Dairy Industry Restructuring Amendment Bill

  • discharged on 13 December 2017

Dairy Industry Restructuring Amendment Bill

Government Bill

242—1

Explanatory note

General policy statement

This Bill amends the Dairy Industry Restructuring Act 2001 (the DIRA) to prevent the expiry of certain provisions in May 2018 and provide for future periodic reviews of the need for regulation to promote the efficient operation of dairy markets in New Zealand. It also removes an element of the regime that contributes least to the DIRA’s efficiency and contestability objectives.

Part 2 of the DIRA regulates 4 key aspects of the New Zealand dairy industry: the dairy export quota management system (subpart 3), herd testing and the New Zealand dairy core database (subpart 4), the activities of Fonterra, to promote the efficient operation of dairy markets in New Zealand (subpart 5), and the monitoring of Fonterra’s farm gate milk price (subpart 5A).

The need for the DIRA regulatory provisions on Fonterra in subparts 5 and 5A of Part 2 is contingent on sufficient competition developing in New Zealand dairy markets. If or when sufficient competition develops, competitive pressure will drive the efficiency of New Zealand dairy markets, removing the need for the DIRA regulatory provisions to do the same.

An automatic expiry of key provisions in subpart 5 and all of subpart 5A in the South Island was triggered in 2015. A statutorily required report on the state of competition, undertaken by the Commerce Commission, found that competition is not yet sufficient and that subparts 5 and 5A should remain in place for the time being. The report also recommended that any transition pathway to deregulation should take a staged approach and initially involve removing elements of the regulatory regime that contribute least to efficiency and contestability.

Removal of default expiry, and future reviews

To ensure the efficient operation of New Zealand dairy markets, the Bill prevents parts of subpart 5 and all of subpart 5A from expiring in the South Island, removes the automatic expiry provisions and the market share thresholds that would trigger them, and establishes a process for periodic reviews of the state of competition and the need for regulation of dairy markets in the future.

The Bill requires that the Minister must, during the year beginning 1 June 2020, commission the next report on the state of competition. Following receipt of the report, the Minister must publish a response in the Gazette and on the Internet site of the Ministry for Primary Industries. The Minister’s response must include a statement as to whether the Minister intends to promote legislation to repeal or amend subpart 5 or 5A before requesting another report. If subparts 5 and 5A are not repealed or amended, the Minister must request a further report on the state of competition no later than 5 years following his or her response.

The Bill also enables a more flexible process for future reviews of the state of competition. Future reviews will allow the Government to assess whether competition is sufficient to ensure the efficient and contestable operation of dairy markets in the absence of the DIRA regulatory regime, and to determine the appropriate regulatory response.

Allowing Fonterra discretion to accept supply from new dairy conversions

The DIRA requires Fonterra to accept all applications to become a shareholding farmer (with limited exceptions that relate to minimum volume to be supplied and transport costs). This is the “open entry” provision. The “open exit” provisions of the DIRA require that Fonterra must allow shareholding farmers to withdraw without unreasonable restrictions or penalties.

The open entry and exit provisions reduce farmers’ switching costs and risks by enabling them to freely enter and exit Fonterra. This lowers the barriers to entry for independent processors by enabling farmers to leave Fonterra and supply someone else, with the confidence of being able to return to Fonterra in the future. This ensures contestability of the market for farmers’ milk and simulates the competitive pressures that Fonterra would face in a competitive market.

The Bill establishes a third exception to open entry, which allows Fonterra discretion to accept applications that pertain to new dairy conversions. This exception applies only where an application relates to a new collection point that has not been used to supply milk in the 5 years immediately prior to the application being made to Fonterra. In some situations, a new collection point may be established on existing dairy land. The Bill provides that these situations are not captured by the new exception.

The effect of the provisions for the third exception is that Fonterra has discretion to accept an application to become a shareholding farmer that relates to a new collection point if less than 50% of the land used to supply milk to that point has been used as dairy land in the previous 5 years. The exception allows for existing dairy farms to expand and the references to 5 years allow for land use to change over time to the most efficient use.

To facilitate the application process for Fonterra and farmers, the Bill requires entering farmers, who are not already Fonterra suppliers, to provide evidence that their farm is not a new dairy conversion. The Bill establishes several types of commonly held information as being conclusive evidence that must be accepted by Fonterra.

Other minor and technical amendments

The Bill establishes a new regulation-making power to enable monitoring of the factory gate market (processors selling raw milk to other processors). This mirrors an existing regulation-making power that allows the Government to monitor the farm gate market (farmers selling raw milk to processors).

The DIRA provides that Fonterra pay a levy to cover the Commerce Commission’s costs of enforcing the DIRA. The Bill simplifies the existing Fonterra levy process to no longer require the Minister for Primary Industries to make annual regulations to recover the levy from Fonterra.

The Bill also makes amendments to reflect changes in responsibility for the management of the New Zealand Dairy Core Database.

Departmental disclosure statement

The Ministry for Primary Industries is required to prepare a disclosure statement to assist with the scrutiny of this Bill. The disclosure statement provides access to information about the policy development of the Bill and identifies any significant or unusual legislative features of the Bill.

Regulatory impact statement

The Ministry for Primary Industries produced the following regulatory impact statements to help inform the main policy decisions taken by the Government relating to the contents of this Bill:

  • Regulatory Impact Statement—Dairy Industry Restructuring Act, 7 September 2016:

  • Requirements on Livestock Improvement Corporation and the role of the Access Panel—Regulatory Impact Statement, July 2014:

  • Regulatory Impact Statement—Transfer of the Dairy Core Database and Herd Improvement Regulatory Review, April 2014.

Clause by clause analysis

Clause 1 is the Title clause.

Clause 2 is the commencement clause. Most provisions in the Bill come into force on the day after the date on which the Bill receives the Royal assent, but some come into force on later dates specified in clause 2.

Clause 3 states that the Act amends the Dairy Industry Restructuring Act 2001 (the principal Act).

Part 1Repeal of provisions that provide for expiry of subparts 5 and 5A of Part 2

Clause 4 repeals sections 147 to 150 to stop the dairy market in the South Island from being deregulated on 31 May 2018. The repeal is in a discrete Part of the Bill so that it may be readily divided into a separate Bill if needed to ensure that the repeal happens before 31 May 2018.

Clauses 5 to 8 consequentially amend the principal Act and consequentially revoke the Dairy Industry Restructuring (Subparts 5 and 5A of Part 2 of Act Disapplied to South Island) Order 2016.

Part 2Other amendments to Principal Act

Clause 9 amends section 4 (the purpose section) to remove a reference to establishing Livestock Improvement Corporation Limited (LIC).

Clause 10 amends section 5 (the interpretation section) to—

  • insert new definitions of competition report, constitution, entity, manager of the core database, previous manager, and intended manager; and

  • insert the definition of government agency that previously applied only in section 148; and

  • replace the definition of core database with a definition that refers to the manager of the core database, the previous manager, and the intended manager, rather than LIC; and

  • replace panel with Access Panel as the term for the New Zealand Dairy Core Database Access Panel.

Clause 11 inserts—

  • new section 5A, which relates to the status of examples; and

  • new section 5B, which gives effect to transitional, savings, and related provisions set out in new Schedule 1.

Clause 12 replaces the subpart 4 heading in Part 2 so that it refers only to management of the core database (and does not refer to LIC).

Clause 13 updates section 43, which is the overview section for subpart 4 of Part 2.

Clause 14 repeals the cross-heading after section 43, which relates to the now-completed restructuring of LIC and is redundant.

Clause 15 inserts new section 43A, which states that the document or instrument constituting the manager of the core database (the manager’s constitution) must be read as requiring the manager to retain the database.

Clause 16 repeals sections 47 to 52, which relate to the constitution and corporate form of LIC. The content of sections 48 to 52 is relocated to new Schedule 2 (which is inserted by clause 35).

Clause 17 repeals section 61 and the cross-heading above it. Section 61 is a spent transitional provision that relates to the now-completed restructuring of LIC.

Clauses 18 to 21 amend sections 62 to 65 to replace references to LIC with references to the manager of the core database.

Clause 22 replaces section 65A with new sections 65A to 65D. New sections 65A to 65C empower the making of regulations that—

  • appoint an entity as manager of the core database:

  • name an entity as an intended manager of the core database:

  • regulate a previous or an intended manager of the core database.

Under new section 65D, regulations made for a previous or an intended manager of the core database are automatically revoked after 5 years, unless an Order in Council is made confirming that the regulations will remain in force.

Clause 23 amends section 66 to replace references to LIC or another entity nominated by the Crown to manage the core database with references to the manager of the core database.

Clause 24 replaces section 68, under which the core database reverts to the Crown if a liquidator is appointed for LIC or LIC is removed from the companies register. New section 68 provides for the management of the core database to revert to the Crown if—

  • the Minister and the manager of the core database agree that new section 43A(1) no longer applies (under that section the manager’s constitution must be read as requiring the manager to retain the core database); or

  • in other specified situations that are similar to, but more extensive than, those currently provided for in section 68.

Clause 25 inserts new section 69A, which makes LIC subject to the provisions in new Schedule 2 (those provisions carry over what is currently set out in sections 48 to 52).

Clause 26 amends section 72, which is the overview section for subpart 5 of Part 2 (regulation of dairy markets and obligations of Fonterra). The amendment adds new sections 96A to 96G to the exception provisions referred to in section 72.

Clause 27 amends section 73, which requires Fonterra to accept applications to supply milk. The amendment refers to a modification of the time frame within which Fonterra must accept some applications.

Clause 28 inserts new section 73A. New section 73A requires an application to supply milk from a new entrant or a shareholding farmer to—

  • state whether the new dairy conversion exception in new section 96A applies; and

  • include evidence to support the position that the exception does not apply (unless Fonterra has collected milk from the collection point within the last 5 years).

Clause 29 inserts new sections 96A to 96G to provide for a new ground upon which Fonterra may reject an application to supply milk. In summary,—

  • the new exception in new section 96A applies if the application relates to the supply of milk from a new collection point. A collection point is a place containing a milk vat, or milk vats, from which milk could be collected. A collection point is new if it has not been used in the last 5 years to supply milk as part of a business (unless it is a replacement collection point under new section 96C):

  • the exception under new section 96A allows Fonterra to reject the application if more than 50% of the production land that is used to produce the milk for supply to the new collection point is new production land. Land is new production land if it has not been used in the last 5 years as part of the production land of a business:

  • new section 96B sets out definitions relating to the exception:

  • new section 96C sets out when a collection point (A) replaces another collection point (B). In this case, the collection point is not new and the exception does not apply:

  • new section 96D deals with the situation where an application relates to 2 or more collection points. In this case, Fonterra must apply new section 96A separately to each collection point as if separate applications had been made for each collection point:

  • new section 96E requires Fonterra to accept certain evidence as conclusive evidence that new section 96A does not apply. For example, a receipt for milk collection or other documents from an independent processor that clearly indicate that the independent processor has accepted milk from the collection point:

  • new section 96F provides for the process if Fonterra does not accept other evidence that is provided. In this case, Fonterra may request further evidence and the time frame for dealing with the application is extended:

  • if Fonterra rejects an application, new section 96G requires it to disclose the evidence on which it relies to reject the application.

Clause 30 amends section 115 to allow regulations to be made that—

  • require Fonterra and independent processors to provide returns for any milk solids supplied by or to them (currently regulations may require only returns for milk solids collected from dairy farmers):

  • prescribe further kinds of evidence that Fonterra must accept as conclusive for the purposes of new section 96E.

Clause 31 replaces section 134, which requires Fonterra to pay a levy. New section 134 provides for a more flexible levy-setting process. This includes providing for—

  • the levy to apply, and be calculated in respect of, more than 1 financial year (but with the levy still being collected in each of those years from Fonterra); and

  • shortfalls in recovering the Commerce Commission’s actual costs. This may allow, for example, a reconciliation of the levy against the levy that would have been payable had the levy calculation used the actual costs and invoicing Fonterra for the amount that was under-recovered.

Clause 32 inserts new sections 147 to 150AA, which set out a process that requires the Minister to regularly request and respond to reports on the state of competition in the dairy industry.

Clause 33 repeals section 156, which is a spent provision dealing with gift duty and tax matters related to the now-completed restructuring of LIC.

Clause 34 inserts new Schedule 1, which provides for transitional, savings, and related matters.

Clause 35 inserts new Schedule 2, which provides for the matters relating to the constitution and corporate form of LIC that are currently set out in sections 48 to 52 (these sections are repealed by clause 16).

Part 3Consequential amendments

Clauses 36 and 37 consequentially amend the principal Act and the Dairy Industry (Herd Testing and New Zealand Dairy Core Database) Regulations 2001.

Schedules

Schedule 1 contains new Schedule 1.

Schedule 2 contains new Schedule 2.

Schedule 3 sets out the consequential amendments effected by clauses 36 and 37.