Changes to dairy industry legislation will mean Fonterra will no longer be obligated to accept all milk offered to it.
Agriculture Minister, Damien O'Connor has announced changes will be made to the Dairy Industry Restructuring Act 2001 (DIRA) and the Dairy Industry Restructuring Raw Milk Regulations 2012 (Raw Milk Regulations).
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The DIRA was passed into law in 2001 and saw the creation of Fonterra. It also promotes the efficient operation of dairy markets in New Zealand.
Under the DIRA, Fonterra was required to take all milk offered to it, something it has been pushing to have changed.
It argued it had to spend hundreds of millions on new stainless steel processing capability as annual milk production climbed.
"Open entry limits our farmer-shareholders and the industry's ability to maximise value for New Zealand. It distorts investment decisions and leaves Fonterra's farmers underwriting risk for competitors who cherry-pick their suppliers," it said in an earlier statement.
Under the new legislation Fonterra will be allowed to "refuse milk supply from farmers in circumstances where milk is not compliant or unlikely to comply with Fonterra's terms and standards of supply or is supplied from newly converted dairy farms."
O'Connor said the changes would provide certainty for the dairy industry and ensure the sector can pursue sustainable value growth.
"The industry has changed considerably since 2001, and it is important to ensure the regulatory regime puts the sector in the best possible position."
He said the changes come after a wide-ranging review.
"Following farmers, independent dairy processors, NGOs, and representatives of Māori interests around the country sharing their views, Cabinet this week approved changes to both pieces of legislation. They will now be progressed through Parliament."
Key changes to DIRA and the raw milk regulations:
-Retain the open entry and exit provisions, with qualifications, to manage ongoing risks arising from Fonterra's large size and scale in New Zealand dairy markets.
-Allow Fonterra to refuse milk supply from farmers in circumstances where milk is not compliant or unlikely to comply with Fonterra's terms and standards of supply or is supplied from newly converted dairy farms.
-Clarify that Fonterra's terms of supply can relate to, and price differentiate on the basis of, various on-farm performance matters, including environmental, animal welfare, climate change and other sustainability standards.
-Limit Fonterra's discretion in regard to setting a key assumption in calculating the base milk price, the asset beta.
-The DIRA shall be reviewed on a four- to six-yearly basis, to provide regulatory certainty.
-Require Fonterra to appoint one member of its Milk Price Panel on the nomination of the Minister of Agriculture.
-Remove the requirement for Fonterra to supply regulated milk to independent processors with their own supply of 30 million litres or more in a single season.
-Update the terms on which Fonterra supplies regulated milk to Goodman Fielder for the benefit of domestic consumers.
Read full details of review here.