Proposed changes to the Dairy Industry Restructuring Act 2001
Contact: Animal sector policy team
Update – 17 March 2017
Bill introduced to Parliament
On 16 March 2017 the Minister for Primary Industries, Nathan Guy introduced the Dairy Industry Restructuring Amendment Bill 2017 (the Bill) to Parliament. The Bill will make changes to support the efficiency and contestability of New Zealand’s dairy industry, as announced by the Government in October 2016.
Parliament will refer the Bill to the Primary Production Select Committee, which will call for public submissions as it considers the Bill.
- Understand how to have your say in the Select Committee process
- Read about the Primary Production Select Committee – New Zealand Parliament website
Update – 21 October 2016
In June 2016, MPI sought views on proposed changes to the Dairy Industry Restructuring Act 2001 (DIRA) and the Dairy Industry Restructuring (Raw Milk) Regulations 2012. MPI issued a discussion document and held public meetings to share information and answer questions on the proposed changes. Public meetings were held in Wellington, Hamilton, Christchurch, Stratford, and Invercargill.
MPI read each submission carefully and considered the points made. Submissions expressed a wide range of views and provided useful examples and understanding of how the proposed changes would impact on submitters.
Having considered submissions received, the Government has decided on a package of changes to the DIRA regulatory regime.
As a package, the changes retain the DIRA regulatory regime for the time being, determine the timing of the next review, and make some changes to the regime to smooth the pathway towards future deregulation.
Specifically, the changes:
- prevent parts of the DIRA from expiring in the South Island, and require that the next review of the state of competition in the New Zealand dairy industry begin during the 2020/21 dairy season
- enable ongoing monitoring of dairy markets
- allow Fonterra discretion to accept applications to become shareholders from new dairy conversions.
- alter who is eligible for regulated milk from Fonterra, and the terms that it is available on. Specifically:
- Fonterra will no longer be required to sell regulated milk to large, export-focused processors from the start of the 2019/20 season.
- All processors purchasing regulated milk will have reduced flexibility in forecasting the volume of regulated milk they intend to purchase from Fonterra from the start of the 2018/19 season.
The requirement for Fonterra to supply regulated milk to processors other than large, export-focused processors is not being changed at this time, although these processors will be subject to the changes in forecasting flexibility. Consultation provided new information about risks of reducing regulated milk to these processors. The Government is therefore deferring the originally-proposed changes to the amount of regulated milk for Goodman Fielder and small or domestically-focused processors. Officials will start a body of work to understand the complexities in this area.
More information on the changes are in the Cabinet paper and the Regulatory Impact Statement.
Most of these changes will be made via a DIRA Amendment Bill. The Bill will be progressed by Parliament, involving a standard Select Committee process and an opportunity for public submissions. The Select Committee is likely to consider the Bill during the first half of 2017.
The changes to eligibility to regulated milk will be made via amendments to the Raw Milk Regulations 2001. Amending regulations does not involve a Select Committee stage.
The DIRA Amendment Bill will also make some minor technical amendments to the DIRA to update references to the manager of the New Zealand Dairy Core Database. These are unrelated to the regulation of Fonterra and do not introduce any new policy.
Summary of submissions
MPI received 105 submissions from a range of individuals and organisations during its public consultation on proposed amendments to the Dairy Industry Restructuring Act 2001 (DIRA) and Dairy Industry (Raw Milk) Regulations 2012 (Raw Milk Regulations).
Summaries follow of the responses to the proposed amendments to the sunset provisions, raw milk regulations, and open entry provisions.
Submitters had mixed views as to whether the current state of competition is sufficient. As a group, farmers, and also Fonterra believe that there is now sufficient competition. Independent processors, parties with an interest in the domestic consumer market, and third party organisations consider there is not currently sufficient competition and that Fonterra remains in a dominant position in the domestic dairy markets.
Of those who considered there is not currently sufficient competition in domestic dairy markets, a 30% market share threshold was preferred as the more suitable trigger for a future review of the DIRA.
Raw milk regulations
Goodman Fielder, independent processors and parties with an interest in the domestic consumer market expressed concern that the proposals to amend the raw milk regulations could negatively impact the domestic milk market.
A large number of submissions were unsure about the likelihood of a factory gate market developing.
Federated Farmers and farmer submitters broadly supported the proposals, but Federated Farmers considered that large, export-focused processors should lose their entitlement sooner than proposed, while farmers largely suggested that the export and/or capacity thresholds should be lower than those proposed.
Fonterra, the Fonterra Shareholders’ Council and a number of farmer submitters considered that the DIRA places undue requirements on Fonterra with regard to the open entry provisions, and that the proposed changes do not go far enough. Almost all other submitters were split between supporting the proposed change to the open entry provisions to allow Fonterra to refuse supply from new conversions, and opposing any change to the provisions.
Monitoring and evaluation proposal and provisions where no changes were proposed
Submissions were also received on the need for government to monitor the development of the unregulated factory gate market for raw milk, the milk price monitoring requirements and the 20% rule.
Background to consultation
From 29 May until 29 June 2016 MPI invited comments on proposed changes to the Dairy Industry Restructuring Act 2001 (DIRA) and the Dairy Industry Restructuring (Raw Milk) Regulations 2012. The proposals were outlined in the discussion document.
- Proposed changes to the Dairy Industry Restructuring Act 2001 (DIRA) & the Dairy Industry Restructuring (Raw Milk) Regulations 2012 [PDF, 252 KB]
Summary of proposals
It was proposed to:
- reset the DIRA market share thresholds, which will delay the expiry of some efficiency and contestability provisions
- amend these provisions to provide a transition pathway to eventual deregulation.
Details of the proposed changes included amending the:
- sunset provisions to remove the default expiry and reset the market share thresholds
- Raw milk regulations to reduce the volumes available to independent processors, including removing the requirement for Fonterra to sell regulated raw milk to large, export-focused processors
- open entry provisions so that Fonterra is no longer required to collect milk from new dairy conversions.
The proposed changes were not intended to alter any other aspects of the current regulatory regime under the DIRA.
Making a submission
Consultation closed at 5pm on 29 June 2016.
Submissions are public information
Note that your submission is public information. Submissions may be the subject of requests for information under the Official Information Act 1982 (OIA). The OIA specifies that information is to be made available to requesters unless there are sufficient grounds for withholding it, as set out in the OIA.
Submitters may wish to indicate grounds for withholding specific information contained in their submission, such as information being commercially sensitive or they wish personal information to be withheld. MPI will take such indications into account when determining whether or not to release the information. Any decision to withhold information requested under the OIA is reviewable by the Ombudsman.
New Zealand’s largest dairy business – Fonterra – was established in 2001 through the merger of the two largest domestic dairy co-operatives and the New Zealand Dairy Board.
Efficiency and contestability provisions
When it was formed, Fonterra collected about 96% of New Zealand’s raw milk production. To enable Fonterra’s creation, the DIRA was implemented to provide an exemption from the merger provisions of the Commerce Act 1986.
To address Fonterra’s market dominance, the DIRA includes provisions in Part 2, subparts 5 and 5A to promote efficiency and contestability in New Zealand dairy markets. The current provisions include:
- Open entry and exit – Farmers must be able to enter and exit the co-operative without unreasonable restrictions or penalties and Fonterra must accept all milk supplied by shareholding farmers.
- The 20% rule – Shareholding farmers can allocate up to 20% of their weekly production to independent processors.
- Milk Price Monitoring Regime – The Commerce Commission reports annually on Fonterra's milk price manual and the setting of the base milk price under the manual.
In addition to Subparts 5 and 5A, the Dairy Industry Restructuring (Raw Milk) Regulations 2012 require that independent processors must be able to obtain raw milk to enable them to compete in dairy markets.
Expiry process for certain efficiency and contestability provisions
Most of the efficiency and contestability provisions were always intended to be temporary and only necessary until sufficient competitive pressure could be applied on Fonterra by existing and potential future competitors. Therefore, the DIRA includes sunset provisions, which were triggered in the South Island in the 2014/15 dairy season when over 20% of milk solids were collected by independent processors.
However, the market share threshold alone is not conclusive evidence that sufficient competition has developed. Therefore prior to the expiry of the efficiency and contestability provisions an independent report on the state of competition in the New Zealand dairy industry is required.
Once the Minister for Primary Industries has given notice of the threshold being met and has responded to the report on the state of competition, the Governor-General must declare, by Order in Council, that the particular provisions in subpart 5 and 5A will cease to apply to the island in which the threshold has been met.
State of competition report by the Commerce Commission
The Commerce Commission report, released on 1 March 2016, considered whether domestic dairy markets would be more or less efficient in the absence of the different components of the DIRA regime. The report found that competition in the industry is not yet sufficient to warrant full deregulation at this time. The Commerce Commission recommended removal of the current default expiry provisions and another state of competition review either:
- when independent processors achieve a 30% market share in the North Island or South Island, or
- after 5 years (the end of the 2021/22 season).
The Commerce Commission also recommended that the Government consider:
- amending the raw milk regulations to facilitate the development of competition in the factory gate market and reduce dependence on regulated raw milk. (The factory gate is the market where raw milk is traded between dairy processors. The farm gate is the market where dairy processors purchase raw milk from farmers.)
- amending the open entry provisions so that Fonterra no longer has to accept an application from a new dairy conversion to be a shareholder supplier.