Issues Facing the Government
Dairy
With the passage of the DIRA, the direction and pace of structural change in the dairy sector is primarily in the hands of the industry.
The industry’s initial application to the Commerce Commission, however, was rejected at the draft determination phase and was subsequently withdrawn by the industry. The Commission considered that the anti-competitive costs outweighed the benefits. The Commission expressed particular concern that farmers would lack choice about whom they could supply milk to. They were also concerned that domestic consumers would have limited choice of suppliers of dairy products. The Commission also noted that much of the asserted benefits were able to be gained without a ‘Mega Co-op’. The industry has yet to submit a second application, and is now not expected to submit it till February/March 2000. The industry will have to address the Commission’s concerns, including in particular the right for farmers to exit the ‘Mega Co-op’ with the fair value of their capital, if the application is to be successful.
If the industry can effect a merger of NZ Dairy Group and Kiwi Dairy by 1 September 2000 on terms that are acceptable to farmers and the Commerce Commission, the industry will move towards a standard commercial legislative environment. The industry would then be free to evolve and respond to the changing international market place without the restrictions imposed by current legislation (such as the requirement to get Parliament’s approval to change their domestic payment arrangements or the constitution of the Board).
If, however, the industry cannot agree on merger terms that are also acceptable to the Commerce Commission, the DIRA will not come into effect. If this happens there may well be demands on the Government to provide an exemption from the Commerce Commission process for the industry. We would strongly argue against any such exemption as it would expose farmers and domestic consumers to an entity with considerable market power, create a precedent for other industries and harm the domestic and international credibility of New Zealand’s current competition policy.
Alternative options if the DIRA does not come into effect include maintaining the status quo or revisiting specific elements of the DIRA. Maintaining the status quo, however, is not considered a viable option given the challenges facing the industry.
One option, if the DIRA does not come into effect, would be to move the industry to general competition and governance law based on the current industry structure of effectively two very large co-operatives. (Assuming the Kiwi/Northland merger is approved by farmer-shareholders.) Such a step, if the co-operatives are fully exposed to competition, could offer significant advantages to farmers and the New Zealand economy. In particular, it would enable the industry to capture the benefits of vertical and horizontal integration while retaining the current advantages (such as benchmark competition) of having more than one major domestic processor. The implications for the Dairy Board and for the tax and quota elements of the DIRA would need to be worked through thoroughly before making any decisions in this regard.
Fruit
Both the Kiwifruit Marketing Board and the Apple and Pear Marketing Board are required by their respective legislation to submit restructuring plans to the Minister. The restructuring plans include a share allocation plan, a constitution for the new company and associated documentation.
The Kiwifruit Marketing Board’s plan was received before the General Election and was approved by the previous Minister on 24 November 1999 to progress to a producer referendum. Seventy-five percent voter approval is required at the referendum for the plan to come into effect. The results of the referendum are expected before Christmas.
The Apple and Pear Marketing Board submitted its restructuring plan on 1 December. No decision was made on the plan by the previous Minister. The Minister must approve the plan, as soon as practicable, to enable it to progress to a grower referendum.
The share allocation plan for apples and pears has proved controversial with the Canterbury Fruitgrowers Association who have filed a claim in the High Court seeking an interim declaration from the Court stopping the Minister approving or declining the plan. The plaintiff’s concerns relate to the proposed basis for allocating shares. A hearing was held in the High Court on 6 December 1999, while interim orders were not granted, an application for review was set down for hearing on 2 to 4 February 2000. This means the Minister can proceed to consider, and if appropriate, approve the plan, but on the clear expectation of a judicial review.
The new regulatory regimes for the apple and pear and kiwifruit export industries provided by the recent legislation are expected to offer some advantages. With growers’ ownership rights in ENZA and Zespri being explicit and tradeable, and with the domestic logistics business for apples also deregulated, the two organisations are expected to face greater commercial pressures to perform. In addition, the requirements for greater financial disclosure, the rules on non-diversification and the arms-lengths rules (for ENZA) are designed to help protect growers and others’ interests while ENZA and Zespri retain the sole or predominant right to buy fruit for export.
However, the industries will continue to face major change, both domestically and offshore. The results of the recent legislative changes were agreed by the Boards and the Government in a negotiation process and will need to be monitored closely. It is likely that further changes will be required sooner rather than later to allow the industries to keep pace with the rapidly changing marketplace.
Non-Trading
As noted above, the non-trading Boards are significant users of farmers’ money, at a time when farmers’ incomes are under pressure.
The current legislative backing for the non-trading Boards could be improved and in a way that would reduce costs for farmers. In particular, legislative changes could permit farmers to decide how much they have to pay for the Boards’ services, what services they buy, how much they are required to invest in the Boards and the appropriate organisational form and governance arrangements for their Boards.
Consultation
The Department of Prime Minister and Cabinet, Inland Revenue Department, Ministry of Agriculture and Forestry, Ministry of Commerce, Ministry of Foreign Affairs and Trade, Te Puni Kokiri and the Treasury have been consulted in the preparation of this report.
Next Steps
The new Government will be required to make several key decisions, and may face some demands for legislative changes, in the Producer Board area.
The critical next step in dairy restructuring is for NZDG and Kiwi to agree the terms of their merger. If this occurs by the end of January, the industry is likely to submit an application for authorisation to the Commission by around March, with a vote of shareholders around May. If the ‘Mega Co-op’ gets both farmer and Commerce Commission approval, the Dairy Industry Restructuring Act comes into effect.
However, if NZDG and Kiwi fail to agree on merger terms, or the ‘Mega Co-op’ fails to get farmer or Commerce Commission approval, the industry may well come back to the Government looking for legislative changes. In such circumstances, a further round of Government/industry consultation seems inevitable. The Government will want to have a well-developed policy direction in such an event.
In the case of the fruit Boards, the key next steps for the Government are:
- the consideration of the Apple and Pear Marketing Board’s plan (which was submitted to the Minister on 1 December 1999 and is subject to a High Court review on 2-4 February);
- consideration of the information provided to growers by the Kiwifruit Marketing Board and the Apple and Pear Marketing Board for their respective referenda on the restructuring plans (as approved by the Minister);
- approval of the enforcement regime for the new (regulatory) Boards in time for the new regimes to apply (1 April 2000 for apples and pears and 1 June 2000 for kiwifruit); and
- monitoring the effective implementation of the new regulations by the new Boards.
For the non-trading Boards, there are no actions currently under way that require immediate Government decisions. However, increasing grower dissatisfaction with the status quo for the non-trading Boards suggests further legislative change will be necessary.
Phil Barry
Team Leader
Table 1 - Summary of Producer Board Operations 1998
Annual |
Assets |
Equity |
Contributing |
|
| NZ Dairy Board | 7,677 |
4,200 |
1,599 |
14,500 |
| NZ Apple and Pear Marketing Board | 784 |
288 |
139 |
1,200 |
| NZ Kiwifruit Marketing Board | 550 |
53 |
3 |
1,800 |
| NZ Hop Marketing Board | 0.4 |
0.4 |
0.3 |
26 |
| NZ Meat Board | 37 |
142 |
133 |
16,800a |
| NZ Wool Board | 54 |
145 |
128 |
|
| NZ Game Industry Board | 8 |
5 |
3 |
3,500 |
| NZ Pork Industry Board | 5 |
5 |
5 |
600 |
TOTAL |
9,115 |
4,838 |
2,010 |
38,426 |
Source: Annual reports
Note:
a. The figure for total commercial beef and sheep farms was provided by the NZ Meat and Wool Economic Service. Not included in this figure are small holdings, government-run farms, studs and mixed-use farms, and farms run in conjunction with other properties. It is estimated that including these would add around 6,000 extra members for wool and 14,000 extra for meat.
| © MAF 1999 |  |
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