clarity for its investment planning.

In addition to these three priority issues, Fonterra's submission also addressed concerns relating to the increase in the total regulated milk supply cap, and the removal of the $0.10 per kgMS premium.

On the supply cap issue, Fonterra said that a proposed increase in the pool of regulated milk would not promote farmgate competition. Instead, it would further discourage Independent Processors from competing for farmgate supply. In addition, if established processors with their own supply become ineligible to take regulated milk by 2015, any current pressure on the maximum supply limit milk would be relieved.

On the $0.10 per kgMS premium on regulated raw milk, Fonterra said the Government introduced this payment for good reasons - to cover the differential price of milk in different parts of the season.

In order to justify the removal of the $0.10 premium, the Raw Milk Regulations would have to introduce either different price points for each month (which reflect the differing seasonal cost/value of that milk) or an obligation to order quantities which match the seasonal curve.